‘The climate crisis is forcing countries, bankers and investors to review the architecture of national debt’ – Technologist

In August, the State of Grenada became the first country in the world to activate the so-called “hurricane clause,” which suspends repayment of its debt for a few months. The next due dates of November 2024 and May 2025 will therefore be postponed, for a total of $12.5 million (€11.3 million). This small Caribbean country, 150 kilometers north of the coast of Venezuela, was swept by a powerful cyclone in early July. With winds gusting to 240 kilometers per hour, Hurricane Beryl smashed fishing boats, cut off drinking water, destroyed power lines and killed one resident. Never before had such a powerful hurricane formed so early in the year in this region. In the space of a few hours, the equivalent of a third of Grenada’s annual GDP was destroyed. As temperatures and sea levels rise, such tropical cyclones will become more frequent and more powerful, with devastating economic consequences and the risk of endless debt.

On a visit to Grenada, Simon Stiell, head of UN Climate, expressed his concern at the fate of those countries facing “endless debt cycles,” borrowing to rebuild until the next “climate-inflicted disaster,” being forced to borrow again and again to rebuild their damaged infrastructure and diverting resources away from education, healthcare and development. He himself comes from the small island of Carriacou in Grenada.

The International Monetary Fund has calculated that one in ten disasters in small countries results in destruction equivalent to at least 30% of annual GDP, compared with just one in 100 in larger countries.

At a time when many developing countries are both victims of global warming and stifled by the weight of their debt, this “hurricane” clause deserves to be generalized. It automatically suspends repayment of a bond or loan, thus avoiding lengthy and costly restructuring negotiations. It also frees up the resources needed to rebuild the economy when the country needs them most. This clause does not erase any debt, it just gives the country a little breathing space – and time – to repay it, while spreading the risk more fairly between borrower and investor.

Risk transfer

The State of Grenada had requested it from its creditors in 2015 during debt renegotiation, as it was no longer able to repay its debt, incapable of recovering from Tropical Cyclone Ivan in 2004, which had cost it the equivalent of twice its annual GDP. So far, only Barbados has also adopted it. Other countries would be well advised to consider it. The World Bank now offers some of its creditor countries a two-year repayment pause in the event of a natural disaster.

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