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Speaker 1: Welcome to zero. I am Akshatrati. This week, back to basics.

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Speaker 1: It's clear that we are in a moment of flux

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Speaker 1: in global affairs. President Donald Trump's America First doctrine is

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Speaker 1: shaking up diplomacy, trade, and markets. The hope that wars

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Speaker 1: across Europe, the Middle East and Africa will ease up

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Speaker 1: isn't really panning out. At the same time, climate change

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Speaker 1: isn't slowing down either, and the impacts in vulnerable countries

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Speaker 1: are growing. The energy transition isn't taking a break either.

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Speaker 1: Last year, the global spend on energy was three trillion dollars,

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Speaker 1: of which more than two trillion dollars was on clean

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Speaker 1: energy technologies. According to Bloomberg nef So, in trying to

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Speaker 1: make sense of things, I found that sometimes it can

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Speaker 1: help to go back to the basics. There are fundamental

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Speaker 1: forces that shape our world, and especially during a tumultuous time,

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Speaker 1: it helps to understand them a little more deeply to

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Speaker 1: be able to make a better mental map of the future.

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Speaker 1: So for the next three episodes, we're going to explore

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Speaker 1: the basics of finance for climate solutions and continue our

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Speaker 1: Moving Money series.

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Speaker 2: Developing countries have said the number we need is a trillion.

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Speaker 2: Developed countries have said maybe, but that's not coming from

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Speaker 2: our budgets. There's no space there that could come from

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Speaker 2: an onion of things. The outer layer might be private sector,

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Speaker 2: the middle layer might be MDBs, and the inner layer

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Speaker 2: may be government budgets.

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Speaker 1: We're welcoming back Avin ash Barsod, special advisor on climate

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Speaker 1: risks to the President of the Inter American Development Bank

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Speaker 1: and former economic advisor to Barbados Prime Minister Mia Mortley.

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Speaker 1: Over the next three episodes, we'll be exploring the role

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Speaker 1: of multilateral development banks and the various innovative financial tools

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Speaker 1: that can unlock private sector investments in the climate transition.

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Speaker 1: But first, let's take a big picture look at how

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Speaker 1: the global financial order works in the first place, and

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Speaker 1: how it can be reshaped for the climate era. We

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Speaker 1: start the conversation by addressing one of the big challenges

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Speaker 1: right now, the cost of capital. Think of it this way.

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Speaker 1: When the cost of borrowing money is cheap, it's easier

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Speaker 1: to build the clean energy projects we need, like solar panels,

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Speaker 1: wind farms, and batteries. Developed countries typically enjoy cheaper costs

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Speaker 1: of capital, meaning stuff can be built with lower borrowing costs.

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Speaker 1: Developing countries, on the other hand, have much much higher

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Speaker 1: cost of capital thanks to real or perceived risks of

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Speaker 1: doing business there. This slows their growth and in the

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Speaker 1: worst case scenario, can lead to a debt trap where

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Speaker 1: they borrow more money just to make the interest payments

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Speaker 1: on old loans. So I asked Savinage, how do we

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Speaker 1: flow the script and how do we lower the cost

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Speaker 1: of capital and make the financial system work for climate

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Speaker 1: action not against it. Hi, Avinash, welcome back to another

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Speaker 1: episode of Moving Money. Thank you. Today we're going to

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Speaker 1: talk about the cost of capital. We've seen a lot

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Speaker 1: of money go into developed countries for renewables, and those

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Speaker 1: countries typically have lower interest rates and thus they're able

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Speaker 1: to borrow money and pay small amounts on their interest payments.

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Speaker 1: But developing countries typically have higher interest rates, and thus

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Speaker 1: even if they had the capital to be borrowed, they

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Speaker 1: will have to pay more on those interest rates. But surely,

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Speaker 1: if the cost of renewbal just keeps falling, high interest rate,

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Speaker 1: low interest rate, doesn't really matter, it'll scale, right.

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Speaker 2: So the issue of the cost of capital only occurred

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Speaker 2: to me a couple of years ago, and indeed, if

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Speaker 2: you look at the if you look at the negotiations,

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Speaker 2: this concept of cost of capital is new. It's only

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Speaker 2: now in communicats in G twenty in the last two years.

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Speaker 1: Oh wow, And those interest rates are a thing that

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Speaker 1: the financial system cannot work without. People were not.

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Speaker 2: Thinking those terms. As you and I have talked about before,

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Speaker 2: many of the people involved in this space are not

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Speaker 2: macro people. They are project financiers, so they're not thinking

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Speaker 2: about global interest rates or country interistrates. They're thinking about

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Speaker 2: a particular project they're trying to finance. And I remember

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Speaker 2: I was in a negotiation room and the negotiative of

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Speaker 2: a small European country is saying, finance isn't the problem,

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Speaker 2: he says, and the rest of us are completely bored

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Speaker 2: over by him thinking this, because we're thinking finance is

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Speaker 2: the problem. And I'm sitting there trying to understand him.

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Speaker 2: And I pick up my phone and I google as

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Speaker 2: his country issued a ten year bond recently and it

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Speaker 2: had and his cost of capital for his government was

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Speaker 2: like three percent. And he was sitting next to the

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Speaker 2: negotiator from South Africa. So I then google what was

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Speaker 2: the last ten year bond issue for South Africa twelve

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Speaker 2: point five, and the other next to him was was Brazil,

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Speaker 2: And I google again and it's like thirteen percent. I'm thinking, Okay,

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Speaker 2: that's the thing. He's not experiencing the cost of capital.

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Speaker 2: So for him, finance isn't the problem for him, it

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Speaker 2: may be about policies and regulations and how does he

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Speaker 2: tax the right thing and subsidize the right thing. For

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Speaker 2: the other two countries, there's no money flowing.

