April 10, 2025 • 38 mins
Even with all the turmoil of the past few months, the energy transition isn’t taking a break. Last year, global spending on clean-energy technologies was more than $2 trillion, according to BloombergNEF. Yet only a small fraction of that money makes its way to developing countries. This week on Zero, Avinash Persaud, climate advisor to the president of Inter-American Development Bank, joins our Moving Money series, and answers the question: how do we make the financial system work for climate action, not against it?
Explore further:
- COP29 Is All About Money. Get Ready for Fights: Moving Money
- Unlocking Climate Trillions With a Global Plan From a Sinking Island
Zero is a production of Bloomberg Green. Our producer is Oscar Boyd. Special thanks to: Mythili Rao, Sommer Saadi, Mohsis Andam, Blake Maples and Siobhan Wagner. Thoughts or suggestions? Email us at zeropod@bloomberg.net. For more coverage of climate change and solutions, visit https://www.bloomberg.com/green.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Welcome to zero. I am Akshatrati. This week, back to basics.
It's clear that we are in a moment of flux
in global affairs. President Donald Trump's America First doctrine is
(00:23):
shaking up diplomacy, trade, and markets. The hope that wars
across Europe, the Middle East and Africa will ease up
isn't really panning out. At the same time, climate change
isn't slowing down either, and the impacts in vulnerable countries
are growing. The energy transition isn't taking a break either.
Last year, the global spend on energy was three trillion dollars,
(00:46):
of which more than two trillion dollars was on clean
energy technologies. According to Bloomberg nef So, in trying to
make sense of things, I found that sometimes it can
help to go back to the basics. There are fundamental
forces that shape our world, and especially during a tumultuous time,
it helps to understand them a little more deeply to
(01:07):
be able to make a better mental map of the future.
So for the next three episodes, we're going to explore
the basics of finance for climate solutions and continue our
Moving Money series.
Speaker 2 (01:19):
Developing countries have said the number we need is a trillion.
Developed countries have said maybe, but that's not coming from
our budgets. There's no space there that could come from
an onion of things. The outer layer might be private sector,
the middle layer might be MDBs, and the inner layer
(01:40):
may be government budgets.
Speaker 1 (01:43):
We're welcoming back Avin ash Barsod, special advisor on climate
risks to the President of the Inter American Development Bank
and former economic advisor to Barbados Prime Minister Mia Mortley.
Over the next three episodes, we'll be exploring the role
of multilateral development banks and the various innovative financial tools
that can unlock private sector investments in the climate transition.
(02:06):
But first, let's take a big picture look at how
the global financial order works in the first place, and
how it can be reshaped for the climate era. We
start the conversation by addressing one of the big challenges
right now, the cost of capital. Think of it this way.
When the cost of borrowing money is cheap, it's easier
to build the clean energy projects we need, like solar panels,
(02:30):
wind farms, and batteries. Developed countries typically enjoy cheaper costs
of capital, meaning stuff can be built with lower borrowing costs.
Developing countries, on the other hand, have much much higher
cost of capital thanks to real or perceived risks of
doing business there. This slows their growth and in the
worst case scenario, can lead to a debt trap where
(02:52):
they borrow more money just to make the interest payments
on old loans. So I asked Savinage, how do we
flow the script and how do we lower the cost
of capital and make the financial system work for climate
action not against it. Hi, Avinash, welcome back to another
(03:15):
episode of Moving Money. Thank you. Today we're going to
talk about the cost of capital. We've seen a lot
of money go into developed countries for renewables, and those
countries typically have lower interest rates and thus they're able
to borrow money and pay small amounts on their interest payments.
But developing countries typically have higher interest rates, and thus
(03:38):
even if they had the capital to be borrowed, they
will have to pay more on those interest rates. But surely,
if the cost of renewbal just keeps falling, high interest rate,
low interest rate, doesn't really matter, it'll scale, right.
Speaker 2 (03:49):
So the issue of the cost of capital only occurred
to me a couple of years ago, and indeed, if
you look at the if you look at the negotiations,
this concept of cost of capital is new. It's only
now in communicats in G twenty in the last two years.
Speaker 1 (04:09):
Oh wow, And those interest rates are a thing that
the financial system cannot work without. People were not.
Speaker 2 (04:16):
Thinking those terms. As you and I have talked about before,
many of the people involved in this space are not
macro people. They are project financiers, so they're not thinking
about global interest rates or country interistrates. They're thinking about
a particular project they're trying to finance. And I remember
I was in a negotiation room and the negotiative of
(04:39):
a small European country is saying, finance isn't the problem,
he says, and the rest of us are completely bored
over by him thinking this, because we're thinking finance is
the problem. And I'm sitting there trying to understand him.
And I pick up my phone and I google as
his country issued a ten year bond recently and it
(04:59):
had and his cost of capital for his government was
like three percent. And he was sitting next to the
negotiator from South Africa. So I then google what was
the last ten year bond issue for South Africa twelve
point five, and the other next to him was was Brazil,
And I google again and it's like thirteen percent. I'm thinking, Okay,
(05:22):
that's the thing. He's not experiencing the cost of capital.
So for him, finance isn't the problem for him, it
may be about policies and regulations and how does he
tax the right thing and subsidize the right thing. For
the other two countries, there's no money flowing.
Speaker 1 (05:39):
Isn't the cost of capital just simply interest rates? I
have a mortgage, I pay a particular interest Sadly it's
gone up in recent years. Welf, what are interest rates?
It's the price of money, and so it is the
cost of capital. It's all circular, not entirely so. In
Europe and the States, capital is abundant and it is cheap.
There's a lot of sas a lot of capital, and
(06:03):
the amount of investment going on is not huge. So
investment takes away from the savings and makes the capital
more scarce. But there's abundance of capital. The price of
money is that prices demand and supply the demand for
the money to invest and supply the money through savings.
(06:23):
You go to a developing country and there's very limited
savings because they're poor, they're small. They're economies. Maybe a
big country, big population, but the economic activity is small
and the demand for things that could be done are huge.
So capital is really scarce. So demand high supply, low
(06:43):
price is high, their cost of capitalist high. Now when
you understand it in that way, you realize what the
solution because many people say, ah, yes, well this is
because they're having to pay a lot of foreign exchange
hedging costs. So why don't we just borrow locally. Yeah,
borrow locally means more demand for investment in a place
(07:05):
with very limited supply of savings. So that's going to
push the cost of capital up even more. So what
we actually need to do is create a channel, a
channel from the place of abundant, cheap capital to the
place of scarce, expensive capital. And when we build this channel,
why is this channel not flowing? Why is money not flowing?
Speaker 2 (07:27):
And their various obstacles, and one obstacle is that, well,
the abundant capital is in dollars and the scarce capital
is in a local currency, and you have foreign exchange risk.
Because one of the interesting things about renewables is, you know,
why is this a new problem again? Foreign exchange is
another one of those issues that was not on their
communicators agendas anywhere just two years ago. Because fossil fuel investments,
(07:52):
for example, are often in dollars because the thing you're
investing in is priced in dollars, can be traded in dollars.
