On 20 March 2020, the UK government announced the Coronavirus Job Retention Scheme (CJRS), and take-up was spectacular.
Reporting in June, the Office for National Statistics said 9.4 million employments had been placed on furlough, with 1.14 million employers having made at least one CJRS claim. At the end of June, the total claimed was £26.5bn.
But the government wasn’t the only source of financial relief for those hit hardest by the shut-down. Mortgage lenders across the board were quick to offer short-term relief to those struggling with three-month ‘mortgage holidays’.
This shows us financial security isn’t just about protecting income but sheltering the vulnerable from the burden of unserviceable debt. What’s true in the micro is true in the macro. Details are hard to come by, but news reports in May 2020 revealed that one in five mortgage holders had requested a pause in payments.
This undoubtedly helped struggling families through the worst of the crisis, but arguably pushed the problem further down the road. Mortgage holidays are not debt relief, and those taking advantage still shoulder the burden of the full amount to be repaid in the same time frame, meaning higher repayments for many. That reckoning is just around the corner for many families in the UK.
Pan out and the same story is now playing out at an international level. Some of the hardest hit nations are having to choose between servicing their debts and investing in economies ravaged by Covid-19. The leaders of the G-20 recognised the hardship such choices could enforce on millions, and agreed to allow the poorest countries to postpone official bilateral debt repayments for three years. To date, around 43 countries have taken up the option.
Some readers may recognise the theme from the early 2000s and the Jubilee debt relief campaign. You would be forgiven for thinking this particular issue had been solved. Sadly, debt re-serving continues to drag developing economies down. 2005 saw the landmark Gleneagles summit in which G8 leaders were pushed to cancel 100% of multilateral debt owed by the poorest countries. According to the ‘One’ campaign against poverty, adding this to previous debt cancellation from Jubilee 2000, close to $100bn of debt was written off for 36 heavily indebted countries.
Why should investors care about debt relief? In as much as their portfolios reflect the world’s economy, they should have an awareness for growth conditions around the world. Should we be investing heavily in those emerging economies whose governments are hamstrung by debt reservicing or combatting Covid-19?
Debt relief had a major impact on the African continent, for example, again according to the One campaign: “After years of burdensome debt payments, incurred by undemocratic leaders, African governments had a clean slate to invest in health, education, and their countries’ growth. This led to real progress: the poverty rate has fallen 16 percentage points over the past two decades on the continent. Many of the fastest growing economies have been in Africa.”
Now those countries face the same issue as UK householders: liquidity. The shutdown of economies has hit the ability to generate earnings and hence to service debts. As anyone familiar with loans and interest knows, the problem gets worse as time goes on, with a propensity to spiral out of control.
Investors and companies have flocked around the Sustainable Development Goals, proudly displaying graphics showing how their investments are contributing to each goal. But in the background, developing country debt had crept to $8trn in 2019, and that was before the before the pandemic hit. Debt servicing will cost developing countries around $3trn in 2020 and 2021.
However, out of crisis comes opportunity. The International Institute for Environment and Development (IIED) recently launched a paper arguing for use of an innovative solution – not another mortgage holiday, but a debt for climate swap. The context is helpful. Previous debt cancellation delivered in the 2000s was significant, but the debt accumulated since has not been directed towards investments that have spurred further productivity or resilience. There is a big opportunity should we be able to swap unproductive debt for climate and sustainability-focused investments.
Much has been made of ‘building back better’ or ensuring stimulus is directed towards solving the climate crisis. Such a focus is demanded by the debt servicing issue also. Heavily indebted countries are often the most vulnerable to climate change and have immediate investment needs.
Investments in climate action have concurrent effects on targeting poverty. Swapping debt for investments in climate resilience makes sense for creditors as they can agree a lower but more certain rate of return and find ways to deliver on the international climate commitments.
Establishing such a system would be no small undertaking, but the reward is significant. The United Nations Framework Convention on Climate Change process recognises the need for huge investments to deliver on the Paris Goals (limiting global warming to at least two degrees); using large scale debt for climate swaps would ‘dwarf the sums available from the Green Climate Fund’, according to the IIED. Previous attempts at creative debt swaps haven’t been saleable, but the world is a very different place with regard to clean energy capacity in 2020.
The UK and other developed nations have the facility to create stimulus packages of historic size. Poorer countries do not; that is why debt relief is such a powerful tool, being the most effective way to allow troubled nations to invest to solve their problems their way.
Matt Crossman is stewardship director at Rathbones and editorial panellist for ESG Clarity