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Speaker 1: Isn't the cost of capital just simply interest rates? I

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Speaker 1: have a mortgage, I pay a particular interest Sadly it's

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Speaker 1: gone up in recent years. Welf, what are interest rates?

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Speaker 1: It's the price of money, and so it is the

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Speaker 1: cost of capital. It's all circular, not entirely so. In

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Speaker 1: Europe and the States, capital is abundant and it is cheap.

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Speaker 1: There's a lot of sas a lot of capital, and

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Speaker 1: the amount of investment going on is not huge. So

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Speaker 1: investment takes away from the savings and makes the capital

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Speaker 1: more scarce. But there's abundance of capital. The price of

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Speaker 1: money is that prices demand and supply the demand for

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Speaker 1: the money to invest and supply the money through savings.

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Speaker 1: You go to a developing country and there's very limited

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Speaker 1: savings because they're poor, they're small. They're economies. Maybe a

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Speaker 1: big country, big population, but the economic activity is small

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Speaker 1: and the demand for things that could be done are huge.

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Speaker 1: So capital is really scarce. So demand high supply, low

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Speaker 1: price is high, their cost of capitalist high. Now when

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Speaker 1: you understand it in that way, you realize what the

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Speaker 1: solution because many people say, ah, yes, well this is

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Speaker 1: because they're having to pay a lot of foreign exchange

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Speaker 1: hedging costs. So why don't we just borrow locally. Yeah,

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Speaker 1: borrow locally means more demand for investment in a place

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Speaker 1: with very limited supply of savings. So that's going to

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Speaker 1: push the cost of capital up even more. So what

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Speaker 1: we actually need to do is create a channel, a

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Speaker 1: channel from the place of abundant, cheap capital to the

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Speaker 1: place of scarce, expensive capital. And when we build this channel,

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Speaker 1: why is this channel not flowing? Why is money not flowing?

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Speaker 2: And their various obstacles, and one obstacle is that, well,

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Speaker 2: the abundant capital is in dollars and the scarce capital

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Speaker 2: is in a local currency, and you have foreign exchange risk.

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Speaker 2: Because one of the interesting things about renewables is, you know,

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Speaker 2: why is this a new problem again? Foreign exchange is

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Speaker 2: another one of those issues that was not on their

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Speaker 2: communicators agendas anywhere just two years ago. Because fossil fuel investments,

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Speaker 2: for example, are often in dollars because the thing you're

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Speaker 2: investing in is priced in dollars, can be traded in dollars.

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Speaker 2: But when I'm buying a solar farm in Brazil, I'm

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Speaker 2: not getting earning dollars. I'm earning a local currency. Hel

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Speaker 2: So now I have a foreign exchange problem. I'm earning

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Speaker 2: revenues in one currency and I've got this other currency

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Speaker 2: that I've invested in.

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Speaker 1: That's true, if you bought gasoline in Brazil, you would

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Speaker 1: be paying in real and then somebody up the chain

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Speaker 1: has to pay eggs on mobile. I guess I got

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Speaker 1: to sell.

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Speaker 2: Gasoline in US dollars. Though I can export the gasoline

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Speaker 2: in US dollars, I can't export my solar farm and

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Speaker 2: wind turbine in US dollars. So it's a fundamentally different problem.

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Speaker 2: And so we want this massive investment, and we're coming

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Speaker 2: across this problem, and so the solution is to clear

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Speaker 2: out this channel, to unblock this channel. And we found

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Speaker 2: that the project financiers think that the solution is to

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Speaker 2: lower the risk.

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Speaker 1: Of the project.

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Speaker 2: As someone who used to work for developing country government

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Speaker 2: and and so, I was a chief investment officer, if

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Speaker 2: you like, for Barbados for a few years, and my

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Speaker 2: job was to speak to these investors and try to

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Speaker 2: attract them. And what I was competing with the governments

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Speaker 2: will basically offered the investors a lot. We try to

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Speaker 2: deal with all of their uncertainties. You know, they had

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Speaker 2: to pick the right things to invest in. But if

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Speaker 2: they were worried about the currency, we would say, well,

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Speaker 2: you know, we'll try to hedge that from you. They

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Speaker 2: were worried about the change in law, change in tax,

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Speaker 2: They were guaranteed everything, and they still didn't really want

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Speaker 2: to come, partly because of the foreign exchange of volatility

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Speaker 2: and uncertainty. So we think the way in which we

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Speaker 2: can reduce the cost of capital in developing countries is

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Speaker 2: to unblock the flow from places of abundant capital by

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Speaker 2: managing the foreign exchange. Now, if cost of capital is

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Speaker 2: a problem, it really frames your approach to many things.

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Speaker 2: So in a rich country, you can think about dealing

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Speaker 2: with the problem of carbon and environment by saying I

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Speaker 2: need to tax things that pollute and subsidize things that

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Speaker 2: are clean. And because the cost of capital is low,

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Speaker 2: that price signal will have investors switching. They will stop

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Speaker 2: investing in a high tax thing and they'll invest in

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Speaker 2: the subsidy thing. Go to a developing country and you

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Speaker 2: impose the same tax and subsidy, but you've got a

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Speaker 2: high cost of capital. They can't do that because they

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Speaker 2: will need lots of money to invest in the new thing.

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Speaker 2: And that's the other thing about renewables is they're very

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Speaker 2: capital intensive. They're operating costs low, but they're very capital intensive,

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Speaker 2: so you need to have capital and capital costs a

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Speaker 2: lot of money, and that is stopping renewable investments happening

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Speaker 2: in developing countries.

