Mark Gongloff: More debt is no climate solution for poor nations
Published in Op Eds
Imagine you borrow $1 million from me, and then I burn down your house and steal your car so you can’t drive to work anymore. But then I offer you a one-year moratorium on debt payments to try to get your life back together while insisting the debt still be paid in full with the deferred interest tacked on to the principal.
On a scale from 1 to 10, with 10 being “most generous,” you would probably rank this deal as “Go directly to jail.” But it’s not far from the bargain the U.S. and other rich countries are offering to low-income countries on the front lines of climate change.
The tiny Caribbean island nation of Grenada recently triggered a “hurricane clause” in its bonds that let it defer payments for a year, giving it some breathing room after the devastation of Hurricane Beryl. Bondholders are pretty much fine with this arrangement because, as Bloomberg News’ Greg Ritchie notes, “Grenada’s clause only defers coupon and principal payments. Its total debt servicing costs over the course of the bond will increase in nominal terms because the deferred interest is added to the principal, creating larger future interest payments.”
Win-win?
The problem here isn’t the bondholders, who are providing Grenada the capital it needs for rebuilding. Beryl leveled the island of Carriacou, home to nearly 10,000 people, and shaved about a third from Grenada’s GDP. The one-two punch of Hurricanes Ivan and Emily in 2004 and 2005, respectively, caused the country financial grief for a decade, including a default, and inspired the 2015 adoption of the hurricane clause. Private creditors are taking risks and should be paid for it.
More important, these sovereign bondholders accounted for just 11% of Grenada’s roughly $650 million in external debt as of the end of 2023. About two-thirds of all its debt was held by “multilateral” creditors, the biggest being the World Bank’s International Development Association. Bilateral creditors held about 17%, the biggest of those being China.
To put that another way, two of Grenada’s biggest lenders are also two of the world’s biggest carbon polluters — the U.S., which is the World Bank’s biggest shareholder, and China. Around the world, in fact, the developing nations most at risk of suffering extreme weather events as the planet heats up are often indebted to the same countries that have produced most of the greenhouse gases warping the climate.
Despite sitting right in the pipeline that carries tropical storms across the Atlantic, Grenada was hurricane free between 1970 and 2004. But three monster storms over the past 20 years have drastically impacted its people, economy and ability to repay debts. And hurricanes may become more frequent, and certainly more powerful, as the planet warms. Hotter ocean water provides fuel to rapidly strengthen storms, helping turn Beryl into the earliest Category 5 on record. (The previous record was held by Emily.) Other countries face a future of increasing drought and famine, floods, wildfires, disease and more.
Recognizing their part in causing this problem, rich nations way back in 2009 pledged to eventually provide $100 billion in financing every year to low-income countries to help them fend off and adapt to climate change. They set a deadline of 2020 to hit that mark. They missed by a couple of years, not reaching their goal until 2022.
Ironically, even as the world’s wealthiest nations reluctantly dug around in their couch cushions to scrape together that $100 billion in 2022, the poorest were paying $70 billion in debt-service payments, the Brookings Institution estimated, a rate likely to continue until at least 2025. As fast as poor countries could get financing in the door, they were shoveling most of it back out to creditors. Often they were exploiting fossil-fuel resources to raise cash.
That same year, high-income countries gave fossil fuels explicit and implicit subsidies of $2.3 trillion, according to the International Monetary Fund. China chipped in an additional $2.2 trillion. All told, the world gave $7 trillion to an industry raking in record profits.
These priorities are profoundly wrong. Beyond the immorality of continuing to bankroll humanity’s zeal for spewing greenhouse gases, wealthy nations have practical reasons to at least flip the stark imbalance between oil subsidies and climate financing on its head.
Developing nations want and deserve the same economic prosperity, clean water and air conditioning rich ones have had. Those rich nations concerned about climate change — all of them, supposedly — will want their poorer cousins to develop in ways that don’t make global heating much worse. That will drive their own costs of fighting and adjusting to climate change far higher.
Countries that lack adequate social and physical infrastructure aren’t prepared for the weather extremes to come. Places like Syria and Central America have already been the source of climate-driven migration to Europe and the U.S., reordering their politics in profound and troubling ways. That’s just a taste of the disruption in store if we don’t help these countries adapt.
Stuff like pushing more hurricane clauses on bondholders might help in some instances, but it’s no solution. Wealthy nations should not only invest much more in the developing world, they should restructure and cancel debts, especially those tied to oil and gas projects. We should offer future relief and other financial aid in grants, not loans that add to already heavy debt burdens. Given we all live on the same planet, when we set fire to some other country’s financial house, we’re also torching our own.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mark Gongloff is a Bloomberg Opinion editor and columnist covering climate change. He previously worked for Fortune.com, the Huffington Post and the Wall Street Journal.
©2024 Bloomberg L.P. Visit bloomberg.com/opinion. Distributed by Tribune Content Agency, LLC.
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