But when I'm buying a solar farm in Brazil, I'm
not getting earning dollars. I'm earning a local currency. Hel
So now I have a foreign exchange problem. I'm earning
revenues in one currency and I've got this other currency
(08:15):
that I've invested in.
Speaker 1 (08:16):
That's true, if you bought gasoline in Brazil, you would
be paying in real and then somebody up the chain
has to pay eggs on mobile. I guess I got
to sell.
Speaker 2 (08:27):
Gasoline in US dollars. Though I can export the gasoline
in US dollars, I can't export my solar farm and
wind turbine in US dollars. So it's a fundamentally different problem.
And so we want this massive investment, and we're coming
across this problem, and so the solution is to clear
out this channel, to unblock this channel. And we found
(08:50):
that the project financiers think that the solution is to
lower the risk.
Speaker 1 (08:55):
Of the project.
Speaker 2 (08:56):
As someone who used to work for developing country government
and and so, I was a chief investment officer, if
you like, for Barbados for a few years, and my
job was to speak to these investors and try to
attract them. And what I was competing with the governments
will basically offered the investors a lot. We try to
(09:16):
deal with all of their uncertainties. You know, they had
to pick the right things to invest in. But if
they were worried about the currency, we would say, well,
you know, we'll try to hedge that from you. They
were worried about the change in law, change in tax,
They were guaranteed everything, and they still didn't really want
to come, partly because of the foreign exchange of volatility
(09:38):
and uncertainty. So we think the way in which we
can reduce the cost of capital in developing countries is
to unblock the flow from places of abundant capital by
managing the foreign exchange. Now, if cost of capital is
a problem, it really frames your approach to many things.
So in a rich country, you can think about dealing
(10:00):
with the problem of carbon and environment by saying I
need to tax things that pollute and subsidize things that
are clean. And because the cost of capital is low,
that price signal will have investors switching. They will stop
investing in a high tax thing and they'll invest in
the subsidy thing. Go to a developing country and you
(10:22):
impose the same tax and subsidy, but you've got a
high cost of capital. They can't do that because they
will need lots of money to invest in the new thing.
And that's the other thing about renewables is they're very
capital intensive. They're operating costs low, but they're very capital intensive,
so you need to have capital and capital costs a
lot of money, and that is stopping renewable investments happening
(10:45):
in developing countries.
Speaker 1 (10:47):
We've talked about how if we want the capital to
flow to developing countries, it's going to come from capital
owners with sit in developed countries. If they invest that
in developing countries, that will allow for more capital to
be there in developing countries and thus will lower their
cost of capital. One is currency exchange risk, one is
(11:08):
political risk. What else is there that they worry about
and can they hedge those other risks as well, economists,
we like to break things down into simple things. It's
a reductivist science. We'd love to be to tell people
there's only one thing you need to do. The reality
is the actual process of investing is quite messy, and
(11:29):
so a company will say, why am I going to
this place I've never been to before to manage a
permitting process I've never managed before. So there's a whole
bunch of uncertainties, you know. The difference between uncertainty and
risk is risk. I can quantify a lot of these things.
They can't quantify. Will it take a day to get
my permit or will it take me three hundred days?
(11:51):
Huge impact on the cost of this business, And so
they are multiple things, but many of them there is
insurance for it. So the insurance of the word bank
MEAGA will offer you political insurance. Export credit agencies offer
political insurance, so there are number of types of insurance
(12:14):
to reduce that. But a country can't offer you insurance
against their own currency because that's saying insurance against themselves
having a problem, at which point they won't be able
to do anything. So it's so we need other players
to come in and manage that. But I think that's
the main obstacle, are the kinds of risk that the
(12:36):
country themselves can't guarantee because the country is trying to
guarantee you everything else. One of the things I found
I have to explain often to my friends and developed
countries is that developing countries promise investors that they can
take them to court in a foreign court for any
change in policy. Now, if you went to Britain or
(13:00):
Money and said, as an investor, I want that if
you change your policies, that you have to compensate me
in full, and if you don't, I'll take you to London.
They'll look at you and you know, think you're crazy.
They say, I can't change policies. What's happened to sovereignty.
I have the sovereigny.
Speaker 2 (13:16):
I'm in parliament, I elect people, I change policies. But
developing countries they've had to give up that to attract investments.
So they actually guarantee a lot of stuff, but they
are things they can't guarantee.
Speaker 1 (13:37):
After the break is cheap money, prolonging the lifespan of
fossil fuels. And by the way, if you're enjoying this episode,
please take a moment to rate and review the show
on Apple Podcasts and Spotify. It helps other listeners find
the show. One way to try and tackle the climate
(14:05):
problem is to electrify as much as possible and decarbonize electricity. Now,
we're getting pretty good at the decarbonization of electricity part
because clean energy is getting cheaper and there are big forces,
economic forces, demand levers that are coming for clean power.
On the electrification side, we aren't doing all that much.
(14:29):
There is electrification or transport that is happening, but most
of the forces of electrification are in countries that are
fossil fuel poor. So countries like China, which does not
have very much oil and gas, or India, which does
not have very much oil or gas, are electrifying much
faster than countries like the UK or Germany.
Speaker 2 (14:49):
Can I just ask you a question there? So you're
saying the degree of electrification is more driven by whether
the country has fossil fuels as opposed to I guess
my previous thinking was it was about sectors, right, So industry,
which may be hard to abate, is how to electrify
parts of sectors. But you're saying it's less sector driven
(15:10):
and more country driven.
Speaker 1 (15:11):
Correct You can electrify parts of industry, and there are
technology constraints on how much you can electrify, or how
quickly you can do it, or what cost you can
do it. But the primary driver of electrifications so far
has been more tied to what fuels that country has
access to domestically, because any fuel that they have to
(15:32):
import is more expensive as to trade deficit, etc. Etc.
So it puts developed countries like the UK and Germany
and the US below the world average when it comes
to their source of energy coming from electricity, which might
feel strange to people. But projecting four years further, if
(15:54):
America keeps on that trajectory, which is to not electrify
all that much, and the rest of the world like
China and India start to electrify more and more, we
could start to see America become less of a leader
in the future of energy, which is a strange thing
to say today because America produces the most amount of
oil in the world, the most amount of gas in
(16:15):
the world. But I am talking about the future of energy,
which I believe is an electrified future.
Speaker 2 (16:21):
You're not just talking about the future energy. Actually, there's
also the future of economic growth in these countries because
electrification produces significant efficiencies which boost growth over and above
the benefits that now will becoming from cheaper fuel sources.
Speaker 1 (16:40):
And that, to me is the central point I want
to get to as we explore why energy and economics
play an intertwined role. So, as I was thinking about
whether there's an economic driver for America to electrify, I
couldn't find one. It is blessed with fossil fuels, It
will have fossil fuels for a long time. That is
an energy equation that I can understand pretty easily.
Speaker 2 (17:03):
Well. Couldn't the driver be that it is actually more
economically efficient?
Speaker 1 (17:07):
Perhaps, but only if there is an economic constraint on
that country to want to be more economically efficient. America
is saying, partly through the fact that the fossil fuel
market and prices are actually a fairly contrived thing, that
they're partly controlled supply and demand can be fairly controlled.
