Late capitalism can no longer afford costly climate policies. Especially not where it is most important: in the Global South. The World Bank warned in early June of a severe debt crisis in “low- and middle-income” countries in the face of high global public debt that skyrocketed during the pandemic response, similar to the wave of sovereign bankruptcies and economic collapses that devastated many developing countries in the 1980s. Compared to 2019, another 75 million people on the periphery of the world system face the threat of falling into “extreme poverty” as extreme debt burdens, inflation and rapidly rising interest rates result in an economic situation that is “similar to the 1970s,” it added (see also: “Back to Stagflation?”).
Of the $305 trillion which global mountains of debt now add up to, emerging economies, including China, account for around $100 trillion. Total global debt in 2019, on the eve of the pandemic, was around 320 percent of global economic output. It now stands at 350 percent of global economic output, peaking in 2020 at 360 percent. Yet much of the growth in debt, made possible primarily by central banks printing money, is precisely in the semiperiphery. More than 80 percent of the debt accumulated last year was newly raised in the emerging markets.
Blackrock and sub-Saharan Africa
The developing and emerging countries are thus threatening to collapse under their debt burden at the very time when comprehensive investments in climate protection would be necessary. The interplay between the ecological and economic crises is unfolding dramatically on the continent that has contributed least to the climate crisis: sub-Saharan Africa. The entire African continent is responsible for only four percent of global greenhouse gas emissions, most of which – historically speaking – have been caused by the Global North. Yet much of the center’s climate aid to Africa, which is already too scarce, takes the form of loans that further increase the debt burden in the periphery, while investment companies like Blackrock – the world’s largest asset manager, with investments of more than $10 trillion – continue to refuse to agree to substantial debt relief.
Blackrock was also the largest creditor of Zambia, which was forced to declare sovereign default at the end of 2020 after the asset management company refused to agree to a suspension of debt service. But the bankruptcy of the southern African nation, which owed $13 billion, is likely just the prelude to the African debt crisis. In 2015, according to estimates from the International Monetary Fund (IMF), eight countries in sub-Saharan Africa were over-indebted and in danger of teetering into national bankruptcy. By March 2022, that number had risen to 23 states. The economic and revenue slumps over the course of the pandemic, the discontinuation of an interest rate moratorium in December 2021, the Russian attack on Ukraine in February 2022, and the Fed’s turnaround on interest rates are leaving more and more African sovereigns in dire straits. In addition, China, which in recent years has acted as a major lender and economic partner to Africa, is itself facing the consequences of a gigantic real estate bubble and the pandemic-induced lockdown. The region’s total debt has nearly doubled, from 380.9 billion in 2012 to around 702.4 billion in the 2020 pandemic year.
This debt burden stifles all approaches to mitigating the consequences of the climate crisis in the periphery with comprehensive packages of measures, as non-governmental organizations (NGOs) warned in the fall of 2021. According to the study, the sum that the world’s 34 poorest countries must spend to service their debts is five times greater than their investments in climate protection: debt payments of $29.4 billion are offset by climate action of $5.4 billion. For years, the World Bank and IMF have encouraged developing countries to borrow to finance development projects, but their interest rates are many times higher than in developed countries because of the higher risk, warned the NGO Jubilee Debt Campaign. Interest rates of more than 10 percent are sometimes common, with the Fed’s interest rate turnaround likely to drive these financing costs in the periphery up even further.
The intertwining of the capitalist debt crisis and the climate crisis
Not only do the intertwining of the capitalist debt crisis and the climate crisis torpedo climate policy in the particularly vulnerable regions on the periphery of the world system, which can hardly afford climate protection. In addition, the consequences of the climate crisis, manifesting themselves in increasing weather extremes and natural disasters, are burdening the national budgets of many countries due to the associated costs – and contributing to the destabilization of the bloated global world financial system. In 2021 alone, the costs of the ten largest natural disasters would add up to around $170 billion, which – at least in terms of repairing destroyed infrastructure – would have to be borne by national budgets. The climate crisis has thus long since acted as a further cost factor in the over-indebted late-capitalist world system. Climate change further accelerates the growth of global mountains of debt and contributes to the destabilization of the financial system.
