The Caribbean countries are trapped in a vicious circle of debt and climate disaster. This is why

When Hurricane Beryl ravaged Carriacou, part of the Caribbean country of Grenada, in July, it virtually leveled the entire island, damaging every building in the community of 8,000 people.

Grenada needed to be rebuilt, but it is a frightening prospect.

In 2022, the country spent The US has made $51.9 million in paying off its loans, and is currently in debt crisis – a financial term that means the country is close to defaulting on its loans or in need of restructuring. Paying for reconstruction will likely force Grenada to borrow more, putting the country in further trouble.

Beryl was the first Category 5 hurricane to form in the Caribbean, a shock even in a region accustomed to big storms. It was fueled by unusually warm ocean waters and increased in strength from Category 1 to Category 4 in just 24 hours, something that could be more likely due to climate change.

But for the island nations of the Caribbean, the trail of destruction left by tropical storms extends to national debts – and their ability to borrow the money to rebuild and repair them.

It places these vulnerable places in an ever-deepening cycle of expensive debt, which will never fully cover the enormous costs of worsening climate disasters, while mortgaging the countries' futures at the same time.

But new proposals on the table at the COP29 climate summit in Baku, Azerbaijan – to use insurance to protect countries from debt problems and protect their vulnerable economies during natural disasters – could help them break out of this cycle.

What is a debt rush?

When Hurricane Maria hit the small Caribbean island of Dominica in 2017, that's what happened causes $1.3 billion in damage, more than double the country's entire economy. About 17,000 of the island's 72,000 residents eventually left.

“That's for one country, for one event in one year,” says Sasha Jattansingh, a climate diplomacy expert at Climate Analytics, a science and policy think tank, who has advised Caribbean governments on climate finance.

“We see the magnitude of just one climate event and how it can decimate a country's economic and social development gains over the years.”

The next storm was the debt Dominica had to take on in order to begin rebuilding. The debt burden has continued to grow, and in 2022 the country was spending $30.2 million a year just to pay off those external loans. It is almost the same as the $32.4 million the country has received in climate financing – also largely in the form of loans – so it can prepare for the next disaster.

In fact, some of the world's poorest countries are sending billions in debt payments to the G20 countries, with payments set to reach $25.3 billion in 2023, according to a analysis by the International Institute for Environment and Development (IIED), a think tank working on climate finance for vulnerable countries.

How do countries get trapped?

Climate research suggests that hurricanes will happen more intense due to man-made global warming. That means more damage for the Caribbean islands and more costs.

“The timelines for these disasters are getting shorter,” Jattansingh said. “You have a cycle of rebuilding, rebuilding, long-term recovery and so on – all until another event can happen.”

This is leading countries to turn to outside lenders again – but at rising interest rates, because the storms that destroy homes and infrastructure also damage a country's credit rating.

Ritu Bhardwaj, lead researcher at IIED, calls it 'a vicious circle'.

“Because [these countries] are already in a flood of debt, no matter how many loans they take, their loan has a higher interest rate. And no matter how much they want to crawl out of that hole, they will still never be able to get up – unless you give them a helping hand, get them out of it and put them on a level playing field.”

More than 40 percent of Small Island Developing States (SIDS), a group of island nations around the world facing similar climate and development challenges, are close to or already in debt – diverting precious resources away from services as health care and education to prevent bankruptcies.

Is there a way out?

As climate disasters increase, SIDS countries want a reform of the global financial system that would get them out of this debt cycle.

In 2020 the G20 launched a new framework for countries in debt problems to restructure their loans with their lenders. Zambia, in southern Africa, was the first country to negotiate under this process, and it took almost four years to reach an agreement with all its creditors.

But that is not something many small island states can do, due to their size.

“If you go to a SIDS country, the entire finance ministry consists of three to four people,” Bhardwaj said. “The capacity [to negotiate] is in itself quite limited.”

IIED has proposed a collective process to negotiate debt relief and restructuring, where countries can negotiate as a group on financial issues – which can be very complex.

“We don't want to go country by country by country because it is also a cost to the country,” Bhardwaj said.

Bhardwaj says it is important to stack different forms of financial assistance to form multiple walls of protection for highly vulnerable island countries.

One proposal: expanding insurance for countries hit by natural disasters.

The Caribbean Catastrophe Risk Insurance Facility is a “risk pool” launched in 2007 to help countries in the region insure themselves against natural disasters. Countries purchase coverage for disasters such as hurricanes, and the insurance pays out if a storm of a certain intensity occurs, according to the insurance policy.

By pooling the risks of multiple countries, CCRIF can offer insurance policies that are much cheaper than if one country were to buy insurance on its own.

Grenada had and was pursuing such a policy at CCRIF paid out $44 million immediately after Beryl to help repair power lines, hospitals, ports and other infrastructure, and to cover agricultural and fishing losses.

“When a pre-defined trigger event occurs, countries can receive rapid disbursements to help them meet immediate needs,” Jattansingh said. “And that could include debt service relief and also support recovery efforts.”

Bhardwaj says that unlike a country with a large landmass like Canada, when a storm hits one Caribbean island, it typically affects the entire country. A single storm can also bring the entire economy, which can depend on tourism and agriculture, to a standstill.

So insurance coverage must reflect that. She proposes insuring a country's entire economy so that an affected country can protect its GDP even if key economic sectors come to a standstill, and not fall further behind in meeting its debt obligations.

IIED estimates that if the SIDS countries' insurance risk were pooled, the cost of protecting their entire GDP would be $106.71 million per year.

Who is responsible?

Bhardwaj says the cost of those insurance premiums should not fall on small island countries, especially as they have contributed little to the carbon emissions that have caused the climate crisis.

She suggests that money could come from global climate finance – and in particular from the Loss and Damages Fund, which officially existed established at the COP28 climate conference in Dubai last year to compensate developing countries for the damage caused by climate disasters.

A sticking point last year was who would pay for it. Under the United Nations Framework Convention on Climate Change, the global treaty that guides climate action, high-income industrialized countries – such as the US, Canada and those in Europe – are required to provide financial resources to developing countries to combat climate change and to adapt to it. .

But rich countries argued that other emerging economies such as China, now the world's biggest carbon emitter, should also have to pay.

The climate finance debate is currently being fought out at COP29. Countries had pledged around $700 million to the Loss and Damages Fund, but this would be far less than the total losses suffered by low-income countries, as just a single storm in a single small country can cause billions of dollars in damage.

However, the loss and damage fund could finance insurance programs that could help countries get out of their debt cycle.

“These countries are not on a level playing field,” Bhardwaj said.

“The global financial architecture is very biased and focused entirely on favoring the richer countries, and the poorer countries are getting poorer and poorer. There is no way they can actually graduate.”

With files from Anand Ram