(17:34):
That they have enabled them to have a cheaper price
than elsewhere, which is actually slowing their shift towards a
more fundamentally efficient thing to do. When there was an
economic crisis and energy crisis in Europe after Russia's attack
on Ukraine, Europe started to electrify faster. America tends to
(17:57):
face none of these crisis it doesn't have on its borders.
It doesn't have an energy crisis given how much it's
blessed with fossil fuels. And then finally, this is the
thing that makes it seem like it's got the most
unfair advantage is it's got the world's reserve currency.
Speaker 3 (18:14):
I think you've actually created a whole other reason why
fossil fuel substies are bad. People think fossil fuel substies
are bad because of the fact that we're subsidizing a
polluting industry, but it's also subsidizing economic inefficiency and slowing
(18:35):
the adjustment. And the fact that the US has reserve
currency status you're saying allows them to do that for longer.
Allows the frog to be in the boiling water for
longer than it might otherwise be able to do if
it didn't have those crutches. Now, reserve currency status is
something that many people find hard to grasp, and I
(19:00):
find a useful way of saying it, especially for people
of my age who remember writing checks, is that reserve
currency status is like writing checks to pay for things
that nobody ever caches.
Speaker 2 (19:14):
They're quite happy to hold your uncashed check because your
uncashed check is a reserve currency that they could use
in the future when they're a difficult situation, and so
that allows them to consume more than they produce to
run a current account deficit, run a fiscal deficit. But
(19:36):
people with countries with reserve currency status, where people are
happy to sell goods but not cash the checks, can
run these deficits.
Speaker 1 (19:45):
But it might be worth taking even one more step
back to understand why we ended up in this situation
in the first place. My understanding is currency used to
be tied to the gold standard. If you didn't have gold,
you couldn't produce the currency. And then at some point
that was taken off, and so a currency just became
a fiat, which is it is backed by the status
(20:07):
of that government and you have to trust in that
government to provide you the value of that currency. And
because America was the world's hegimen at that time, the
dollar started to become the reserve currency of the world.
Maybe there's a better way of understanding.
Speaker 2 (20:25):
Yes, I'm not internally sure that's the way I would
view it. Before the dollar was a reserve currency. Stilling
was the world's reserve currency. The Roman currency was a
reserve currency. You're finding Roman coins thousands of miles away
from where the Roman Empire was because clearly their currency
was a reserve currency. So the key to being a
(20:46):
reserve currency is you are a big trader, and there's
value in people holding your currency being able to buy
your goods in the future. So they are happy to
hold your current if you don't produce anything and they
don't sell you anything that's not very valuable. So we've
never really had a small country or a non trader
(21:09):
ever become a reserve currency country. So it's a function
of your position in the world trade and it kind
of amplifies your positions. So if you're the world's biggest trader,
you then become even bigger in international finance. So the
US maybe one side of fifty percent of global trade,
(21:31):
but the US dollar is one side of almost eighty
percent of financial transactions because it has this reserve currency status.
Speaker 1 (21:40):
Ali Zaidi, who is the National Climate Advisor to President Biden,
said that if under Donald Frum, America doesn't pursue the
technologies of the twenty first century, which are mostly electric.
It would be economic malpractice because as a result, America
will start to fall behind the rest of the world,
(22:00):
and as it does so, it may have to trade
less with the world, and maybe the reserve currency status
of the dollar starts to weaken.
Speaker 2 (22:09):
But that will be hell. I mean, I think that
we have some experience of that. So if becoming a
reserve currency is like writing checks to buy stuff and
no one ever cashing your checks, losing reserve currency status
is all those checks come back to be cashed at
(22:29):
the same time. This is what happened in the UK
from the mid nineteen sixties. It led to the Sterling
devaluation of sixty seven, the so called Barsel Accords of
nineteen sixty eight, which will when there had to be
an international agreement to stop people sending back their sterling
and asking for to be repaid in gold or other things.
(22:51):
They had to have a special agreement. The irony was
the minute they announced this international agreement to save sterling.
It woke everyone up to the fact that Stirling Who's
engrave challenge and it collapsed afterwards. So the September bars
agreements in sixty eight were a real problem.
Speaker 1 (23:09):
It's like the streysand effect, but playing out in the sixties. Now.
One thing I enjoy about our conversation is that we
start from one place and we typically start to unspool
more and more complicated things. One thing that comes up
again and again is the international system. Now, what is
a way to define the international system? I think we
(23:30):
all have a sense of it, but is there a
clearer way of understanding it?
Speaker 2 (23:35):
I think it actually comes back to the international reserve
currency aspect. So the international system, to me, you see
it most when there is a global fright of some
kind a shock. It could be a war, it could
be some natural disaster. You see that investors get scared,
(23:59):
and invest who get scared run to safety. And what
we're finding that they run to the same place. That's
the international reserve currency, and that today is the US dollar.
So you see by the system, we had this EBB
and flow of capital to and from US dollars, and
that's the system. And now that's partly a function of history,
(24:22):
a function of the size of the international of the
US economy that it has the capacity to use absorb
your dollars that you've kept as reserves. It's also then
becomes morphed into conventions. So when you look at credit ratings,
when you look at accounting standards, the US dollar and
dollar assets are given special status because the convention writers
(24:47):
will say, well, that is more liquid if you've got
it in dollars. And so the world has safe assets,
and these safe assets are in US dollars. And it's
a very interesting dimension of development is that the US
is an exporter of safe assets and developing countries are
(25:07):
importers of safe assets. And that's the international system.
Speaker 1 (25:11):
But if China is now running a trade surplus substantial
one and has been running it for many many years now,
it's also starting to wield a lot of power with it. Yuon,
So the Chinese Central Bank has created a digital yuan,
and I have heard from suppliers in Europe that get
(25:33):
their solar panels or other electricity related infrastructure from China
directly find it easier to pay the Chinese supplier through
the digital yuon rather than having to go through multiple
banks where the euro will be committed to a dollar,
will be then converted back to a yuan and go
(25:53):
through costs at every transaction. The cost of transaction falls,
the speed of transaction falls, and more and more Yuon
gets traded.
Speaker 2 (26:02):
That's an important development. But you know the measure of
whether it is having global impact is when China starts
running deficits. China running a surplus is a sign that
people are not really hoarding you On. When people start
hoarding u On internationally, then China goes into that place
(26:23):
where they are consuming stuff, writing checks to pay for it,
checks and you are and people aren't catching the checks,
so they can consume more than they're producing and running
a current account deficit. And clearly that's not where we
are today, but we may not be a million miles
from that. But so our future, if the future is Chinese,
(26:46):
then that future contains big Chinese deficits.
Speaker 1 (26:49):
So this power imbalance where America acts as a fossil
fuel state because it has so much fossil fuels and
has this reserve currency that gives it essentially an unlimited
checking account, how does that make it easier or harder
for developing countries to move to clean energy to increase
the amount of climate finance that we are going to need.
Where money, maybe dollars, flows from America to developing countries.
