More debt is no climate solution for poor nations

IMAGINE you borrow US$1 million from me, and then I burn down your house and steal your car so you can’t drive to work anymore. But then I offer you a one-year moratorium on debt payments to try to get your life back together while insisting the debt still be paid in full, with the deferred interest tacked on to the principal.

On a scale from one to 10, with 10 being “most generous”, you would probably rank this deal as “go directly to jail”. But it’s not far from the bargain the US and other rich countries are offering to low-income countries on the frontlines of climate change.

The tiny Caribbean island nation of Grenada recently triggered a “hurricane clause” in its bonds that let it defer payments for a year, giving it some breathing room after the devastation of Hurricane Beryl. Bondholders are pretty much fine with this arrangement because, as Bloomberg News’ Greg Ritchie notes: “Grenada’s clause only defers coupon and principal payments. Its total debt-servicing costs over the course of the bond will increase in nominal terms because the deferred interest is added to the principal, creating larger future interest payments.”