- Global debt hovers around $ 300 trillion
- Possible constraint as climate challenges worsen
- Low-income countries face risk of debt distress
WASHINGTON, Nov. 18 (Reuters) – Huge government spending kept the global economy afloat during the pandemic as authorities mobilized a fiscal response not seen since World War II to bolster household incomes and give businesses a chance to survive the health crisis.
But the resulting nearly $ 300 trillion debt pile held by governments, businesses and households will leave many countries with vulnerable finances and strain efforts to address pressing challenges such as climate change. and the aging of the population.
Even as rich and poor governments take stock of shabby finances, inflation is pushing central banks towards higher interest rates and tightening monetary policy which, for the indebted, can only pay off. less favorable calculations.
“This means higher borrowing costs, higher interest charges for the government and for real sectors,” said Emre Tiftik, director of sustainability research for the Institute of International Finance (IIF). , the global association of the financial industry.
“In the medium term, the problem is to find the resources to finance the climate objectives and most are extremely late on this point”, he added of the rapid decarbonization of the world economy necessary to avoid a climate crisis.
This month’s Glasgow climate talks resulted in new commitments from countries to cut carbon emissions, but left many questions unanswered about how the commitments will be funded and delivered. practice.
According to the IIR, global debt may have peaked due to the pandemic and could decline slightly by the end of the year from the current $ 296 trillion.
But reducing dependence on carbon-based fuels and mitigating climate damage is expected to require massive public and private investment – in the order of $ 90 trillion by 2030, according to a World Bank estimate.
At this point, there is no global plan on how to ensure it, and governments’ share of climate investments will have to compete with social, health and other spending priorities that are expected to escalate due to trends. demographic, such as an aging population.
The vast pandemic stimulus deployed by the rich world successfully supported their economies and was also sustainable in a landscape dominated by low or near zero interest rates. But as the cycle shifts towards tighter policies, it will mean higher interest charges, higher risk of possible debt crises in emerging markets, and less ability to meet climate goals.
“The balance of benefits and costs of accumulating debt is increasingly tilting towards costs,” academics at the Washington-based Brookings Institution wrote last month, citing possible constraints on policy and “crowding out” of private investment.
Low-income countries will be hit hardest, with some already facing unsustainable debt levels and others excluded from the more favorable financing available to richer countries, according to Professor Amar Bhattacharya of the London School of Economics.
“The cost of servicing the debt is very high and this may interact with climate ambition and climate vulnerability,” he said, calling for more efforts to restructure the debt of these countries.
In contrast, developed countries can finance debts in national currencies usually at low rates, and in the case of the United States, Europe and some others, have central banks with effectively unlimited capacity to absorb the debt. and create bank reserves.
Congressional Budget Office projections in July 2021 showed that the US debt-servicing costs as a percentage of gross domestic product would increase only modestly over the next decade, rising from around 1.6% in 2020. to 2.7% in 2031 – even with an overall debt reaching 106% of GDP by then, a level which, in previous years, would have sounded the alarm bells.
“Economically, the most advanced economies are not facing a great debt constraint right now,” said Jason Furman, professor of economics at Harvard University who has tried to reshape the debate on public debt to focus more on service costs and less on the total amount. .
But he’s politically sensitive, which has prompted congressional officials to cut back on climate investments proposed by President Joe Biden. And there is always a risk of disruption from either a sharp change in Federal Reserve policy and the potential impact on global financial markets that could be triggered, or if Congress does not raise the cap on the Federal Reserve. American debt.
Europe goes through its own balancing act, as EU capitals debate how to ease rules that force governments to keep budget deficits below 3% of GDP and debt below by 60%.
Most agree these restrictions are no longer realistic and would require far too ambitious debt cuts for most EU countries, keep economic growth on track and make room for the € 650 billion annuals that the EU needs to tackle climate change over the next decade.
Such realities explain the fervor in Glasgow which greeted the announcement by the United Nations climate envoy, Mark Carney, that banks and other institutions with a total of 130 trillion dollars of private capital had made. of the fight against climate change a priority.
But as critics questioned whether this whole astronomical sum was really aligned with a zero-carbon world, it was clear that governments, whether rich or poor, will have to figure out how they do much of the heavy lifting, regardless of any immediate debt crunch they may be facing.
What might be on the minds, as LSE’s Bhattacharya said in a webinar this week, is that if the investment is not found now to tame the growing climate impacts on the economy, then global debt is likely to become even more unmanageable.
“This investment is the best way to really ensure long-term debt sustainability,” he said.
Reporting by Howard Schneider and Mark John; Additional reports and graphics by Marc Jones; Editing by Leslie Adler
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