Speaker 2 (27:14):
Now it is actually strongly linked, but I need to
build that story a little bit. So firstly, if we
want the big middle income countries India in particular Brazil, Mexico, Indonesia,
South Africa to shift into renewables and the planet needs
(27:35):
them to shift massively and rapidly, the future energy demand
in India's about to explode and if those are fossil
fuel fired, that's going to be a problem. We're expecting
massive investment. We need massive investment by definition, more than
they have domestic savings. If they have enough domestic savings
(27:57):
to match the investment, we know we're not doing enough
investment because we're requiring there's some massive global sized investment boom.
So they have to get the money from abroad. The
international system has to work for the planet and for climate,
and it's not because of this imbalance. And as a
result we have these very different costs of capital. Cost
(28:21):
of capital in India, even India, big country, deep liquid
markets would be about eight percent to raise money eight
percent plus, whilst it may still be three percent four
percent in Europe. So we need to bring capital from
places where it's abundant to places where it's scarce, and
this channel is blocked. The channel is blocked because investors
(28:43):
are concerned about this reserve currency status and the impact
of that, and they don't think in terms of reserve
current status. But what they're thinking about is currency volatility.
Because if you are the if you are an import
of safe assets, what happens is your currency is very volatile.
When things are going well and people don't need safety,
(29:06):
people are flooding into your country, and your currency is booming.
When things are looking uneasy around the world, may have
nothing to do with your country, and maybe your neighboring country.
Then money is fleeing and so the currency is going
up and down and you can do nothing about it.
And international investors see that, they see that volatility, and
(29:27):
they are saying, well, I can't manage that volatility. That
volatility is not even to do with your country, to
do with the international system, and what can you do
about it?
Speaker 3 (29:38):
Now?
Speaker 2 (29:38):
When you have problems in a country with reserve currency status,
they can do stuff about it. You know, when the
economy is hit badly, they can cut infrast rates, they
can expand spending. Investors are still there, They're not fleeing,
they're not worried about your policies. This imbalance in the
system is blocking the f of money from places where
(30:02):
the capital is the places where we need the capital.
So we need a solution that takes away this imbalance.
That actually means that for renewable energies, we can count
these middle income countries as being part of the reserve
currency zone and not subject to this kind of volatility.
(30:23):
And that's something we're working on with the Foreign Exchange
Liquidity Facility, using the fact that the multilateral development banks
are also triple A, so they are safe assets, and
so we will spread our cordon of safety around projects
involved in renewable energy so that the international investor knows
(30:45):
they can rely on a development bank to be lending
the project dollars at times of as international stress. The
project has to pay back, but they're less subject to
the volatility of the international financial system and the volatility
of the currency markets.
Speaker 1 (31:04):
That's a stunning explanation for a thing that I came
across in my very early days of journalism. I joined
a news organization called Courts, and on the very first
day of my job, there was a betting round going
on in the general slack channel, and it was on
how many jobs in the US will the job's numbers say,
(31:28):
And it made no sense to me, as somebody with
a science background, not an economics background. Why the world
cares about the US economy producing a few hundred thousand
jobs in a monthly basis? Now I know because when
something happens to the US, when it sneezes, everybody cares
because of the dollar, because the reserve currency, because tiny
(31:49):
volatility of the US economy has much bigger ripple effects
in the rest of the world.
Speaker 2 (31:55):
And you know, what happened during COVID is a very
interesting way of matching something that everyone experience and so
know a little bit about with this international financial system.
So COVID happens impacts us all roughly around the same time,
the developed countries, with their reserve currencies are able to
slash interest rates, we go back towards zero. They're able
(32:17):
to expand fiscal policy, and investors don't flee because they
see governments reacting. Investors flee from the developing countries who
are unable to act that way. So they have to
start raising interest rates to keep money in and they
have to cut back their spending. Their currencies are falling,
and they deepen their recession because that's the only way
(32:39):
they can respond. Then, as a result of them deepening
the recession and the developed countries being able to respond quickly,
the developed countries have the recovery quicker. So now what
they've got to do is they've got to raise their
interest rates so that they're recovering faster. Inflation's coming up,
so they raise interest rates and setting their currencies up.
And again money's fleeing from the developed countries because they're
(33:01):
now being attracted from these higher infrast rates available in
the safe haven. So again the recovery slowed in developing
countries because they've got to respond to money leaving. So
when they should be recovering, the recovery is delayed because
they're raising interest rates before their economy is recovered, and
they're having to cut back spending before their economy is recovered.
(33:22):
So what you saw was the response of the developing
world was they were unable to respond fast enough in
terms of policy on the way down, and they were
unable to recover fast enough on the way up. And
that was because nothing to do with what they were
doing in their country. That was to do with the
international financial system and the way it works, and.
Speaker 1 (33:43):
In some way as climate change plays out and more
and more disasters are felt. Let's hope it's never as
extreme as the pandemic was at any given time, but
we will sustain that level of impact over a longer period,
and we'll see developing countries suffer through the same cycle,
perhaps in a lender time frame.
Speaker 2 (34:00):
So developing countries, especially finance ministry officials, central bank officials,
they have long seen this and long wondered what can
we do about it? It has been very hard to
do something about it because they were never very significant
in the international economy. Now they are. They are looking so,
for example, the bricks countries are thinking about, well, maybe
(34:22):
we should create our own reserve currency. And because the
brick countries are big traders, they actually have the potential
of doing something in a way that they couldn't have done,
say twenty years ago. I'm not sure they have a
solution yet, but there's a potential that they could do something,
and it would seem to me that it would be
(34:43):
the interests of the beneficiaries of the existing system to
prolong that system by trying to make the system work
better for everybody. And if they don't do that, the
system will at some point be usurped by another system.
Speaker 1 (34:59):
Could you imagine what that other system might be?
Speaker 2 (35:01):
The future of international reserve currency status will be determined
by who is the biggest trader. And we're in a
world increasingly where China is exporting and importing from developing
countries and maintaining its increasing share of international trade, and
so they are potentially the next beneficiary. And you know,
(35:27):
India is an alternative as well, because the one challenge
that China has has a few but one of the
main ones. And often you hear people say that China
will get owed before it gets rich. That the one
child policy meant that China has an acute demographic and
(35:47):
it's aging heavily, and that aging will slow its growth
and slow its economic presence globally. India is still at
a sweet spot on demographics and expanding, and that divergence
will increase, and so we will be in a world
at some point in this century in which India is
(36:08):
the world's largest economy and the largest trader, and so
India or China maybe become the next reserve currency.
Speaker 1 (36:16):
Wait what I mean? I thought it'll be either an
American century or Chinese century. I'm an Indian, but did
not expect India to become the world's largest economy.
Speaker 2 (36:27):
And it's not something they're intending to, you know. Whilst
America and China have been quite deliberate about their international role,
it will be in somewhat typical Indian fashion, haphazardly and
happening just out of some crazy evolution.
Speaker 1 (36:44):
Thank you, Having Nash, Thank you very much. Thank you
for listening to Zero. Next week in the Moving Money series,
we'll be looking at the role of multilateral development banks.
If you have any questions about climate finance, please write
to us at Zero pod at Bloomberg dot net. And
(37:07):
if you like this episode, please take a moment to
rate and review the show on Apple Podcasts or Spotify,
Share this episode with a friend or with your mortgage advisor.
