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How debt and climate change pose ‘systemic risk’ to world 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 clobbers its economy.

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

They owe staggering amounts of money to various foreign lenders. They face staggering climate risks, too. And now, with the coronavirus pandemic pummeling 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 required to protect them from climate disasters.

The combination of debt, climate change and environmental degradation “represents a systemic risk to the global economy that may trigger a cycle that depresses revenues, increases spending and exacerbates climate and nature vulnerabilities,” according to a new assessment by the World Bank, International Monetary Fund and others, which was seen by The New York Times. It comes after months of pressure from academics and advocates for lenders to address this problem.

The bank and the IMF, whose top officials are meeting this week, are planning talks in the next few months with debtor countries, creditors, advocates and ratings agencies to figure out how to make new money available for what they call a green economic recovery. The goal is to come up with concrete proposals before the international climate talks in November and ultimately to get buy-in from the world’s wealthiest countries, including China, which is the largest single creditor country in the world.

Kristalina Georgieva, managing director of the IMF, said in an emailed statement that green recovery programs had the potential to spur ambitious climate action in developing countries, “especially at a time they face fiscal constraints because of the impact of the pandemic on their economies.”

One of the countries at the crossroads of the climate and debt crises is Belize, a middle-income country on the Caribbean coast of Central America. Its foreign debt had been steadily rising for the last few years. It was also feeling some of the most acute effects of climate change: sea-level rise, bleached corals, coastal erosion. The pandemic dried up tourism, a mainstay of its economy. Then, after two hurricanes, Eta and Iota, hit neighbouring Guatemala, floods swept away farms and roads downstream in Belize.

Today, the debt that Belize owes its foreign creditors is equal to 85% of its entire national economy. The private credit ratings agency Standard & Poor’s has downgraded its creditworthiness, making it tougher to get loans on the private market. The IMF calls its debt levels “unsustainable.”

Belize, said Christopher Coye, the country’s minister of state for finance, needs immediate debt relief to deal with the effects of global warming that it had little role in creating.

“How do we pursue climate action?” he said. “We are fiscally constrained at this point.”

“We should be compensated for suffering the excesses of others and supported in mitigating and adapting to climate change effects — certainly in the form of debt relief and concessionary funding,” Coye said.

Many Caribbean countries like Belize do not qualify for low-interest loans that poorer countries are eligible for.

The United Nations said on March 31 that the global economic collapse endangered nearly $600 billion in debt service payments over the next five years. Both the World Bank and the IMF are important lenders, but so are rich countries, as well as private banks and bondholders. The global financial system would face a huge problem if countries faced with shrinking economies defaulted on their debts.

“We cannot walk head-on, eyes wide open, into a debt crisis that is foreseeable and preventable,” UN…

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