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Speaker 1: We've talked about how if we want the capital to

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Speaker 1: flow to developing countries, it's going to come from capital

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Speaker 1: owners with sit in developed countries. If they invest that

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Speaker 1: in developing countries, that will allow for more capital to

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Speaker 1: be there in developing countries and thus will lower their

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Speaker 1: cost of capital. One is currency exchange risk, one is

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Speaker 1: political risk. What else is there that they worry about

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Speaker 1: and can they hedge those other risks as well, economists,

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Speaker 1: we like to break things down into simple things. It's

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Speaker 1: a reductivist science. We'd love to be to tell people

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Speaker 1: there's only one thing you need to do. The reality

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Speaker 1: is the actual process of investing is quite messy, and

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Speaker 1: so a company will say, why am I going to

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Speaker 1: this place I've never been to before to manage a

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Speaker 1: permitting process I've never managed before. So there's a whole

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Speaker 1: bunch of uncertainties, you know. The difference between uncertainty and

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Speaker 1: risk is risk. I can quantify a lot of these things.

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Speaker 1: They can't quantify. Will it take a day to get

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Speaker 1: my permit or will it take me three hundred days?

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Speaker 1: Huge impact on the cost of this business, And so

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Speaker 1: they are multiple things, but many of them there is

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Speaker 1: insurance for it. So the insurance of the word bank

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Speaker 1: MEAGA will offer you political insurance. Export credit agencies offer

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Speaker 1: political insurance, so there are number of types of insurance

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Speaker 1: to reduce that. But a country can't offer you insurance

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Speaker 1: against their own currency because that's saying insurance against themselves

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Speaker 1: having a problem, at which point they won't be able

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Speaker 1: to do anything. So it's so we need other players

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Speaker 1: to come in and manage that. But I think that's

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Speaker 1: the main obstacle, are the kinds of risk that the

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Speaker 1: country themselves can't guarantee because the country is trying to

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Speaker 1: guarantee you everything else. One of the things I found

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Speaker 1: I have to explain often to my friends and developed

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Speaker 1: countries is that developing countries promise investors that they can

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Speaker 1: take them to court in a foreign court for any

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Speaker 1: change in policy. Now, if you went to Britain or

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Speaker 1: Money and said, as an investor, I want that if

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Speaker 1: you change your policies, that you have to compensate me

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Speaker 1: in full, and if you don't, I'll take you to London.

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Speaker 1: They'll look at you and you know, think you're crazy.

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Speaker 1: They say, I can't change policies. What's happened to sovereignty.

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Speaker 1: I have the sovereigny.

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Speaker 2: I'm in parliament, I elect people, I change policies. But

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Speaker 2: developing countries they've had to give up that to attract investments.

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Speaker 2: So they actually guarantee a lot of stuff, but they

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Speaker 2: are things they can't guarantee.

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Speaker 1: After the break is cheap money, prolonging the lifespan of

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Speaker 1: fossil fuels. And by the way, if you're enjoying this episode,

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Speaker 1: please take a moment to rate and review the show

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Speaker 1: on Apple Podcasts and Spotify. It helps other listeners find

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Speaker 1: the show. One way to try and tackle the climate

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Speaker 1: problem is to electrify as much as possible and decarbonize electricity. Now,

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Speaker 1: we're getting pretty good at the decarbonization of electricity part

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Speaker 1: because clean energy is getting cheaper and there are big forces,

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Speaker 1: economic forces, demand levers that are coming for clean power.

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Speaker 1: On the electrification side, we aren't doing all that much.

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Speaker 1: There is electrification or transport that is happening, but most

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Speaker 1: of the forces of electrification are in countries that are

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Speaker 1: fossil fuel poor. So countries like China, which does not

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Speaker 1: have very much oil and gas, or India, which does

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Speaker 1: not have very much oil or gas, are electrifying much

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Speaker 1: faster than countries like the UK or Germany.

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Speaker 2: Can I just ask you a question there? So you're

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Speaker 2: saying the degree of electrification is more driven by whether

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Speaker 2: the country has fossil fuels as opposed to I guess

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Speaker 2: my previous thinking was it was about sectors, right, So industry,

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Speaker 2: which may be hard to abate, is how to electrify

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Speaker 2: parts of sectors. But you're saying it's less sector driven

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Speaker 2: and more country driven.

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Speaker 1: Correct You can electrify parts of industry, and there are

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Speaker 1: technology constraints on how much you can electrify, or how

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Speaker 1: quickly you can do it, or what cost you can

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Speaker 1: do it. But the primary driver of electrifications so far

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Speaker 1: has been more tied to what fuels that country has

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Speaker 1: access to domestically, because any fuel that they have to

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Speaker 1: import is more expensive as to trade deficit, etc. Etc.

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Speaker 1: So it puts developed countries like the UK and Germany

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Speaker 1: and the US below the world average when it comes

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Speaker 1: to their source of energy coming from electricity, which might

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Speaker 1: feel strange to people. But projecting four years further, if

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Speaker 1: America keeps on that trajectory, which is to not electrify

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Speaker 1: all that much, and the rest of the world like

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Speaker 1: China and India start to electrify more and more, we

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Speaker 1: could start to see America become less of a leader

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Speaker 1: in the future of energy, which is a strange thing

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Speaker 1: to say today because America produces the most amount of

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Speaker 1: oil in the world, the most amount of gas in

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Speaker 1: the world. But I am talking about the future of energy,

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Speaker 1: which I believe is an electrified future.

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Speaker 2: You're not just talking about the future energy. Actually, there's

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Speaker 2: also the future of economic growth in these countries because

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Speaker 2: electrification produces significant efficiencies which boost growth over and above

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Speaker 2: the benefits that now will becoming from cheaper fuel sources.

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Speaker 1: And that, to me is the central point I want

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Speaker 1: to get to as we explore why energy and economics

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Speaker 1: play an intertwined role. So, as I was thinking about

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Speaker 1: whether there's an economic driver for America to electrify, I

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Speaker 1: couldn't find one. It is blessed with fossil fuels, It

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Speaker 1: will have fossil fuels for a long time. That is

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Speaker 1: an energy equation that I can understand pretty easily.