And now for the sound of the week. M Yes,
(37:28):
that's the sound of Japan's Maglev train performing a test
run at five hundred kilometers per hour. This episode was
produced by Oscar Boydberg's head of podcast is Sage Bowman
and head of Talk is Brendan neunim Our. Theme music
is composed by Wonderly Special thanks to might Ley Rau
Somarsadi Mosses and Blake Maples and Shawan Wagner i'm Akshadrati
(37:53):
back next week for another episode of Moving Money,
Welcome to zero. I am Akshatrati. This week, back to basics.
It's clear that we are in a moment of flux
in global affairs. President Donald Trump's America First doctrine is
(00:23):
shaking up diplomacy, trade, and markets. The hope that wars
across Europe, the Middle East and Africa will ease up
isn't really panning out. At the same time, climate change
isn't slowing down either, and the impacts in vulnerable countries
are growing. The energy transition isn't taking a break either.
Last year, the global spend on energy was three trillion dollars,
(00:46):
of which more than two trillion dollars was on clean
energy technologies. According to Bloomberg nef So, in trying to
make sense of things, I found that sometimes it can
help to go back to the basics. There are fundamental
forces that shape our world, and especially during a tumultuous time,
it helps to understand them a little more deeply to
(01:07):
be able to make a better mental map of the future.
So for the next three episodes, we're going to explore
the basics of finance for climate solutions and continue our
Moving Money series.
Speaker 2 (01:19):
Developing countries have said the number we need is a trillion.
Developed countries have said maybe, but that's not coming from
our budgets. There's no space there that could come from
an onion of things. The outer layer might be private sector,
the middle layer might be MDBs, and the inner layer
(01:40):
may be government budgets.
Speaker 1 (01:43):
We're welcoming back Avin ash Barsod, special advisor on climate
risks to the President of the Inter American Development Bank
and former economic advisor to Barbados Prime Minister Mia Mortley.
Over the next three episodes, we'll be exploring the role
of multilateral development banks and the various innovative financial tools
that can unlock private sector investments in the climate transition.
(02:06):
But first, let's take a big picture look at how
the global financial order works in the first place, and
how it can be reshaped for the climate era. We
start the conversation by addressing one of the big challenges
right now, the cost of capital. Think of it this way.
When the cost of borrowing money is cheap, it's easier
to build the clean energy projects we need, like solar panels,
(02:30):
wind farms, and batteries. Developed countries typically enjoy cheaper costs
of capital, meaning stuff can be built with lower borrowing costs.
Developing countries, on the other hand, have much much higher
cost of capital thanks to real or perceived risks of
doing business there. This slows their growth and in the
worst case scenario, can lead to a debt trap where
(02:52):
they borrow more money just to make the interest payments
on old loans. So I asked Savinage, how do we
flow the script and how do we lower the cost
of capital and make the financial system work for climate
action not against it. Hi, Avinash, welcome back to another
(03:15):
episode of Moving Money. Thank you. Today we're going to
talk about the cost of capital. We've seen a lot
of money go into developed countries for renewables, and those
countries typically have lower interest rates and thus they're able
to borrow money and pay small amounts on their interest payments.
But developing countries typically have higher interest rates, and thus
(03:38):
even if they had the capital to be borrowed, they
will have to pay more on those interest rates. But surely,
if the cost of renewbal just keeps falling, high interest rate,
low interest rate, doesn't really matter, it'll scale, right.
Speaker 2 (03:49):
So the issue of the cost of capital only occurred
to me a couple of years ago, and indeed, if
you look at the if you look at the negotiations,
this concept of cost of capital is new. It's only
now in communicats in G twenty in the last two years.
Speaker 1 (04:09):
Oh wow, And those interest rates are a thing that
the financial system cannot work without. People were not.
Speaker 2 (04:16):
Thinking those terms. As you and I have talked about before,
many of the people involved in this space are not
macro people. They are project financiers, so they're not thinking
about global interest rates or country interistrates. They're thinking about
a particular project they're trying to finance. And I remember
I was in a negotiation room and the negotiative of
(04:39):
a small European country is saying, finance isn't the problem,
he says, and the rest of us are completely bored
over by him thinking this, because we're thinking finance is
the problem. And I'm sitting there trying to understand him.
And I pick up my phone and I google as
his country issued a ten year bond recently and it
(04:59):
had and his cost of capital for his government was
like three percent. And he was sitting next to the
negotiator from South Africa. So I then google what was
the last ten year bond issue for South Africa twelve
point five, and the other next to him was was Brazil,
And I google again and it's like thirteen percent. I'm thinking, Okay,
(05:22):
that's the thing. He's not experiencing the cost of capital.
So for him, finance isn't the problem for him, it
may be about policies and regulations and how does he
tax the right thing and subsidize the right thing. For
the other two countries, there's no money flowing.
Speaker 1 (05:39):
Isn't the cost of capital just simply interest rates? I
have a mortgage, I pay a particular interest Sadly it's
gone up in recent years. Welf, what are interest rates?
It's the price of money, and so it is the
cost of capital. It's all circular, not entirely so. In
Europe and the States, capital is abundant and it is cheap.
There's a lot of sas a lot of capital, and
(06:03):
the amount of investment going on is not huge. So
investment takes away from the savings and makes the capital
more scarce. But there's abundance of capital. The price of
money is that prices demand and supply the demand for
the money to invest and supply the money through savings.
(06:23):
You go to a developing country and there's very limited
savings because they're poor, they're small. They're economies. Maybe a
big country, big population, but the economic activity is small
and the demand for things that could be done are huge.
So capital is really scarce. So demand high supply, low
(06:43):
price is high, their cost of capitalist high. Now when
you understand it in that way, you realize what the
solution because many people say, ah, yes, well this is
because they're having to pay a lot of foreign exchange
hedging costs. So why don't we just borrow locally. Yeah,
borrow locally means more demand for investment in a place
(07:05):
with very limited supply of savings. So that's going to
push the cost of capital up even more. So what
we actually need to do is create a channel, a
channel from the place of abundant, cheap capital to the
place of scarce, expensive capital. And when we build this channel,
why is this channel not flowing? Why is money not flowing?
Speaker 2 (07:27):
And their various obstacles, and one obstacle is that, well,
the abundant capital is in dollars and the scarce capital
is in a local currency, and you have foreign exchange risk.
Because one of the interesting things about renewables is, you know,
why is this a new problem again? Foreign exchange is
another one of those issues that was not on their
communicators agendas anywhere just two years ago. Because fossil fuel investments,
(07:52):
for example, are often in dollars because the thing you're
investing in is priced in dollars, can be traded in dollars.
But when I'm buying a solar farm in Brazil, I'm
not getting earning dollars. I'm earning a local currency. Hel
So now I have a foreign exchange problem. I'm earning
revenues in one currency and I've got this other currency
(08:15):
that I've invested in.
Speaker 1 (08:16):
That's true, if you bought gasoline in Brazil, you would
be paying in real and then somebody up the chain
has to pay eggs on mobile. I guess I got
to sell.
Speaker 2 (08:27):
Gasoline in US dollars. Though I can export the gasoline
in US dollars, I can't export my solar farm and
wind turbine in US dollars. So it's a fundamentally different problem.
