IIF Green Weekly Insight

Financing a Sustainable Recovery

June 4, 2020

Emre Tiftik, Director of Sustainability Research, etiftik@iif.com

Paul Della Guardia, Financial Economist, pdellaguardia@iif.com
Katherine Standbridge, Research Assistant, kstandbridge@iif.com
Editor: Sonja Gibbs, Managing Director, Global Policy Initiatives, sgibbs@iif.com

• Social issues to the fore: growing tensions in the U.S. could undermine efforts to tackle the COVID-19 outbreak
• Net borrowing needs for G4 governments are set to triple 2019 levels, topping $5 trillion in 2020 (13% of G4 GDP)
• The size of G4 central banks’ balance sheets is on track to exceed $22 trillion—up from $15 trillion in 2019
• This renewed buildup in general government debt will have long-term consequences and could significantly hamper climate
risk mitigation and adaptation policies for highly indebted countries

Risk of a vicious circle: As the impact of the COVID-19 Chart 1: Global economic policy uncertainty at record highs
pandemic continues to unfold, the social consequences of index, end-2005=100
deteriorating economic conditions are becoming a major
500 Global
challenge for policymakers across the globe. In the face of
massive job losses, the rise in social unrest in the U.S. (and U.S.
many other countries e.g. Hong Kong) could well under- 400 Euro Area
mine already-depressed consumer and business confidence
and threaten economic recovery. With economic policy un- 300
certainty at or near record levels (Chart 1), sustained civil
strife could significantly delay retail businesses from reo- 200
pening while also triggering a second wave of COVID-19 in-
fections—further weighing on consumption. This in turn 100
could trigger a vicious cycle of high unemployment, falling
income and still more social tensions, forcing governments 0
2006 2008 2010 2012 2014 2016 2018 2020
to expand their fiscal response to the COVID-19 pandemic
Source: EPUI, Bloomberg, IIF
to mitigate resulting social-economic costs.
More fiscal packages on the way: The global fiscal pol-
icy response to the pandemic has been extraordinary, with Chart 2: G4 governments to see sharp rise in net borrowing
over $9 trillion deployed to date. While off-budget needs this year
measures such as loan guarantee schemes and equity injec- % of G4 GDP
tions have accounted for just over half of government sup- 14
port, direct budget support has amounted to some $4.4 tril- U.S.
12
lion. Overall fiscal deficits are expected to rise rapidly, par-
Euro Area
ticularly across G4 countries, surpassing 13% of G4 GDP in 10
2020—up from 4% in 2019 and much larger than the spike Japan
8
during the global financial crisis (Chart 2). This implies a UK
surge in G4 general government borrowing needs from 6
around $1.5 trillion last year to over $5.2 trillion in 2020,
4
with the U.S. borrowing requirement alone coming in at
$3.5 trillion. In the Euro Area, net government financing 2
needs in 2020/21 are expected to be highest in the region’s
0
two most pandemic-ravaged countries, Spain and Italy—at
2007 2009 2011 2013 2015 2017 2019 2021
over 16% of their GDP (Chart 3).
Source: European Commission, CBO, MoF Japan, IIF
Although a modest decline in net borrowing needs is ex-
pected in 2021, the abnormal degree of uncertainty around Chart 3: Euro Area governments face large net financing
needs—notably hard-hit Spain and Italy
the outlook may well prompt sovereigns to introduce addi-
tional fiscal packages in the next three to 12 months. In the % of GDP, projected cumulative net borrowing needs by general
meantime, G4 sovereigns should continue to benefit from governments
18
benign financing conditions—U.S. 10yr yields remain near 16 2021
record lows, while abundant central bank liquidity keeps 14 2020
12
rates low in the Euro Area and Japan. The massive QE re- 10
sponse to the COVID-19 epidemic has already added over 8
$4.5 trillion to G4 central bank balance sheets. With the 6
4
ECB’s decision today to add a further EUR 600 billion to 2
the bond-buying program, G4 central bank balance sheets 0

Malta
Latvia
Spain
Italy
France
Belgium

Germany
Ireland

Austria
Slovenia
Finland

Portugal
Netherlands
Estonia

Cyprus

Greece
Euro Area
Slovakia

Lithuania
should surpass $22 trillion by year-end—up from $15.3 tril-
lion in 2019 (Chart 4). This suggests that G4 budget deficits
will be almost fully financed by central banks.
Against the backdrop of a massive wave of debt issuance,
government debt-to-GDP ratios across G4 countries are ex- Source: European Commission, IIF
pected to increase by some 15 percentage points in 2020,
varying from 4pps in Luxembourg to 24pps in Italy (Chart
Chart 4: G4 central bank balance sheets set to exceed $22 tril-
5). Such a sharp rise in government debt levels will have lion in 2020—vs $15 trillion in 2019
lasting effects on the global economy and could hamper ef-
$ trillion
forts to tackle climate risk and to achieve the Sustainable 9
Development Goals. This would put pressure on highly in- Dec-20
8
debted sovereigns over the medium term, potentially lead- May-20
7
ing to higher borrowing costs. Dec-19
6
EU sows seeds of a “green recovery”: In the European
5
Commission’s recent EU budget to power Europe’s recovery,
the green and digital transitions remain in sharp focus across 4
three areas: (1) a €540bn package comprising safety nets for 3
workers, businesses, and sovereigns; (2) the €750bn Next 2
Generation EU recovery proposal; and (3) the €1.1tn Multi- 1
annual Financial Framework spanning 2021-2027. The Next 0
Generation EU proposal features significant initiatives de- Fed ECB BoJ BoE
signed to orient resources towards achieving European
Green Deal (EGD) objectives. A new €560bn Recovery and Source: Fed, ECB, BoJ, BoE, Bloomberg, IIF
Resilience Facility aims to ensure that investments and re-
forms are geared towards the green transition, and the new Chart 5: Government debt-to-GDP ratios will rise substan-
€55bn REACT-EU initiative will support a green recovery in tially in 2020
member states suffering the most severe socioeconomic im- % of GDP
pacts of the crisis, as a part of a broader cohesion policy. Fur-
ther, the Just Transition Fund, which seeks to alleviate the 240 2020
economic pressures of the transition towards climate neu- 2019
190
trality, has been increased by €30bn, while rural areas will
receive €15bn for the changes needed to adapt to the EGD. 140
The EC is also planning to strengthen investment capacity
and strategic autonomy of value chains—both crucial areas 90
for the green transition, while also mobilizing revenues in a
way consistent with delivering on the EGD: these include 40
Ireland
Italy

France

Spain
Belgium

Germany
Japan

U.S.

Austria
Slovenia
Portugal

Finland
Greece

Cyprus

UK
Euro Area

taxing non-recycled plastics packaging waste, potentially ex-

tending the EU’s Emissions Trading System to the maritime
and aviation sectors, and a carbon border adjustment mech-
anism on carbon-intensive imports.
Source: European Commission, CBO, MoF Japan, IIF

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