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Speaker 2: Well. Couldn't the driver be that it is actually more

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Speaker 2: economically efficient?

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Speaker 1: Perhaps, but only if there is an economic constraint on

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Speaker 1: that country to want to be more economically efficient. America

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Speaker 1: is saying, partly through the fact that the fossil fuel

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Speaker 1: market and prices are actually a fairly contrived thing, that

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Speaker 1: they're partly controlled supply and demand can be fairly controlled.

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Speaker 1: That they have enabled them to have a cheaper price

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Speaker 1: than elsewhere, which is actually slowing their shift towards a

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Speaker 1: more fundamentally efficient thing to do. When there was an

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Speaker 1: economic crisis and energy crisis in Europe after Russia's attack

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Speaker 1: on Ukraine, Europe started to electrify faster. America tends to

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Speaker 1: face none of these crisis it doesn't have on its borders.

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Speaker 1: It doesn't have an energy crisis given how much it's

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Speaker 1: blessed with fossil fuels. And then finally, this is the

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Speaker 1: thing that makes it seem like it's got the most

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Speaker 1: unfair advantage is it's got the world's reserve currency.

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Speaker 3: I think you've actually created a whole other reason why

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Speaker 3: fossil fuel substies are bad. People think fossil fuel substies

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Speaker 3: are bad because of the fact that we're subsidizing a

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Speaker 3: polluting industry, but it's also subsidizing economic inefficiency and slowing

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Speaker 3: the adjustment. And the fact that the US has reserve

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Speaker 3: currency status you're saying allows them to do that for longer.

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Speaker 3: Allows the frog to be in the boiling water for

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Speaker 3: longer than it might otherwise be able to do if

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Speaker 3: it didn't have those crutches. Now, reserve currency status is

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Speaker 3: something that many people find hard to grasp, and I

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Speaker 3: find a useful way of saying it, especially for people

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Speaker 3: of my age who remember writing checks, is that reserve

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Speaker 3: currency status is like writing checks to pay for things

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Speaker 3: that nobody ever caches.

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Speaker 2: They're quite happy to hold your uncashed check because your

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Speaker 2: uncashed check is a reserve currency that they could use

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Speaker 2: in the future when they're a difficult situation, and so

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Speaker 2: that allows them to consume more than they produce to

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Speaker 2: run a current account deficit, run a fiscal deficit. But

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Speaker 2: people with countries with reserve currency status, where people are

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Speaker 2: happy to sell goods but not cash the checks, can

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Speaker 2: run these deficits.

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Speaker 1: But it might be worth taking even one more step

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Speaker 1: back to understand why we ended up in this situation

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Speaker 1: in the first place. My understanding is currency used to

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Speaker 1: be tied to the gold standard. If you didn't have gold,

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Speaker 1: you couldn't produce the currency. And then at some point

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Speaker 1: that was taken off, and so a currency just became

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Speaker 1: a fiat, which is it is backed by the status

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Speaker 1: of that government and you have to trust in that

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Speaker 1: government to provide you the value of that currency. And

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Speaker 1: because America was the world's hegimen at that time, the

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Speaker 1: dollar started to become the reserve currency of the world.

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Speaker 1: Maybe there's a better way of understanding.

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Speaker 2: Yes, I'm not internally sure that's the way I would

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Speaker 2: view it. Before the dollar was a reserve currency. Stilling

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Speaker 2: was the world's reserve currency. The Roman currency was a

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Speaker 2: reserve currency. You're finding Roman coins thousands of miles away

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Speaker 2: from where the Roman Empire was because clearly their currency

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Speaker 2: was a reserve currency. So the key to being a

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Speaker 2: reserve currency is you are a big trader, and there's

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Speaker 2: value in people holding your currency being able to buy

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Speaker 2: your goods in the future. So they are happy to

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Speaker 2: hold your current if you don't produce anything and they

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Speaker 2: don't sell you anything that's not very valuable. So we've

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Speaker 2: never really had a small country or a non trader

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Speaker 2: ever become a reserve currency country. So it's a function

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Speaker 2: of your position in the world trade and it kind

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Speaker 2: of amplifies your positions. So if you're the world's biggest trader,

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Speaker 2: you then become even bigger in international finance. So the

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Speaker 2: US maybe one side of fifty percent of global trade,

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Speaker 2: but the US dollar is one side of almost eighty

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Speaker 2: percent of financial transactions because it has this reserve currency status.

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Speaker 1: Ali Zaidi, who is the National Climate Advisor to President Biden,

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Speaker 1: said that if under Donald Frum, America doesn't pursue the

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Speaker 1: technologies of the twenty first century, which are mostly electric.

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Speaker 1: It would be economic malpractice because as a result, America

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Speaker 1: will start to fall behind the rest of the world,

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Speaker 1: and as it does so, it may have to trade

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Speaker 1: less with the world, and maybe the reserve currency status

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Speaker 1: of the dollar starts to weaken.

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Speaker 2: But that will be hell. I mean, I think that

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Speaker 2: we have some experience of that. So if becoming a

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Speaker 2: reserve currency is like writing checks to buy stuff and

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Speaker 2: no one ever cashing your checks, losing reserve currency status

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Speaker 2: is all those checks come back to be cashed at

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Speaker 2: the same time. This is what happened in the UK

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Speaker 2: from the mid nineteen sixties. It led to the Sterling

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Speaker 2: devaluation of sixty seven, the so called Barsel Accords of

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Speaker 2: nineteen sixty eight, which will when there had to be

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Speaker 2: an international agreement to stop people sending back their sterling

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Speaker 2: and asking for to be repaid in gold or other things.