This combination of mountains of debt and an escalating climate crisis could develop into a “systemic risk” for the global economy, U.S. media warned in 2021, citing assessments by the World Bank and IMF. Unsustainable debt, climate change, and environmental degradation would thus reinforce a “cycle of reduced revenues, rising expenditures, and increasing climatic vulnerabilities.” This crisis mechanism is evident in the periphery: While developing countries had already accumulated loans of some 8.1 trillion to foreign creditors in 2019, the servicing of which consumed 17.4 percent of their government revenues (a tripling of the debt burden compared to 2011!), hardly anything has flowed from the North’s promised climate aid, which is expected to total $100 billion.
The devastating interplay between over-indebtedness and natural disasters is exemplified by Mozambique, a developing country in Southwest Africa that was already suffering from high levels of debt in 2019, when it was devastated by two cyclones that killed more than 1,000 people and caused $870 million in damage. The government in Maputo felt compelled as a result of the extreme weather event to continue borrowing to repair at least some of the damage. Now Mozambique is on the IMF list of African countries at risk of national bankruptcy referred to above. Last March, the finance ministers of several African countries warned that “a considerable part” of their budgets would have to be spent in response to extreme weather events such as droughts and floods, and that the “financial buffers” had already been largely exhausted.
The financial system in future socio-ecological crisis episodes
But the climate crisis is also likely to place the entire global financial system increasingly in a precarious position, as its foundation once considered solid – the market for government bonds – hardly reflects the growing risks, the news agency Bloomberg recently warned. According to this, institutional investors increasingly question the valuation of government bonds by the major rating agencies, as the sudden shocks caused by extreme weather events are hardly included in their calculations. However, the grades that rating agencies such as Moody’s Investors Service, S&P Global Ratings, and Fitch Ratings assign to bonds are crucial to their interest rate levels. The lower the rating, the more expensive the debt service.
A comprehensive “pricing-in” of climate risks would thus make debt servicing more expensive, which would increase the risk of sovereign bankruptcies. This does not apply only to the periphery of the capitalist world system, as Bloomberg pointed out. Countries such as Japan, Mexico, South Africa or Spain could also be driven into sovereign default in the coming decades by the interplay between debt burdens and the climate crisis, if their efforts to reduce CO2 emissions are “too late, too abrupt or economically damaging.” Countries such as Russia, Canada and Australia, which are heavily dependent on exports of fossil fuels, could also find themselves in difficulties.
However, government bonds, especially in the central countries such as the USA or the FRG, are considered the foundation, the concrete underlying the global financial house of cards. In every crisis, capital flees from risky investments into the “safe” bond market. If this bond market can no longer be considered a “safe haven,” this would destabilize the entire financial system in future socio-ecological crisis episodes. The government bond market is “the safety net” of the world financial system, one analyst told Bloomberg, “everyone retreats to it in times of turmoil and disaster.”
However, the usual crisis reflexes in the financial markets, which are supported by the good rating of government bonds by rating agencies, no longer match the reality of the climate crisis. Rating agencies have made catastrophic misjudgments in the past, in the run-up to the 2008 global financial crisis, when mortgage securitizations that flooded financial markets during the housing bubble in the U.S. and the EU were rated far too well. Now, a similar scenario looms on the bond markets, where the risks of the climate crisis are systematically hidden.
Since the bursting of the transatlantic real estate bubble in 2008, the states have in any case been acting as the last rallying force of late capitalism, which is choking on its productivity and can only prolong its agony through ever new, credit-financed economic stimulus programs and extreme money printing. This inner barrier of capital thus also interacts directly on the bond markets with the outer barrier of capital, the finite nature of planet Earth and the limits of its ecological carrying capacity.
This text is a contribution to the Berliner Gazette’s “After Extractivism” text series; its German version is available on Berliner Gazette. You can find more contents on the English-language “After Extractivism” website. Have a look here: https://after-extractivism.berlinergazette.de
Tomasz Konicz has been working as a freelance journalist and publicist for over 15 years, focusing on crisis analysis and ideology critique. His books include “Politik in der Krisenfalle” (2012), “Krisenideologie. Wahn und Wirklichkeit spätkapitalistischer Krisenverarbeitung” (2013), “Aufstieg und Zerfall des Deutschen Europa” (2015), “Kapitalkollaps” (2016), “Faschismus im 21. Jahrhundert” (2018), “Klimakiller Kapital. Wie ein Wirtschaftssystem unsere Lebensgrundlagen zerstört” (2020). The author of this article finances his journalistic work largely through donations. If this text appeals to you, then you are welcome to participate – either via Patreon, or by direct bank transfer after consultation by mail.