And so we want this massive investment, and we're coming
across this problem, and so the solution is to clear
out this channel, to unblock this channel. And we found
(08:50):
that the project financiers think that the solution is to
lower the risk.
Speaker 1 (08:55):
Of the project.
Speaker 2 (08:56):
As someone who used to work for developing country government
and and so, I was a chief investment officer, if
you like, for Barbados for a few years, and my
job was to speak to these investors and try to
attract them. And what I was competing with the governments
will basically offered the investors a lot. We try to
(09:16):
deal with all of their uncertainties. You know, they had
to pick the right things to invest in. But if
they were worried about the currency, we would say, well,
you know, we'll try to hedge that from you. They
were worried about the change in law, change in tax,
They were guaranteed everything, and they still didn't really want
to come, partly because of the foreign exchange of volatility
(09:38):
and uncertainty. So we think the way in which we
can reduce the cost of capital in developing countries is
to unblock the flow from places of abundant capital by
managing the foreign exchange. Now, if cost of capital is
a problem, it really frames your approach to many things.
So in a rich country, you can think about dealing
(10:00):
with the problem of carbon and environment by saying I
need to tax things that pollute and subsidize things that
are clean. And because the cost of capital is low,
that price signal will have investors switching. They will stop
investing in a high tax thing and they'll invest in
the subsidy thing. Go to a developing country and you
(10:22):
impose the same tax and subsidy, but you've got a
high cost of capital. They can't do that because they
will need lots of money to invest in the new thing.
And that's the other thing about renewables is they're very
capital intensive. They're operating costs low, but they're very capital intensive,
so you need to have capital and capital costs a
lot of money, and that is stopping renewable investments happening
(10:45):
in developing countries.
Speaker 1 (10:47):
We've talked about how if we want the capital to
flow to developing countries, it's going to come from capital
owners with sit in developed countries. If they invest that
in developing countries, that will allow for more capital to
be there in developing countries and thus will lower their
cost of capital. One is currency exchange risk, one is
(11:08):
political risk. What else is there that they worry about
and can they hedge those other risks as well, economists,
we like to break things down into simple things. It's
a reductivist science. We'd love to be to tell people
there's only one thing you need to do. The reality
is the actual process of investing is quite messy, and
(11:29):
so a company will say, why am I going to
this place I've never been to before to manage a
permitting process I've never managed before. So there's a whole
bunch of uncertainties, you know. The difference between uncertainty and
risk is risk. I can quantify a lot of these things.
They can't quantify. Will it take a day to get
my permit or will it take me three hundred days?
(11:51):
Huge impact on the cost of this business, And so
they are multiple things, but many of them there is
insurance for it. So the insurance of the word bank
MEAGA will offer you political insurance. Export credit agencies offer
political insurance, so there are number of types of insurance
(12:14):
to reduce that. But a country can't offer you insurance
against their own currency because that's saying insurance against themselves
having a problem, at which point they won't be able
to do anything. So it's so we need other players
to come in and manage that. But I think that's
the main obstacle, are the kinds of risk that the
(12:36):
country themselves can't guarantee because the country is trying to
guarantee you everything else. One of the things I found
I have to explain often to my friends and developed
countries is that developing countries promise investors that they can
take them to court in a foreign court for any
change in policy. Now, if you went to Britain or
(13:00):
Money and said, as an investor, I want that if
you change your policies, that you have to compensate me
in full, and if you don't, I'll take you to London.
They'll look at you and you know, think you're crazy.
They say, I can't change policies. What's happened to sovereignty.
I have the sovereigny.
Speaker 2 (13:16):
I'm in parliament, I elect people, I change policies. But
developing countries they've had to give up that to attract investments.
So they actually guarantee a lot of stuff, but they
are things they can't guarantee.
Speaker 1 (13:37):
After the break is cheap money, prolonging the lifespan of
fossil fuels. And by the way, if you're enjoying this episode,
please take a moment to rate and review the show
on Apple Podcasts and Spotify. It helps other listeners find
the show. One way to try and tackle the climate
(14:05):
problem is to electrify as much as possible and decarbonize electricity. Now,
we're getting pretty good at the decarbonization of electricity part
because clean energy is getting cheaper and there are big forces,
economic forces, demand levers that are coming for clean power.
On the electrification side, we aren't doing all that much.
(14:29):
There is electrification or transport that is happening, but most
of the forces of electrification are in countries that are
fossil fuel poor. So countries like China, which does not
have very much oil and gas, or India, which does
not have very much oil or gas, are electrifying much
faster than countries like the UK or Germany.
Speaker 2 (14:49):
Can I just ask you a question there? So you're
saying the degree of electrification is more driven by whether
the country has fossil fuels as opposed to I guess
my previous thinking was it was about sectors, right, So industry,
which may be hard to abate, is how to electrify
parts of sectors. But you're saying it's less sector driven
(15:10):
and more country driven.
Speaker 1 (15:11):
Correct You can electrify parts of industry, and there are
technology constraints on how much you can electrify, or how
quickly you can do it, or what cost you can
do it. But the primary driver of electrifications so far
has been more tied to what fuels that country has
access to domestically, because any fuel that they have to
(15:32):
import is more expensive as to trade deficit, etc. Etc.
So it puts developed countries like the UK and Germany
and the US below the world average when it comes
to their source of energy coming from electricity, which might
feel strange to people. But projecting four years further, if
(15:54):
America keeps on that trajectory, which is to not electrify
all that much, and the rest of the world like
China and India start to electrify more and more, we
could start to see America become less of a leader
in the future of energy, which is a strange thing
to say today because America produces the most amount of
oil in the world, the most amount of gas in
(16:15):
the world. But I am talking about the future of energy,
which I believe is an electrified future.
Speaker 2 (16:21):
You're not just talking about the future energy. Actually, there's
also the future of economic growth in these countries because
electrification produces significant efficiencies which boost growth over and above
the benefits that now will becoming from cheaper fuel sources.
Speaker 1 (16:40):
And that, to me is the central point I want
to get to as we explore why energy and economics
play an intertwined role. So, as I was thinking about
whether there's an economic driver for America to electrify, I
couldn't find one. It is blessed with fossil fuels, It
will have fossil fuels for a long time. That is
an energy equation that I can understand pretty easily.
Speaker 2 (17:03):
Well. Couldn't the driver be that it is actually more
economically efficient?
Speaker 1 (17:07):
Perhaps, but only if there is an economic constraint on
that country to want to be more economically efficient. America
is saying, partly through the fact that the fossil fuel
market and prices are actually a fairly contrived thing, that
they're partly controlled supply and demand can be fairly controlled.
(17:34):
That they have enabled them to have a cheaper price
than elsewhere, which is actually slowing their shift towards a
more fundamentally efficient thing to do. When there was an
economic crisis and energy crisis in Europe after Russia's attack
on Ukraine, Europe started to electrify faster. America tends to
(17:57):
face none of these crisis it doesn't have on its borders.
It doesn't have an energy crisis given how much it's
blessed with fossil fuels. And then finally, this is the
thing that makes it seem like it's got the most
unfair advantage is it's got the world's reserve currency.