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Speaker 2: They had to have a special agreement. The irony was

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Speaker 2: the minute they announced this international agreement to save sterling.

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Speaker 2: It woke everyone up to the fact that Stirling Who's

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Speaker 2: engrave challenge and it collapsed afterwards. So the September bars

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Speaker 2: agreements in sixty eight were a real problem.

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Speaker 1: It's like the streysand effect, but playing out in the sixties. Now.

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Speaker 1: One thing I enjoy about our conversation is that we

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Speaker 1: start from one place and we typically start to unspool

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Speaker 1: more and more complicated things. One thing that comes up

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Speaker 1: again and again is the international system. Now, what is

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Speaker 1: a way to define the international system? I think we

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Speaker 1: all have a sense of it, but is there a

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Speaker 1: clearer way of understanding it?

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Speaker 2: I think it actually comes back to the international reserve

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Speaker 2: currency aspect. So the international system, to me, you see

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Speaker 2: it most when there is a global fright of some

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Speaker 2: kind a shock. It could be a war, it could

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Speaker 2: be some natural disaster. You see that investors get scared,

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Speaker 2: and invest who get scared run to safety. And what

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Speaker 2: we're finding that they run to the same place. That's

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Speaker 2: the international reserve currency, and that today is the US dollar.

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Speaker 2: So you see by the system, we had this EBB

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Speaker 2: and flow of capital to and from US dollars, and

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Speaker 2: that's the system. And now that's partly a function of history,

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Speaker 2: a function of the size of the international of the

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Speaker 2: US economy that it has the capacity to use absorb

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Speaker 2: your dollars that you've kept as reserves. It's also then

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Speaker 2: becomes morphed into conventions. So when you look at credit ratings,

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Speaker 2: when you look at accounting standards, the US dollar and

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Speaker 2: dollar assets are given special status because the convention writers

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Speaker 2: will say, well, that is more liquid if you've got

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Speaker 2: it in dollars. And so the world has safe assets,

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Speaker 2: and these safe assets are in US dollars. And it's

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Speaker 2: a very interesting dimension of development is that the US

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Speaker 2: is an exporter of safe assets and developing countries are

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Speaker 2: importers of safe assets. And that's the international system.

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Speaker 1: But if China is now running a trade surplus substantial

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Speaker 1: one and has been running it for many many years now,

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Speaker 1: it's also starting to wield a lot of power with it. Yuon,

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Speaker 1: So the Chinese Central Bank has created a digital yuan,

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Speaker 1: and I have heard from suppliers in Europe that get

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Speaker 1: their solar panels or other electricity related infrastructure from China

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Speaker 1: directly find it easier to pay the Chinese supplier through

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Speaker 1: the digital yuon rather than having to go through multiple

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Speaker 1: banks where the euro will be committed to a dollar,

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Speaker 1: will be then converted back to a yuan and go

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Speaker 1: through costs at every transaction. The cost of transaction falls,

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Speaker 1: the speed of transaction falls, and more and more Yuon

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Speaker 1: gets traded.

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Speaker 2: That's an important development. But you know the measure of

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Speaker 2: whether it is having global impact is when China starts

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Speaker 2: running deficits. China running a surplus is a sign that

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Speaker 2: people are not really hoarding you On. When people start

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Speaker 2: hoarding u On internationally, then China goes into that place

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Speaker 2: where they are consuming stuff, writing checks to pay for it,

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Speaker 2: checks and you are and people aren't catching the checks,

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Speaker 2: so they can consume more than they're producing and running

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Speaker 2: a current account deficit. And clearly that's not where we

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Speaker 2: are today, but we may not be a million miles

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Speaker 2: from that. But so our future, if the future is Chinese,

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Speaker 2: then that future contains big Chinese deficits.

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Speaker 1: So this power imbalance where America acts as a fossil

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Speaker 1: fuel state because it has so much fossil fuels and

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Speaker 1: has this reserve currency that gives it essentially an unlimited

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Speaker 1: checking account, how does that make it easier or harder

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Speaker 1: for developing countries to move to clean energy to increase

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Speaker 1: the amount of climate finance that we are going to need.

435
00:27:09,440 --> 00:27:14,600
Speaker 1: Where money, maybe dollars, flows from America to developing countries.

436
00:27:14,480 --> 00:27:16,840
Speaker 2: Now it is actually strongly linked, but I need to

437
00:27:16,880 --> 00:27:20,879
Speaker 2: build that story a little bit. So firstly, if we

438
00:27:21,000 --> 00:27:28,520
Speaker 2: want the big middle income countries India in particular Brazil, Mexico, Indonesia,

439
00:27:29,040 --> 00:27:35,280
Speaker 2: South Africa to shift into renewables and the planet needs

440
00:27:35,320 --> 00:27:40,879
Speaker 2: them to shift massively and rapidly, the future energy demand

441
00:27:41,040 --> 00:27:43,879
Speaker 2: in India's about to explode and if those are fossil

442
00:27:43,920 --> 00:27:47,280
Speaker 2: fuel fired, that's going to be a problem. We're expecting

443
00:27:47,520 --> 00:27:51,600
Speaker 2: massive investment. We need massive investment by definition, more than

444
00:27:51,640 --> 00:27:57,320
Speaker 2: they have domestic savings. If they have enough domestic savings

445
00:27:57,359 --> 00:28:00,000
Speaker 2: to match the investment, we know we're not doing enough

446
00:28:00,040 --> 00:28:06,720
Speaker 2: investment because we're requiring there's some massive global sized investment boom.

