As Europe fights coronavirus and climate, is ‘green stimulus’ the way?

Some economies face heavy spending to meet carbon reduction targets. (AFP)
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Updated 26 March 2020

As Europe fights coronavirus and climate, is ‘green stimulus’ the way?

  • Coronavirus has taken some focus away from environmental issues but pressure is now mounting to design spending around climate change

LONDON: For European governments battling to brace economies pummelled by the coronavirus, there might be no better time to
go green.

Normally thrifty countries, such as Germany, accept they will have to spend heavily to weather the economic shock of the coronavirus. Many also face the challenge of plowing billions of euros into climate schemes to keep carbon reduction pledges.

Could “green stimulus” be the answer?

For budget hawks preparing to throw out the traditional fiscal rule book to fight the pandemic, green bonds — raising debt for funding projects such as renewable energy and public transport — might be a palatable option.

Coronavirus has taken some focus away from environmental issues but pressure is now mounting to design spending around climate change. On Tuesday, UK government adviser Chris Stark urged governments to “look to green stimulus.”

Germany is pulling out the stops, eyeing around €350 billion of new debt to finance stimulus. Europe’s biggest economy separately aims to cut greenhouse gas emissions to 55 percent of 1990 levels by 2030.

Britain, meanwhile, has promised to pay 80 percent of wages for employees facing layoffs as a result of lockdown measures, to be funded by selling more debt. It has also previously pledged to bring carbon emissions to almost zero by 2050.

Simon Bond, director of responsible investment portfolio management at London-based Columbia Threadneedle, wrote last year to the UK Treasury urging it to issue “green gilts.”

He said now was the time to roll them out given the pressing need for stimulus due to the virus outbreak.

“The rationale for green gilts is to target projects which actively contribute to the aspiration to bring greenhouse gas emissions to net zero by 2050,” Bond told Reuters. “Those projects should be part of green infrastructure spending and associated with fiscal stimulus.”

So far governments have been relatively slow to embrace green debt; there are just 12 sovereign green bond issuers worldwide, amounting to less than a tenth of the green bond market, which also includes debt from companies and other entities and saw $250 billion in new issuances last year.

But debt agencies say change is on its way.

Germany plans to issue a green bond in the second half of 2020 as does Italy; other candidates are Spain, Sweden, Denmark and Britain.

Germany’s debt agency told Reuters its green bond plans would go ahead despite the coronavirus outbreak. It has just published an update, announcing Germany would “substantially strengthen and decisively develop” the green and sustainable investment market.

It also hopes to establish a green yield curve for the euro area, as its chart below shows.

Green bonds currently comprise less than 0.1 percent of total sovereign debt, according to S&P Global. Given governments have some $9 trillion of outstanding debt worldwide, going green on even a small portion of that would give the market a huge boost.

What’s held them back so far is fear that green bonds will damage mainstream issuance programs by stealing trading volumes from those markets, eventually raising overall borrowing costs, officials from five European debt agencies told Reuters.

It could also further fragment a market already thinned out by the European Central Bank’s asset purchase program.

Even in Britain, home to a $2 trillion gilt market, debt agency chief, Robert Stheeman, has expressed doubts that issuing green gilts would be cost effective.

But debt agencies have come up with strategies that could allow green borrowing without the associated risks.

Denmark is considering an issue whose proceeds may not be earmarked directly for environmental projects but would come with a pledge for equivalent green spending, said Thorsten Meyer Larsen, head of monetary policy operations and government debt at Denmark’s central bank.

Under this idea, it would attach a green certificate to a standard government bond.

“Everyone can see that the green agenda is growing and we want to be part of that, but not in a way that’s detrimental to our existing bonds and bondholders,” Meyer Larsen said.

“So if you buy that (equivalent spending) idea then that’s a bit more straightforward.”

Germany is, meanwhile, exploring an option to sell twin bonds: So a green issue with the same maturity and coupon as its conventional peer and replacing part of the conventional bond’s auction volume, according to a market participant with knowledge of the country’s plans.

The person said that during a crisis, perhaps like the ongoing volatility, investors could switch from the green bond to the conventional issue, which would have better trading volumes.


S&P cuts Australia’s sovereign outlook, affirms AAA rating

Updated 08 April 2020

S&P cuts Australia’s sovereign outlook, affirms AAA rating

  • S&P affirmed Australia’s prized rating but said a downgrade was possible within the next two years
  • Australian long-dated bonds sold off after S&P’s outlook downgrade

SYDNEY: Global ratings agency S&P on Wednesday lowered its outlook on Australia’s coveted ‘AAA’ rating to “negative” from “stable” in anticipation of a “material” weakening in the government’s debt position as it splashes out a large fiscal stimulus package.
S&P affirmed Australia’s prized rating but said a downgrade was possible within the next two years if the economic damage from the COVID-19 outbreak is more severe or prolonged than it currently expects.
Australia is among a handful of countries in the world to boast the best ranking from all three major ratings agencies.
But it has come under a cloud as the pandemic has dealt Australia a severe economic and fiscal shock, with S&P predicting the A$2 trillion ($1.23 trillion) economy would plunge into recession for the first time in nearly 30 years.
This would cause a “substantial deterioration of the government’s fiscal headroom at the ‘AAA’ rating level,” S&P said in a statement.
Treasurer Josh Frydenberg said the outlook downgrade was “a reminder of the importance of maintaining our commitment to medium term fiscal sustainability.”
The government has pledged A$320 billion ($197.73 billion) in fiscal spending, or 16.4 percent of annual economic output, to backstop the economy and prevent a crisis as the pandemic shuts companies and leaves many unemployed.
Some fund managers said Wednesday’s outlook downgrade was unlikely to raise the government’s borrowing costs by much though it could hurt Australian companies whose ratings are dependent on the sovereign rating.
“A large proportion of credit funds are mandated to maintain funds in a specific ratings bucket,” said Asmita Kulkarni, Director Investment Strategy at FIIG.
“With potential widespread downgrades we could see funds being forced to sell-down investment which would result in a widening of credit spreads.”
Australian long-dated bonds sold off after S&P’s outlook downgrade with 10-year yields jumping to 0.967 percent from 0.909 percent at Tuesday’s close.
Economists said they do not expect a rating downgrade prior to the federal budget due on Oct. 6.
It was only in September 2018 that S&P upgraded Australia’s outlook to “stable” from “negative” as the budget came close to balance. The government had even projected a surplus for the current fiscal year and next.
While all those predictions are now under water, Australia’s public debt is still in good shape, S&P noted.
“While fiscal stimulus measures will soften the blow presented by the COVID-19 outbreak and weigh heavily on public finances in the immediate future, they won’t structurally weaken Australia’s fiscal position,” S&P said.
“This expected improvement is a key supporting factor of our ‘AAA’ rating.”