Speaker 3 (18:14):
I think you've actually created a whole other reason why
fossil fuel substies are bad. People think fossil fuel substies
are bad because of the fact that we're subsidizing a
polluting industry, but it's also subsidizing economic inefficiency and slowing
(18:35):
the adjustment. And the fact that the US has reserve
currency status you're saying allows them to do that for longer.
Allows the frog to be in the boiling water for
longer than it might otherwise be able to do if
it didn't have those crutches. Now, reserve currency status is
something that many people find hard to grasp, and I
(19:00):
find a useful way of saying it, especially for people
of my age who remember writing checks, is that reserve
currency status is like writing checks to pay for things
that nobody ever caches.
Speaker 2 (19:14):
They're quite happy to hold your uncashed check because your
uncashed check is a reserve currency that they could use
in the future when they're a difficult situation, and so
that allows them to consume more than they produce to
run a current account deficit, run a fiscal deficit. But
(19:36):
people with countries with reserve currency status, where people are
happy to sell goods but not cash the checks, can
run these deficits.
Speaker 1 (19:45):
But it might be worth taking even one more step
back to understand why we ended up in this situation
in the first place. My understanding is currency used to
be tied to the gold standard. If you didn't have gold,
you couldn't produce the currency. And then at some point
that was taken off, and so a currency just became
a fiat, which is it is backed by the status
(20:07):
of that government and you have to trust in that
government to provide you the value of that currency. And
because America was the world's hegimen at that time, the
dollar started to become the reserve currency of the world.
Maybe there's a better way of understanding.
Speaker 2 (20:25):
Yes, I'm not internally sure that's the way I would
view it. Before the dollar was a reserve currency. Stilling
was the world's reserve currency. The Roman currency was a
reserve currency. You're finding Roman coins thousands of miles away
from where the Roman Empire was because clearly their currency
was a reserve currency. So the key to being a
(20:46):
reserve currency is you are a big trader, and there's
value in people holding your currency being able to buy
your goods in the future. So they are happy to
hold your current if you don't produce anything and they
don't sell you anything that's not very valuable. So we've
never really had a small country or a non trader
(21:09):
ever become a reserve currency country. So it's a function
of your position in the world trade and it kind
of amplifies your positions. So if you're the world's biggest trader,
you then become even bigger in international finance. So the
US maybe one side of fifty percent of global trade,
(21:31):
but the US dollar is one side of almost eighty
percent of financial transactions because it has this reserve currency status.
Speaker 1 (21:40):
Ali Zaidi, who is the National Climate Advisor to President Biden,
said that if under Donald Frum, America doesn't pursue the
technologies of the twenty first century, which are mostly electric.
It would be economic malpractice because as a result, America
will start to fall behind the rest of the world,
(22:00):
and as it does so, it may have to trade
less with the world, and maybe the reserve currency status
of the dollar starts to weaken.
Speaker 2 (22:09):
But that will be hell. I mean, I think that
we have some experience of that. So if becoming a
reserve currency is like writing checks to buy stuff and
no one ever cashing your checks, losing reserve currency status
is all those checks come back to be cashed at
(22:29):
the same time. This is what happened in the UK
from the mid nineteen sixties. It led to the Sterling
devaluation of sixty seven, the so called Barsel Accords of
nineteen sixty eight, which will when there had to be
an international agreement to stop people sending back their sterling
and asking for to be repaid in gold or other things.
(22:51):
They had to have a special agreement. The irony was
the minute they announced this international agreement to save sterling.
It woke everyone up to the fact that Stirling Who's
engrave challenge and it collapsed afterwards. So the September bars
agreements in sixty eight were a real problem.
Speaker 1 (23:09):
It's like the streysand effect, but playing out in the sixties. Now.
One thing I enjoy about our conversation is that we
start from one place and we typically start to unspool
more and more complicated things. One thing that comes up
again and again is the international system. Now, what is
a way to define the international system? I think we
(23:30):
all have a sense of it, but is there a
clearer way of understanding it?
Speaker 2 (23:35):
I think it actually comes back to the international reserve
currency aspect. So the international system, to me, you see
it most when there is a global fright of some
kind a shock. It could be a war, it could
be some natural disaster. You see that investors get scared,
(23:59):
and invest who get scared run to safety. And what
we're finding that they run to the same place. That's
the international reserve currency, and that today is the US dollar.
So you see by the system, we had this EBB
and flow of capital to and from US dollars, and
that's the system. And now that's partly a function of history,
(24:22):
a function of the size of the international of the
US economy that it has the capacity to use absorb
your dollars that you've kept as reserves. It's also then
becomes morphed into conventions. So when you look at credit ratings,
when you look at accounting standards, the US dollar and
dollar assets are given special status because the convention writers
(24:47):
will say, well, that is more liquid if you've got
it in dollars. And so the world has safe assets,
and these safe assets are in US dollars. And it's
a very interesting dimension of development is that the US
is an exporter of safe assets and developing countries are
(25:07):
importers of safe assets. And that's the international system.
Speaker 1 (25:11):
But if China is now running a trade surplus substantial
one and has been running it for many many years now,
it's also starting to wield a lot of power with it. Yuon,
So the Chinese Central Bank has created a digital yuan,
and I have heard from suppliers in Europe that get
(25:33):
their solar panels or other electricity related infrastructure from China
directly find it easier to pay the Chinese supplier through
the digital yuon rather than having to go through multiple
banks where the euro will be committed to a dollar,
will be then converted back to a yuan and go
(25:53):
through costs at every transaction. The cost of transaction falls,
the speed of transaction falls, and more and more Yuon
gets traded.
Speaker 2 (26:02):
That's an important development. But you know the measure of
whether it is having global impact is when China starts
running deficits. China running a surplus is a sign that
people are not really hoarding you On. When people start
hoarding u On internationally, then China goes into that place
(26:23):
where they are consuming stuff, writing checks to pay for it,
checks and you are and people aren't catching the checks,
so they can consume more than they're producing and running
a current account deficit. And clearly that's not where we
are today, but we may not be a million miles
from that. But so our future, if the future is Chinese,
(26:46):
then that future contains big Chinese deficits.
Speaker 1 (26:49):
So this power imbalance where America acts as a fossil
fuel state because it has so much fossil fuels and
has this reserve currency that gives it essentially an unlimited
checking account, how does that make it easier or harder
for developing countries to move to clean energy to increase
the amount of climate finance that we are going to need.
Where money, maybe dollars, flows from America to developing countries.
Speaker 2 (27:14):
Now it is actually strongly linked, but I need to
build that story a little bit. So firstly, if we
want the big middle income countries India in particular Brazil, Mexico, Indonesia,
South Africa to shift into renewables and the planet needs
(27:35):
them to shift massively and rapidly, the future energy demand
in India's about to explode and if those are fossil
fuel fired, that's going to be a problem. We're expecting
massive investment. We need massive investment by definition, more than
they have domestic savings. If they have enough domestic savings
(27:57):
to match the investment, we know we're not doing enough
investment because we're requiring there's some massive global sized investment boom.