447
00:28:06,880 --> 00:28:08,879
Speaker 2: So they have to get the money from abroad. The

448
00:28:08,920 --> 00:28:12,520
Speaker 2: international system has to work for the planet and for climate,

449
00:28:12,880 --> 00:28:17,280
Speaker 2: and it's not because of this imbalance. And as a

450
00:28:17,320 --> 00:28:21,160
Speaker 2: result we have these very different costs of capital. Cost

451
00:28:21,200 --> 00:28:25,000
Speaker 2: of capital in India, even India, big country, deep liquid

452
00:28:25,040 --> 00:28:28,280
Speaker 2: markets would be about eight percent to raise money eight

453
00:28:28,280 --> 00:28:31,400
Speaker 2: percent plus, whilst it may still be three percent four

454
00:28:31,400 --> 00:28:35,440
Speaker 2: percent in Europe. So we need to bring capital from

455
00:28:35,560 --> 00:28:38,440
Speaker 2: places where it's abundant to places where it's scarce, and

456
00:28:38,720 --> 00:28:43,320
Speaker 2: this channel is blocked. The channel is blocked because investors

457
00:28:43,760 --> 00:28:48,720
Speaker 2: are concerned about this reserve currency status and the impact

458
00:28:48,720 --> 00:28:50,720
Speaker 2: of that, and they don't think in terms of reserve

459
00:28:50,760 --> 00:28:54,800
Speaker 2: current status. But what they're thinking about is currency volatility.

460
00:28:55,440 --> 00:28:59,040
Speaker 2: Because if you are the if you are an import

461
00:28:59,080 --> 00:29:03,120
Speaker 2: of safe assets, what happens is your currency is very volatile.

462
00:29:03,640 --> 00:29:06,040
Speaker 2: When things are going well and people don't need safety,

463
00:29:06,240 --> 00:29:10,240
Speaker 2: people are flooding into your country, and your currency is booming.

464
00:29:10,760 --> 00:29:14,120
Speaker 2: When things are looking uneasy around the world, may have

465
00:29:14,240 --> 00:29:17,760
Speaker 2: nothing to do with your country, and maybe your neighboring country.

466
00:29:18,040 --> 00:29:20,640
Speaker 2: Then money is fleeing and so the currency is going

467
00:29:20,720 --> 00:29:22,960
Speaker 2: up and down and you can do nothing about it.

468
00:29:23,400 --> 00:29:27,680
Speaker 2: And international investors see that, they see that volatility, and

469
00:29:27,720 --> 00:29:30,280
Speaker 2: they are saying, well, I can't manage that volatility. That

470
00:29:30,640 --> 00:29:33,120
Speaker 2: volatility is not even to do with your country, to

471
00:29:33,120 --> 00:29:37,080
Speaker 2: do with the international system, and what can you do

472
00:29:37,200 --> 00:29:37,720
Speaker 2: about it?

473
00:29:38,280 --> 00:29:38,600
Speaker 3: Now?

474
00:29:38,680 --> 00:29:42,640
Speaker 2: When you have problems in a country with reserve currency status,

475
00:29:43,040 --> 00:29:45,320
Speaker 2: they can do stuff about it. You know, when the

476
00:29:45,360 --> 00:29:48,920
Speaker 2: economy is hit badly, they can cut infrast rates, they

477
00:29:48,960 --> 00:29:53,000
Speaker 2: can expand spending. Investors are still there, They're not fleeing,

478
00:29:53,560 --> 00:29:57,760
Speaker 2: they're not worried about your policies. This imbalance in the

479
00:29:57,800 --> 00:30:02,240
Speaker 2: system is blocking the f of money from places where

480
00:30:02,240 --> 00:30:04,760
Speaker 2: the capital is the places where we need the capital.

481
00:30:05,080 --> 00:30:09,320
Speaker 2: So we need a solution that takes away this imbalance.

482
00:30:09,560 --> 00:30:13,600
Speaker 2: That actually means that for renewable energies, we can count

483
00:30:13,960 --> 00:30:18,440
Speaker 2: these middle income countries as being part of the reserve

484
00:30:18,560 --> 00:30:22,720
Speaker 2: currency zone and not subject to this kind of volatility.

485
00:30:23,040 --> 00:30:26,560
Speaker 2: And that's something we're working on with the Foreign Exchange

486
00:30:26,600 --> 00:30:30,800
Speaker 2: Liquidity Facility, using the fact that the multilateral development banks

487
00:30:31,080 --> 00:30:35,640
Speaker 2: are also triple A, so they are safe assets, and

488
00:30:35,720 --> 00:30:41,440
Speaker 2: so we will spread our cordon of safety around projects

489
00:30:41,480 --> 00:30:45,600
Speaker 2: involved in renewable energy so that the international investor knows

490
00:30:45,640 --> 00:30:50,120
Speaker 2: they can rely on a development bank to be lending

491
00:30:50,160 --> 00:30:54,600
Speaker 2: the project dollars at times of as international stress. The

492
00:30:54,640 --> 00:30:58,520
Speaker 2: project has to pay back, but they're less subject to

493
00:30:58,640 --> 00:31:02,720
Speaker 2: the volatility of the international financial system and the volatility

494
00:31:02,720 --> 00:31:03,760
Speaker 2: of the currency markets.

