“We cannot be held hostage by a financial system designed before climate change”: this is a real cry of alarm about emerging countries, launched by Marcos Neto of the United Nations Development Program (UNDP), where he heads the Sustainable Finance department. Covid, war in Ukraine, inflation: The international context is particularly overwhelming for developing countries, already exhausted by the effects of the pandemic and deeply affected by climate change. As a development specialist, the UN expert deciphers the innovations that could support these countries, while exposing the flaws of the international financial system.
Le Temps: UN Secretary-General Antonio Guterres said in mid-April that more than 100 developing countries were on the brink of collapse. Do you share this observation?
Marcos Neto: We have a convergence of so many problems that we can speak of a perfect storm. The covid is still there, access to vaccines is still problematic in the vast majority of emerging countries. Geopolitical problems and the Russian invasion of Ukraine have exacerbated rising energy and food prices, two areas of particular concern to developing countries. All of this comes as industrialized nations have started raising interest rates and withdrawing liquidity. And on top of that, we have climate change, regardless of whether there is a pandemic or a war. The depressing message of the latest IPCC report is a reality; we have to face it now. One of our surveys found that before the invasion of Ukraine, 62 countries were in debt crisis. This number has likely increased, not just among the poorest countries.
What measures do you recommend to mitigate the effects of this situation?
We need to restart certain support mechanisms that have been put in place over the past two years to cope with the covid crisis and that have stopped. For example, the Secretary-General of the United Nations has asked the G20, the IMF and the World Bank to relaunch the Debt Service Suspension Initiative (DSSI)¹ with the aim of extending it to middle-income countries and all countries that run the risk of debt. The “Common Framework”†² created by the IMF and the World Bank to manage the debt is not working. Only three countries participated [Tchad, Zambie et Ethiopie, ndlr]†
Why has this mechanism not attracted more countries?
The answer is complicated. One of the elements is that countries fear that by taking advantage of this common framework, their credit rating will be lowered by the rating agencies, causing them to lose access to the bond market.
In short, these countries would lose on the one hand what they would gain on the other.
Precisely. This illustrates the huge problem with the role of rating agencies in the global financial system. We cannot look at the current world, in which we have to move towards a low-carbon economy, without taking into account when calculating the ratings the process of decarbonising the economy, the UN 2030 Agenda for Sustainable Development or the Sustainable Development Goals (SDGs). Otherwise, we will penalize the countries that are trying to decarbonise, for investing in the SDGs, because we believe that this is spending that is increasing the deficits. Rather, they should be treated as investments in the future of humanity. This question should be discussed with the credit rating agencies to determine which elements should be taken into account when calculating a country’s solvency. But this conversation has not started.
Also read: The impotent WTO in the face of the food crisis
Sri Lanka, which is considered a middle-income country, has recently defaulted on its debt. Could this defect have been prevented? How do you prevent other countries from defaulting in turn?
Recently, we proposed to the Government of Sri Lanka a medium-term solution based on debt swap. In this logic, the creditors would negotiate a debt reduction of several billion dollars, in return for public investment in ecological transition, climate change, etc. But in an April 28 article by a Sri Lankan corporate media, rating agency Moody’s said that if such swaps were set up, they would be considered a default because private creditors would receive less than what they had lent. This must change. We cannot be held hostage by a financial system that was created before the world had to deal with climate change. If private creditors are willing to accept these kinds of eco-friendly mechanisms, why isn’t Moody’s?
We are therefore heading for an increase in total debt. Is there no alternative? Is there no limit to the level of debt the financial system can hold?
We absolutely need to make sure that sustainability issues are part of the equation. But I don’t believe you can go back to the austerity of the past, in today’s world, where hundreds of millions of people have fallen back into poverty because of covid, where people struggle to buy food, where the energy transition needs to be implemented.
Even if that means that the debt problem in emerging countries will not be solved?
Europe spends a fortune on its green fund (Green Deal). The United States has mobilized several billion dollars to deal with the covid crisis. These are very positive developments. Why should we tell emerging countries that austerity is essential? We may be dealing with the debt problem over a longer period of time so we don’t sacrifice the investments we talked about. The debt crisis is a reality, different means must make it possible to overcome it. But we cannot afford to exclude countries like Sri Lanka from the capital markets. The country has no milk and we would discuss austerity? All this will lead to social unrest, to migration. The way financial problems are solved will have visible consequences in the lives of millions of people. If we think it’s just a math equation or a financial issue, we won’t solve the climate crisis, we’ll have migrations, famines. We have to find solutions.
Also read: A slight, but healthy fear of debt
1. Debt Service Suspension Initiative (ISSD)
The G20’s Debt Service Suspension Initiative (DSSI), which came into effect on May 1, 2020, aimed to enable the poorest countries to temporarily suspend payments to their official creditors, in order to concentrate their resources in the fight against the pandemic. According to the World Bank, the 48 participating countries (out of 73 eligible countries) could avoid $12.9 billion in debt service from May 2020 to December 2021 (programme end date).
The Common Framework for Future Debt Management, adopted in November 2020 as part of the G20, aims to coordinate the restructuring of a country’s debt so that both private and public creditors share the cost of this measure.
3. Debt Swaps
This financial instrument makes it possible to cancel a portion of a government’s debt in exchange for launching green investments financed with a large portion of the capital that should have been used to repay the erased debt . Funded projects must deliver environmental benefits at regional, national or global level.