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

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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 the 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 on 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 a flurry of proposals from economists, lawyers and others to solve 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. Widely circulated proposal calls on the Group of 20 (the world’s 20 largest economies) to demand 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 slashed 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.



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