Coronavirus and carbon have paved the way for default

LONDON – As the coronavirus disease 2019 (COVID-19) creates unprecedented debt, climate change could lead to defaults on a planet dangerously close, according to the United Nations panel, to warming.

To avoid catastrophe, countries adhere to carbon reduction measures. But that would be costly and likely add to the global debt buildup that asset manager Janus Henderson estimated had risen to $62.5 trillion by the end of last year.

With floods and wildfires sweeping the world, estimates differ on how much damage warming will do to its economy.

But a report earlier this year from the Bank of America (BofA) put the amount at $54-69 trillion by 2100, which compares to an assessment of the entire global economy of about $80 trillion.

A study by index provider FTSE Russell warned that the financial consequences could appear in less than a decade.

Julian Moussaoui, co-author of the report and senior director of sustainable investing at FTSE Russell, added that the first climate-related credit rating cuts will soon hit countries.

In the worst case, developing countries, including Malaysia, South Africa, Mexico and even wealthier economies like Italy could be in default by 2050.

The study concluded that in another case, where government responses are initially slow, countries such as Australia, Poland, Japan and Israel would also be at risk of default and downgrade.

Studies like this show that while developing countries are inherently more vulnerable to rising sea levels and drought, rich countries will not survive the consequences of climate change.

“You can talk about climate change and its impact and it won’t be long before someone is talking about Barbados or Fiji or the Maldives,” Moritz Kramer, chief economist at Countryrisk.io and former head of sovereign ratings at S&P Global.

“What surprised me was the effect on the richest and highest-ranking countries,” Kramer added.

Another study by a group of universities, including Cambridge, found that 63 countries – nearly half the number ranked by S&P Global, Moody’s and Fitch – could see their credit ratings decline by 2030 due to climate change.

He said China, Chile, Malaysia and Mexico will be hit the hardest by six degrees of cuts by the end of the century, while the United States, Germany, Canada, Australia, India and Peru could see around four degrees.

This study estimated that a corresponding increase in borrowing costs would add between $137 and $205 billion to countries’ combined annual debt service payments by 2100.

Rating downgrades generally increase borrowing costs, especially if they cause countries to exit bond indexes tracked by funds that manage trillions of dollars.

Warning light

Developed countries are ramping up spending to mitigate climate damage, with Germany setting up a €30 billion recovery fund after recent floods, while Singapore is allocating the equivalent of $72 billion to protect against rising sea levels in the next century.

For emerging economies, which are already affected by the Covid-19 virus, the climate crisis will bring more pressure.

The International Monetary Fund (IMF) warns that a 10 percentage point increase in vulnerability to climate change, according to the Notre Dame Global Adaptation Initiative Index, is associated with a more than 150 basis point increase in margins over long-term government development. bonds. . countries.

The average increase for all countries was 30 basis points.

The United Nations Environment Program estimates that in developing countries, annual adaptation costs will reach $300 billion in 2030, and will rise to $500 billion in 2050.

As a percentage of GDP, sovereign debt remains around 60% in emerging economies, according to data from the Institute of International Finance (IIF), compared to nearly 100% in the United States and Great Britain and 200% in Japan.

The rise from pre-pandemic levels to around 52% is of particular concern. European, American and Japanese central banks mainly provide government loans, but this is not possible in poor countries, which eventually have to repay debts.

“How would you enable the type of financing required given the high levels of debt and the importance of rating frameworks?” said Sonya Gibbs, director of global capital markets at the Institute of International Finance. – Dara Ranasinghe and Karen Stroker/Reuters