So they have to get the money from abroad. The
international system has to work for the planet and for climate,
and it's not because of this imbalance. And as a
result we have these very different costs of capital. Cost
(28:21):
of capital in India, even India, big country, deep liquid
markets would be about eight percent to raise money eight
percent plus, whilst it may still be three percent four
percent in Europe. So we need to bring capital from
places where it's abundant to places where it's scarce, and
this channel is blocked. The channel is blocked because investors
(28:43):
are concerned about this reserve currency status and the impact
of that, and they don't think in terms of reserve
current status. But what they're thinking about is currency volatility.
Because if you are the if you are an import
of safe assets, what happens is your currency is very volatile.
When things are going well and people don't need safety,
(29:06):
people are flooding into your country, and your currency is booming.
When things are looking uneasy around the world, may have
nothing to do with your country, and maybe your neighboring country.
Then money is fleeing and so the currency is going
up and down and you can do nothing about it.
And international investors see that, they see that volatility, and
(29:27):
they are saying, well, I can't manage that volatility. That
volatility is not even to do with your country, to
do with the international system, and what can you do
about it?
Speaker 3 (29:38):
Now?
Speaker 2 (29:38):
When you have problems in a country with reserve currency status,
they can do stuff about it. You know, when the
economy is hit badly, they can cut infrast rates, they
can expand spending. Investors are still there, They're not fleeing,
they're not worried about your policies. This imbalance in the
system is blocking the f of money from places where
(30:02):
the capital is the places where we need the capital.
So we need a solution that takes away this imbalance.
That actually means that for renewable energies, we can count
these middle income countries as being part of the reserve
currency zone and not subject to this kind of volatility.
(30:23):
And that's something we're working on with the Foreign Exchange
Liquidity Facility, using the fact that the multilateral development banks
are also triple A, so they are safe assets, and
so we will spread our cordon of safety around projects
involved in renewable energy so that the international investor knows
(30:45):
they can rely on a development bank to be lending
the project dollars at times of as international stress. The
project has to pay back, but they're less subject to
the volatility of the international financial system and the volatility
of the currency markets.
Speaker 1 (31:04):
That's a stunning explanation for a thing that I came
across in my very early days of journalism. I joined
a news organization called Courts, and on the very first
day of my job, there was a betting round going
on in the general slack channel, and it was on
how many jobs in the US will the job's numbers say,
(31:28):
And it made no sense to me, as somebody with
a science background, not an economics background. Why the world
cares about the US economy producing a few hundred thousand
jobs in a monthly basis? Now I know because when
something happens to the US, when it sneezes, everybody cares
because of the dollar, because the reserve currency, because tiny
(31:49):
volatility of the US economy has much bigger ripple effects
in the rest of the world.
Speaker 2 (31:55):
And you know, what happened during COVID is a very
interesting way of matching something that everyone experience and so
know a little bit about with this international financial system.
So COVID happens impacts us all roughly around the same time,
the developed countries, with their reserve currencies are able to
slash interest rates, we go back towards zero. They're able
(32:17):
to expand fiscal policy, and investors don't flee because they
see governments reacting. Investors flee from the developing countries who
are unable to act that way. So they have to
start raising interest rates to keep money in and they
have to cut back their spending. Their currencies are falling,
and they deepen their recession because that's the only way
(32:39):
they can respond. Then, as a result of them deepening
the recession and the developed countries being able to respond quickly,
the developed countries have the recovery quicker. So now what
they've got to do is they've got to raise their
interest rates so that they're recovering faster. Inflation's coming up,
so they raise interest rates and setting their currencies up.
And again money's fleeing from the developed countries because they're
(33:01):
now being attracted from these higher infrast rates available in
the safe haven. So again the recovery slowed in developing
countries because they've got to respond to money leaving. So
when they should be recovering, the recovery is delayed because
they're raising interest rates before their economy is recovered, and
they're having to cut back spending before their economy is recovered.
(33:22):
So what you saw was the response of the developing
world was they were unable to respond fast enough in
terms of policy on the way down, and they were
unable to recover fast enough on the way up. And
that was because nothing to do with what they were
doing in their country. That was to do with the
international financial system and the way it works, and.
Speaker 1 (33:43):
In some way as climate change plays out and more
and more disasters are felt. Let's hope it's never as
extreme as the pandemic was at any given time, but
we will sustain that level of impact over a longer period,
and we'll see developing countries suffer through the same cycle,
perhaps in a lender time frame.
Speaker 2 (34:00):
So developing countries, especially finance ministry officials, central bank officials,
they have long seen this and long wondered what can
we do about it? It has been very hard to
do something about it because they were never very significant
in the international economy. Now they are. They are looking so,
for example, the bricks countries are thinking about, well, maybe
(34:22):
we should create our own reserve currency. And because the
brick countries are big traders, they actually have the potential
of doing something in a way that they couldn't have done,
say twenty years ago. I'm not sure they have a
solution yet, but there's a potential that they could do something,
and it would seem to me that it would be
(34:43):
the interests of the beneficiaries of the existing system to
prolong that system by trying to make the system work
better for everybody. And if they don't do that, the
system will at some point be usurped by another system.
Speaker 1 (34:59):
Could you imagine what that other system might be?
Speaker 2 (35:01):
The future of international reserve currency status will be determined
by who is the biggest trader. And we're in a
world increasingly where China is exporting and importing from developing
countries and maintaining its increasing share of international trade, and
so they are potentially the next beneficiary. And you know,
(35:27):
India is an alternative as well, because the one challenge
that China has has a few but one of the
main ones. And often you hear people say that China
will get owed before it gets rich. That the one
child policy meant that China has an acute demographic and
(35:47):
it's aging heavily, and that aging will slow its growth
and slow its economic presence globally. India is still at
a sweet spot on demographics and expanding, and that divergence
will increase, and so we will be in a world
at some point in this century in which India is
(36:08):
the world's largest economy and the largest trader, and so
India or China maybe become the next reserve currency.
Speaker 1 (36:16):
Wait what I mean? I thought it'll be either an
American century or Chinese century. I'm an Indian, but did
not expect India to become the world's largest economy.
Speaker 2 (36:27):
And it's not something they're intending to, you know. Whilst
America and China have been quite deliberate about their international role,
it will be in somewhat typical Indian fashion, haphazardly and
happening just out of some crazy evolution.
Speaker 1 (36:44):
Thank you, Having Nash, Thank you very much. Thank you
for listening to Zero. Next week in the Moving Money series,
we'll be looking at the role of multilateral development banks.
If you have any questions about climate finance, please write
to us at Zero pod at Bloomberg dot net. And
(37:07):
if you like this episode, please take a moment to
rate and review the show on Apple Podcasts or Spotify,
Share this episode with a friend or with your mortgage advisor.
And now for the sound of the week. M Yes,
(37:28):
that's the sound of Japan's Maglev train performing a test
run at five hundred kilometers per hour. This episode was
produced by Oscar Boydberg's head of podcast is Sage Bowman
and head of Talk is Brendan neunim Our. Theme music
is composed by Wonderly Special thanks to might Ley Rau
Somarsadi Mosses and Blake Maples and Shawan Wagner i'm Akshadrati
(37:53):
back next week for another episode of Moving Money,
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