495
00:31:04,040 --> 00:31:08,080
Speaker 1: That's a stunning explanation for a thing that I came

496
00:31:08,120 --> 00:31:11,920
Speaker 1: across in my very early days of journalism. I joined

497
00:31:11,960 --> 00:31:14,880
Speaker 1: a news organization called Courts, and on the very first

498
00:31:14,920 --> 00:31:19,080
Speaker 1: day of my job, there was a betting round going

499
00:31:19,120 --> 00:31:22,360
Speaker 1: on in the general slack channel, and it was on

500
00:31:22,920 --> 00:31:27,360
Speaker 1: how many jobs in the US will the job's numbers say,

501
00:31:28,160 --> 00:31:31,560
Speaker 1: And it made no sense to me, as somebody with

502
00:31:31,600 --> 00:31:34,640
Speaker 1: a science background, not an economics background. Why the world

503
00:31:34,720 --> 00:31:38,160
Speaker 1: cares about the US economy producing a few hundred thousand

504
00:31:38,240 --> 00:31:43,160
Speaker 1: jobs in a monthly basis? Now I know because when

505
00:31:43,480 --> 00:31:46,680
Speaker 1: something happens to the US, when it sneezes, everybody cares

506
00:31:46,760 --> 00:31:49,800
Speaker 1: because of the dollar, because the reserve currency, because tiny

507
00:31:49,880 --> 00:31:54,360
Speaker 1: volatility of the US economy has much bigger ripple effects

508
00:31:54,400 --> 00:31:55,560
Speaker 1: in the rest of the world.

509
00:31:55,960 --> 00:31:58,800
Speaker 2: And you know, what happened during COVID is a very

510
00:31:58,840 --> 00:32:02,280
Speaker 2: interesting way of matching something that everyone experience and so

511
00:32:02,480 --> 00:32:05,440
Speaker 2: know a little bit about with this international financial system.

512
00:32:05,560 --> 00:32:09,720
Speaker 2: So COVID happens impacts us all roughly around the same time,

513
00:32:10,280 --> 00:32:14,600
Speaker 2: the developed countries, with their reserve currencies are able to

514
00:32:14,800 --> 00:32:17,920
Speaker 2: slash interest rates, we go back towards zero. They're able

515
00:32:17,960 --> 00:32:21,480
Speaker 2: to expand fiscal policy, and investors don't flee because they

516
00:32:21,520 --> 00:32:26,760
Speaker 2: see governments reacting. Investors flee from the developing countries who

517
00:32:26,800 --> 00:32:29,520
Speaker 2: are unable to act that way. So they have to

518
00:32:29,560 --> 00:32:32,800
Speaker 2: start raising interest rates to keep money in and they

519
00:32:32,800 --> 00:32:35,840
Speaker 2: have to cut back their spending. Their currencies are falling,

520
00:32:36,360 --> 00:32:39,040
Speaker 2: and they deepen their recession because that's the only way

521
00:32:39,080 --> 00:32:42,200
Speaker 2: they can respond. Then, as a result of them deepening

522
00:32:42,280 --> 00:32:45,920
Speaker 2: the recession and the developed countries being able to respond quickly,

523
00:32:46,320 --> 00:32:49,680
Speaker 2: the developed countries have the recovery quicker. So now what

524
00:32:49,720 --> 00:32:51,360
Speaker 2: they've got to do is they've got to raise their

525
00:32:51,360 --> 00:32:54,120
Speaker 2: interest rates so that they're recovering faster. Inflation's coming up,

526
00:32:54,240 --> 00:32:57,239
Speaker 2: so they raise interest rates and setting their currencies up.

527
00:32:57,280 --> 00:33:01,240
Speaker 2: And again money's fleeing from the developed countries because they're

528
00:33:01,240 --> 00:33:04,440
Speaker 2: now being attracted from these higher infrast rates available in

529
00:33:04,480 --> 00:33:08,760
Speaker 2: the safe haven. So again the recovery slowed in developing

530
00:33:08,760 --> 00:33:11,920
Speaker 2: countries because they've got to respond to money leaving. So

531
00:33:11,960 --> 00:33:15,280
Speaker 2: when they should be recovering, the recovery is delayed because

532
00:33:15,280 --> 00:33:18,440
Speaker 2: they're raising interest rates before their economy is recovered, and

533
00:33:18,480 --> 00:33:21,680
Speaker 2: they're having to cut back spending before their economy is recovered.

534
00:33:22,000 --> 00:33:25,120
Speaker 2: So what you saw was the response of the developing

535
00:33:25,120 --> 00:33:29,440
Speaker 2: world was they were unable to respond fast enough in

536
00:33:29,520 --> 00:33:32,320
Speaker 2: terms of policy on the way down, and they were

537
00:33:32,440 --> 00:33:36,080
Speaker 2: unable to recover fast enough on the way up. And

538
00:33:36,120 --> 00:33:38,320
Speaker 2: that was because nothing to do with what they were

539
00:33:38,320 --> 00:33:40,440
Speaker 2: doing in their country. That was to do with the

540
00:33:40,480 --> 00:33:43,560
Speaker 2: international financial system and the way it works, and.

541
00:33:43,560 --> 00:33:46,080
Speaker 1: In some way as climate change plays out and more

542
00:33:46,120 --> 00:33:48,920
Speaker 1: and more disasters are felt. Let's hope it's never as

543
00:33:48,920 --> 00:33:51,600
Speaker 1: extreme as the pandemic was at any given time, but

544
00:33:51,720 --> 00:33:55,240
Speaker 1: we will sustain that level of impact over a longer period,

545
00:33:55,600 --> 00:33:58,600
Speaker 1: and we'll see developing countries suffer through the same cycle,

546
00:33:58,680 --> 00:34:00,520
Speaker 1: perhaps in a lender time frame.

