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How Debt and Climate Change Pose ‘Systemic Risk’ to the Global Economy

How does a country deal with climate disasters when it is drowning in debt? Not very well, it turns out. Especially not when a global pandemic hits its economy.

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

They owe huge amounts of money to various foreign lenders. They also face dizzying climatic risks. And now, with the coronavirus pandemic hitting their economies, it is increasingly recognized 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. .

The combination of debt, climate change and environmental degradation “poses a systemic risk to the global economy that can trigger a cycle that lowers income, increases spending, and exacerbates vulnerabilities to climate and nature. According to a new assessment by the World Bank, International Monetary Fund and others, which has been seen by The Times. It comes after months of pressure from academics and lender advocates to tackle this problem.

The bank and the IMF, whose senior officials are meeting this week, are planning talks in the coming months with debtor countries, creditors, advocates and rating agencies to find out how to make money available for this. which they call a green economic recovery. The aim is to come up with concrete proposals ahead of the international climate negotiations in November and ultimately get the world’s richest countries on board, including China, which is the largest single creditor country in the world. world.

IMF Managing Director Kristalina Georgieva said in a statement that green stimulus programs have the potential to spur ambitious climate action in developing countries, “especially at a time when they face budgetary constraints due to the impact of the pandemic on their economies. . “

One of the countries at the crossroads of the climate crisis and the debt crisis is Belize, a middle-income country located on the Caribbean coast of Central America. Its foreign debt has grown steadily in recent years. He was also feeling some of the more acute effects of climate change: rising sea levels, bleached corals, coastal erosion. The pandemic has dried up tourism, the mainstay of its economy. Then, after two hurricanes, Eta and Iota, hit neighboring Guatemala, flooding swept through farms and roads downstream from Belize.

Today, the debt Belize owes to its foreign creditors is equivalent to 85% of its entire national economy. The private rating agency Standard & Poor’s has downgraded its creditworthiness, making it more difficult to obtain loans on the private market. The International Monetary Fund calls its debt levels “unsustainable”.

Belize, said Christopher Coye, the country’s finance minister, needs immediate debt relief to deal with the effects of global warming which it has had little role to play.

“How do we pursue climate action?” he said. “We are currently financially constrained.”

“We should be compensated for suffering from the excesses of others and supported in mitigating and adapting to the effects of climate change – certainly in the form of debt relief and concessional financing. Said Mr. Coye.

Many Caribbean countries like Belize are not eligible for the low interest loans that poorer countries are entitled to.

The United Nations said Thursday that the global economic collapse puts nearly $ 600 billion in debt service payments at risk over the next five years. The World Bank and the International Monetary Fund are important lenders, as are rich countries, as well as private banks and bondholders. The global financial system would face a huge problem if countries with shrinking economies defaulted on their debts.

“We cannot walk head-on, with our eyes wide open, in a predictable and preventable debt crisis,” UN Secretary-General António Guterres said last week, calling for debt relief for one. wide range of countries. “Many developing countries face financing constraints that prevent them from investing in recovery and resilience.”

The Biden administration, in an executive order on climate change, said it would use its voice in international financial institutions, like the World Bank, to align debt relief with the goals of the Paris agreement on the climate, although she has not yet detailed what that means.

Discussions on debt and climate are expected to intensify in the run-up to the November climate negotiations, where money is expected to be one of the main sticking points. Rich countries fall far short of delivering the $ 100 billion pledged per year to help poorer countries cope with the effects of global warming. On their own, low- and middle-income countries owed foreign lenders $ 8.1 trillion in 2019, the most recent year for which data is available – and that was before the pandemic.

At the time, half of all countries the World Bank classified as low income were either in what it called “debt distress or at high risk.” Many of them are also extremely vulnerable to climate change, including more frequent droughts, more severe hurricanes and rising sea levels that wash away the coasts.

(The fund said Monday it would not force 28 of the world’s poorest countries to repay their debt until October, so their governments can use the money for emergency relief from the pandemic. )

Lately there has been an avalanche of proposals from economists, lawyers and others to tackle the problem. Details vary. But they all call on, one way or another, rich countries and private creditors to offer debt relief, so countries can use those funds to move away from fossil fuels, adapt to effects of climate change or get a financial reward for natural resources. assets that they already protect, such as forests and wetlands. A widely circulated proposal calls on the Group of 20 (the world’s 20 largest economies) to demand that lenders offer relief “in exchange for a commitment to use some of the new fiscal space for a green and inclusive recovery” .

Across the world from Belize, the low-lying Pacific island nation of Fiji has seen a succession of storms in recent years that have resulted in destruction and the need to borrow money to rebuild. The pandemic has caused an economic downturn. In December, Tropical Cyclone Yasa destroyed homes and crops. Fiji’s debts have skyrocketed, including to China, and the country, whose very existence is threatened by rising sea levels, has scaled back planned climate projects, according to a World Resources Institute study .

The authors proposed what they called a climate-health-debt swap, where bilateral creditors, namely China, would write off part of the debt in exchange for climate and health care investments. (China has not said anything publicly about the idea of ​​debt swaps.)

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

He was already sinking into huge debt, including secret loans the government had not disclosed, when back-to-back cyclones returned in 2019. They killed 1,000 people and left more than $ 870 million in physical damage. Mozambique has taken out more loans to cope. Then came the pandemic. The IMF says the country is in debt distress.

Six countries on the continent are in debt distress and many more have had their credit ratings downgraded by private rating agencies. In March, finance ministers across Africa said many of their countries had already spent a significant portion of their budgets to deal with extreme weather events such as droughts and floods, and that some countries were spending a tenth of their budget for climate change adaptation efforts. “Our budget buffers are now really depleted,” they wrote.

In developing countries, the share of public revenue earmarked for the payment of external debt almost tripled to 17.4% between 2011 and 2020, according to an analysis by Eurodad, a debt relief group. .

Research suggests that climate risks have already made it more expensive for developing countries to borrow money. The problem should get worse. A recent article found that climate change will increase the cost of borrowing for many other countries as early as 2030, unless efforts are made to significantly reduce greenhouse gas emissions.

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