How debt and climate change pose a ‘systemic risk’ to the global economy

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    How does one deal with climate crises when the country is in debt? Not very well, it turns out. Especially not when a global epidemic stunts its economy.

    Take Belize, Fiji and Mozambique. In various countries, they are among dozens of countries at the crossroads of two growing global crises that are attracting the attention of international financial institutions: climate change and debt.

    They provide exorbitant funds to various foreign lenders. They also face the danger of climate crisis. And now, with the coronovirus epidemic clouding their economies, there is a growing recognition that their debt obligations stand in the way of meeting the immediate needs of their people – not to mention the investments needed to protect them from climate disasters. .

    According to a new assessment by the World Bank, the International Monetary Fund, the combination of debt, climate change and environmental degradation “represents a systemic risk to the global economy that can trigger a cycle that controls revenue, spending.” Enhances and exacerbates the vulnerabilities of climate and nature “. Fund and others, which were viewed by the Times. It comes after months of pressure from academics and advocates for lenders to solve this problem.

    The bank and IMF, whose top officials are meeting this week, are planning negotiations with debtor countries, creditors, advocates and rating agencies over the next few months to find out how they can make a green economic recovery How to provide new money. The goal is to come up with concrete proposals to secure procurement from the world’s wealthiest countries, including China, before the international climate talks in November and finally, the world’s largest single-creditor country.

    IMF managing director Kristalina Georgieva said in an emailed statement that green recovery programs had the potential for ambitious climate action in developing countries, “especially at a time when they face financial constraints due to the impact of the epidemic on their economies.” We do.” “

    Belize, a country at the crossroads of climate and debt crises, is a middle-income country on the Caribbean coast of Central America. Its foreign debt had been steadily increasing over the years. It was also experiencing some of the most acute effects of climate change: sea level rise, bleached coral, coastal erosion. Epidemic tourism, a mainstay of its economy, dried up. Then, after two storms, Eta and Iota, flooded neighboring Guatemala, floods swept fields and roads downstream in Belize.

    Today, the debt that Belize owes to its foreign creditors amounts to 85 percent of its entire national economy. Private credit rating agency Standard & Poor’s has lowered its credibility, making it harder to get loans on the private market. The International Monetary Fund calls its debt levels “uncertain”.

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    Credit …E.P.A. via Shutterstock

    Belize said the country’s Minister of State for Finance Christopher Coy needed immediate debt relief to deal with the effects of global warming, which it played little role in creating.

    “How do we take climate action?” They said. “We are mistakenly constrained at this point.”

    “We must be compensated to withstand the excesses of others and be supported in mitigating and adapting to the effects of climate change – certainly in the form of debt relief and concessional funds,” Mr Coey said.

    Many Caribbean countries such as Belize are not eligible for low-interest loans that are eligible for poor countries.

    The United Nations said on Thursday that the global economic collapse threatens nearly $ 600 billion in debt service payments over the next five years. Both the World Bank and the International Monetary Fund are important lenders, but are therefore wealthy countries, as well as private banks and bondholders. The global financial system would face a major problem if countries faced shrinking economies, which defaulted on their loans.

    UN Secretary-General Antonio Guterres said last week, “We cannot walk in a crisis that is in a debt crisis that is visionary and preventable.” “Many developing countries face financing constraints, which means they cannot invest in recovery and resilience.”

    In an executive order on climate change, the Biden administration said, it would use its voice in international financial institutions, like the World Bank, to provide debt relief with the goals of the Paris Climate Agreement, though it has not yet been detailed What to say?

    Debt for climate talks and discussions about climate are likely to intensify in November, where funding is expected to be one of the main sticking points. Rich countries are no closer to promising $ 100 billion per year to help poor countries cope with the effects of global warming. Low and middle-income countries owe only $ 8.1 trillion to foreign lenders in 2019, for which the most recent year of data is available – and that was before the epidemic.

    At that time, half of all countries that the World Bank classified as low-income either called it “debt crisis or at high risk”. Many of them are also severely vulnerable to climate change, including more frequent droughts, strong storms, and rising sea levels that wash away beaches.

    (The fund said on Monday that it would not require the 28 poorest countries in the world to make debt payments through October, so their governments could use the funds on emergency epidemic-related relief.)

    Recently, there has been a flood of proposals from economists, advocates and others to solve the problem. Details vary. But they call in one way or another to offer debt relief to all wealthy countries and private creditors, so countries use those funds to move away from fossil fuels, adapt to the effects of climate change, or natural To obtain financial reward for. Properties that are already protected, such as forests and wetlands. A widely circulated proposal calling on the Group of 20 (the world’s 20 largest economies) to require lenders to “give relief in exchange for a commitment to use some new fiscal space for green and inclusive recovery” . “

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    Credit …Fiji Red Cross, via Agence France-Press – Getty Images

    From Belize to the other side of the world, the low-lying Pacific island nation of Fiji has experienced a succession of storms in recent years that brought destruction and needed to borrow money to rebuild. The epidemic caused an economic downturn. In December, the tropical cyclone Yesa destroyed homes and crops. According to research by the World Resources Institute, Fiji’s debts have increased for China and the country, which are at risk of sea level rise.

    The authors proposed what they call a climate-health-debt swap, where bilateral creditors, namely China, would forgive some debt in exchange for climate and health care investment. (China has not publicly said anything about the idea of ​​a debt swap.)

    And then there is Mozambique. The sixth poorest country in the world.

    It was already submerged under huge debts, including secret loans that the government had not disclosed when, in 2019, a back-to-back cyclone struck. They killed 1,000 people and left more than $ 870 million in physical damage. Mozambique took more debt to cope. Then came an epidemic. The IMF says that the country is in debt crisis.

    The continent’s six countries are in debt crisis, and several others have downgraded their credit ratings by private rating agencies. In March, finance ministers across Africa said that many of their countries had already spent a large part of their budgets to deal with extreme weather events such as droughts and floods, and some countries spent a tenth of their budgets on climate adaptation efforts Were spending part. “Our fiscal buffers are now really finished,” he wrote.

    In developing countries, the share of government revenue that paid off foreign debt between 2011 and 2020 was 17.4 percent, the analysis found by Eurodad, a debt relief advocacy group.

    Research suggests that climate risks have already made it more expensive for developing countries to borrow money. The problem is projected to worsen. A recent paper found climate change would push up borrowing costs for many more countries by 2030, unless efforts were made to reduce greenhouse gas emissions.

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