547
00:34:00,960 --> 00:34:05,960
Speaker 2: So developing countries, especially finance ministry officials, central bank officials,

548
00:34:06,080 --> 00:34:09,719
Speaker 2: they have long seen this and long wondered what can

549
00:34:09,719 --> 00:34:11,200
Speaker 2: we do about it? It has been very hard to

550
00:34:11,239 --> 00:34:14,719
Speaker 2: do something about it because they were never very significant

551
00:34:14,760 --> 00:34:19,600
Speaker 2: in the international economy. Now they are. They are looking so,

552
00:34:19,640 --> 00:34:22,759
Speaker 2: for example, the bricks countries are thinking about, well, maybe

553
00:34:22,800 --> 00:34:25,920
Speaker 2: we should create our own reserve currency. And because the

554
00:34:25,960 --> 00:34:30,440
Speaker 2: brick countries are big traders, they actually have the potential

555
00:34:30,520 --> 00:34:33,520
Speaker 2: of doing something in a way that they couldn't have done,

556
00:34:34,239 --> 00:34:37,560
Speaker 2: say twenty years ago. I'm not sure they have a

557
00:34:38,239 --> 00:34:41,920
Speaker 2: solution yet, but there's a potential that they could do something,

558
00:34:42,160 --> 00:34:43,719
Speaker 2: and it would seem to me that it would be

559
00:34:43,840 --> 00:34:48,200
Speaker 2: the interests of the beneficiaries of the existing system to

560
00:34:48,280 --> 00:34:51,560
Speaker 2: prolong that system by trying to make the system work

561
00:34:51,680 --> 00:34:55,040
Speaker 2: better for everybody. And if they don't do that, the

562
00:34:55,120 --> 00:34:58,760
Speaker 2: system will at some point be usurped by another system.

563
00:34:59,120 --> 00:35:01,399
Speaker 1: Could you imagine what that other system might be?

564
00:35:01,880 --> 00:35:06,799
Speaker 2: The future of international reserve currency status will be determined

565
00:35:06,840 --> 00:35:10,160
Speaker 2: by who is the biggest trader. And we're in a

566
00:35:10,200 --> 00:35:16,360
Speaker 2: world increasingly where China is exporting and importing from developing

567
00:35:16,400 --> 00:35:21,399
Speaker 2: countries and maintaining its increasing share of international trade, and

568
00:35:21,480 --> 00:35:26,799
Speaker 2: so they are potentially the next beneficiary. And you know,

569
00:35:27,280 --> 00:35:32,000
Speaker 2: India is an alternative as well, because the one challenge

570
00:35:32,040 --> 00:35:34,960
Speaker 2: that China has has a few but one of the

571
00:35:35,000 --> 00:35:39,200
Speaker 2: main ones. And often you hear people say that China

572
00:35:39,440 --> 00:35:42,879
Speaker 2: will get owed before it gets rich. That the one

573
00:35:43,000 --> 00:35:47,520
Speaker 2: child policy meant that China has an acute demographic and

574
00:35:47,600 --> 00:35:51,880
Speaker 2: it's aging heavily, and that aging will slow its growth

575
00:35:52,239 --> 00:35:57,799
Speaker 2: and slow its economic presence globally. India is still at

576
00:35:57,840 --> 00:36:02,760
Speaker 2: a sweet spot on demographics and expanding, and that divergence

577
00:36:02,800 --> 00:36:05,080
Speaker 2: will increase, and so we will be in a world

578
00:36:05,080 --> 00:36:08,200
Speaker 2: at some point in this century in which India is

579
00:36:08,200 --> 00:36:12,279
Speaker 2: the world's largest economy and the largest trader, and so

580
00:36:12,640 --> 00:36:16,760
Speaker 2: India or China maybe become the next reserve currency.

581
00:36:16,960 --> 00:36:19,640
Speaker 1: Wait what I mean? I thought it'll be either an

582
00:36:19,640 --> 00:36:23,439
Speaker 1: American century or Chinese century. I'm an Indian, but did

583
00:36:23,520 --> 00:36:26,640
Speaker 1: not expect India to become the world's largest economy.

584
00:36:27,239 --> 00:36:30,080
Speaker 2: And it's not something they're intending to, you know. Whilst

585
00:36:30,280 --> 00:36:33,959
Speaker 2: America and China have been quite deliberate about their international role,

586
00:36:34,520 --> 00:36:38,719
Speaker 2: it will be in somewhat typical Indian fashion, haphazardly and

587
00:36:40,160 --> 00:36:43,160
Speaker 2: happening just out of some crazy evolution.

588
00:36:44,560 --> 00:36:54,160
Speaker 1: Thank you, Having Nash, Thank you very much. Thank you

589
00:36:54,200 --> 00:36:57,480
Speaker 1: for listening to Zero. Next week in the Moving Money series,

590
00:36:57,719 --> 00:37:00,840
Speaker 1: we'll be looking at the role of multilateral development banks.

591
00:37:01,480 --> 00:37:04,200
Speaker 1: If you have any questions about climate finance, please write

592
00:37:04,239 --> 00:37:07,279
Speaker 1: to us at Zero pod at Bloomberg dot net. And

593
00:37:07,440 --> 00:37:09,640
Speaker 1: if you like this episode, please take a moment to

594
00:37:09,719 --> 00:37:12,320
Speaker 1: rate and review the show on Apple Podcasts or Spotify,

595
00:37:12,960 --> 00:37:16,040
Speaker 1: Share this episode with a friend or with your mortgage advisor.

596
00:37:16,640 --> 00:37:21,080
Speaker 1: And now for the sound of the week. M Yes,

597
00:37:28,520 --> 00:37:31,640
Speaker 1: that's the sound of Japan's Maglev train performing a test

598
00:37:31,760 --> 00:37:37,480
Speaker 1: run at five hundred kilometers per hour. This episode was

599
00:37:37,520 --> 00:37:41,080
Speaker 1: produced by Oscar Boydberg's head of podcast is Sage Bowman

600
00:37:41,280 --> 00:37:44,120
Speaker 1: and head of Talk is Brendan neunim Our. Theme music

601
00:37:44,239 --> 00:37:47,520
Speaker 1: is composed by Wonderly Special thanks to might Ley Rau

602
00:37:47,920 --> 00:37:53,560
Speaker 1: Somarsadi Mosses and Blake Maples and Shawan Wagner i'm Akshadrati

603
00:37:53,800 --> 00:38:00,480
Speaker 1: back next week for another episode of Moving Money,