Biodiversity loss may push developing world closer to default

‘Many developing nations are at significant risk of sovereign debt default.’
Image: Bloomberg

Loss of biodiversity across the world may push many developing nations close to default and trigger massive downgrades for China and India, according to the first sovereign credit rating adjusted for ecological destruction.

A “partial ecosystems collapse” of fisheries, tropical timber production and wild pollination would increase annual borrowing costs for 26 nations including the US by $53 billion, according to a team led by academics at Cambridge University.

The research is groundbreaking, extending earlier work on how government finances will be threatened by climate change.

The report said China’s credit rating would drop six notches, adding $18 billion to its annual interest payments for the government and an extra $20 billion to $30 billion of debt for its corporate sector. Malaysia would be cut almost seven notches, with up to $2.6 billion in additional interest payments every year.

The team of economists from the universities of Cambridge, East Anglia, Sheffield Hallam, and SOAS University of London used the World Bank’s simulation of a partial ecosystems collapse to measure the cost nation by nation. The World Bank estimates that the GDP loss would exceed the losses in 2020 caused by Covid-19 in about half the countries for which data is available.

“Many developing nations are at significant risk of sovereign debt default,” under the scenario, the team said. They studied the creditworthiness of nations with a total of $66 trillion in sovereign debt.

“It is not just the financiers that lose out,” said Matthew Agarwala, the lead author from Cambridge University’s Bennett Institute for Public Policy. “Increased sovereign risk sees markets demand higher risk premia, meaning governments — and ultimately, tax payers — pay more to borrow.”

Even assuming a business-as-usual scenario where degradation continues at current trends, China and Indonesia would have their sovereign credit ratings downgraded by two notches by 2030 and India and Bangladesh by one.

South Asia is also most exposed to climate change risks. S&P Global Ratings analysis earlier this year showed that it 10 times more economic output was under threat in the region than in Europe.

© 2022 Bloomberg

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