Conversation on Climate, Debt, and Security

At the recent Munich Security Conference Dean Kyte moderated conversation between pivotal climate, financial, and political stakeholders. Joining her were German Minister for Foreign Affairs Annalena Baerbock, Managing Director and Chair of the International Monetary Fund (IMF) Kristalina Georgieva, and President of the Deutsche Bundesbank Joachim Nagel.

Dean Kyte posed a guiding question for the panelists in her opening remarks: “Is the international financial system fit for purpose for this particular moment in history and this particular nexus of problems?”

Kicking off discussion, Baerbock characterized the challenges attending the twin climate and debt crises. “The states that are suffering most from the climate crisis have contributed the least to it,” she said, referencing the urgency behind the loss and damages fund established at COP27 in November.

To maintain the 1.5-degree goal, 2.4 trillion dollars of financing is needed annually in developing countries. Additionally, every tenth of a degree we do not achieve, will cost two or three times as much in damages. More importantly, Baerbock said, “It costs lives, hundreds, thousands of human lives.”

Inflation, rising interest rates in the global north, a strong dollar, and the Russian war in Ukraine are exacerbating the global debt crisis. To underline the vicious cycle of disaster and debt at play, Baerbock pointed to Dominica, where in 2017 Hurricane Maria wreaked damages equivalent to 226% of the nation’s GDP. To recover, Dominica had to incur new debt at considerably higher interest rates than industrialized nations, leaving little room and money to prepare for the next hurricane.

Baerbock sees the need for the World Bank’s model to adapt to accommodate the reality of this climate and debt nexus, as well as the mobilization of more private investment. In her purview as minister for foreign affairs, she sees that the threats posed by the climate crisis represent an integrated security risk.

“If we want to handle this crisis effectively, we have to do it holistically as a national government and also as an international community,” said Baerbock. “What will be decisive is that the international community does not only include state actors but also private actors. Private and public interests and capital will have to be activated for climate friendly investment.”

Georgieva echoed Baerbock’s sentiment in her remarks. “This is the responsibility of everyone,” she said. “We do face an existential threat, and it is not a secret that we are way behind schedule to deal with this crisis. It is everybody’s job.”

Georgieva considered this imperative within the mandate of the IMF. In light of the economic toll of the pandemic, the IMF asked its more affluent members to lend them some of their special drawing rights (SDRs) to awaken dormant assets in developing countries. Germany and France were key initial contributors this effort, supporting Barbados, Costa Rica, Rwanda, and Bangladesh.

Georgieva also discussed how the IMF was the first financial institution to provide concessional finance on the basis of vulnerability to climate shocks. In Georgieva’s view, debt is not necessarily problematic but becomes so when countries are hit by exogenous shock, and for many countries, major climate events and growing debt will continue to hit them simultaneously. Georgieva proposed that there could be significant movement towards debt reduction by linking it to the carbon offset market; she suggested countries could put forward carbon offsets they create or purchase to pay down their debt in the medium term.

Central banks also have a role to play, and in the past seven years, Dean Kyte noted that leading regulators and supervisors have become leading voices for climate action. While Nagel said that they might not consider themselves climate activists at the Bundesbank, they have also recognized that climate policy is essential to good monetary policy, and mobilizing a response to the crises will require both public and private funds.

“There need to be different levers: public funds, a basic level of crowd money, and the rest might have to go through credits, loans,” said Nagel. “It needs to be clear for all countries that there needs to be a predetermined path towards debt reduction, and that, very often, is an issue moving more and more into the background as you look at the ability of countries to deal with their debts.”

“It’s not that there’s one institution and one element that we can use to deal with all these challenges,” said Baerbock. Pointing to the EU’s handling of the 2009 Euro Crisis, Baerbock noted how as a political union, they agreed on criteria and jointly passed international laws. “It’s not a panacea, but we have to create a mosaic. That’s what we agreed at COP, how different elements can be brought together.”

“Two huge crises—climate and debt—are driving insecurity worldwide,” said Dean Kyte in closing. “What we need to take away from this is that the publics of the developed world have to understand how inextricably linked we all are to each other, and we have to find some way of taking the system we have with all of the ingenuity and all the capital that’s already in it, and make it work for everybody.”

“If we can make it work for those most vulnerable, we will all benefit,” she added. ”Let's turn words into action, pledges into concrete plans.”