In warm climate: Coronavirus and carbon set fire to default wildfires in Sicily: debt in a warm climate
LONDON - Where COVID-19 has precipitated unprecedented debts, climate change could trigger defaults across the planet which a United Nations panel says is dangerously close to runaway warming.
Countries are committing to carbon reduction measures to prevent disaster. However, these will be costly and likely to add to a global debt pile which asset manager Janus Henderson estimates ballooned by the end of last year to $62.5 trillion.
How much damage climate change will inflict on a country's economy?
But a report reported by BofA earlier this year puts it at $54 to 69 trillion in 2100, which compares to a valuation of the global economy of around $80 trillion.
The financial repercussions could manifest themselves in under a decade, a study by index provider FTSE Russell warns.
The first climate-linked credit rating downgrades are set to hit countries soon, the report's co-author and FTSE Russell's senior sustainable investment manager, Julien Moussavi added.
In a worst case scenario, developing countries including Malaysia, South Africa, Mexico and even wealthier economies such as Italy could default on debt by 2050.
In another, where governments are initially slow to react, states including Australia, Poland, Japan and Israel, will be at risk of default and ratings downgrades too, the study concluded.
While the richer countries are inherently more vulnerable to sea levels and drought, developing countries will not escape global climate change fallout, such studies show.
You can talk about climate change and its effects and it won't be long before someone talks about Barbados, Fiji, or Maldives, Moritz Kraemer from Countryrisk.io and former head of sovereign ratings at S&P Global.
What was a surprise to me is the impact on richer countries, Kraemer added.
Another study by a group of universities including Cambridge concluded that 63 countries roughly half the number of rated by S&P Global, Moody's and Fitch - could see credit ratings reduced by 2030 because of climate change.
China, Chile, Malaysia, and Mexico were the hardest hit by the end of the century with six decreases, while the United States, Canada, India, Germany, and Peru could see around four.
The combined increase in borrowing costs would add $137 $205 billion to countries' annual debt payments by 2100, this study estimated.
Ratings downgrades normally raise borrowing costs, especially if they cause the countries to be ejected from Bond Indexes tracked by funds with trillions of dollars.
Developed countries are investing to prevent climate damage, with Germany creating a 30-billion euro rescue fund after recent floods, while Singapore is budgeting the equivalent of $72 billion to protect against rising sea levels in the next century.
For the emerging economies, already preoccupied by COVID - 19, the climate crisis will heap more pressure on them.
The International Monetary Fund warns that a 10 percentage-point increase in climate change vulnerability, as measured by the Notre Dame Global Adaptation Initiative Index, is associated with an increase of over 150 basis points in long-term government bond spreads for developing countries.
The average rise across all countries was 30 bps.
The U.N. environment programme estimates that in developing countries annual adaptation costs will be as much as $500 billion in 2030, rising to $300 billion in 2050.
As a percentage of gross domestic product, sovereign debt is still around 60% in emerging economies, data from the Institute of International Finance shows, versus 100% or so in the United States and Britain and 200% in Japan.
The rise from an pre-pandemic level of around 52% is a particular concern. European, U.S. and Japanese Central Banks are essentially underwriting state borrowing but this is not possible in poor countries who must repay debt.
How do I enable the type of funding required given the high debt levels and the importance of ratings? Sonja Gibbs, director of global capital markets at the IIF said.