For this week’s exploration of the Day After, we look at four crises shaping the decisions of today and the world of tomorrow. We begin with the largest climate bill to pass the US Senate and its implications for the future of the climate fight. From there, we turn to the Chinese debt crisis, which has quietly been chipping away at the stability of the Chinese economy. We then turn our attention to Germany, whose strained gas supplies due to the war in Ukraine are forcing policymakers to potentially shutter entire industries to keep their people warm. Finally, we examine how Sri Lanka’s default may have far-reaching ripple effects in the developing world. As these fractured systems wreak havoc on an increasingly unstable world, it is necessary to maintain a long-term view, focusing on the principles which have propelled us this far and trusting them to take us further, recalling that “Courage is not simply one of the virtues but the form of every virtue at the testing point” – C.S. Lewis.

US Senate Passes Sweeping Climate, Tax and Healthcare Package

George Wright and Leo Sands, BBC 

Five Decades in the Making: Why It Took Congress So Long to Act on Climate

Coral Davenport and Lisa Friedman, The New York Times

In 1969, President Richard Nixon’s adviser Daniel Patrick Moynihan wrote a memo warning that the increase of carbon dioxide in the atmosphere would have dangerous repercussions. More than 50 years later, Congress is finally about to pass legislation that will include the largest investment in climate action in the nation’s history. For the last half-century, the debate around climate change has ebbed and flowed. A few years following Moynihan’s memo, William Norhaus proposed the idea of a carbon tax, an effort that won him the Nobel Memorial Prize in Economic Sciences. Climate change started making headlines in the late eighties, leading Vice President Al Gore and President Bill Clinton to promote climate action measures, but they were shut down in the Senate and climate policy took a back seat until 2009 when President Barrack Obama tried again with the “cap-and-trade” bill. Again, the bill stalled in the Senate. It looked as though history was going to repeat itself yet again, but Democratic Senate majority leader Chuck Schumer and Democratic Senator Joe Manchin, who had blocked the passage of the Democrats’ original economic package due to fears it would exacerbate inflation, were finally able to reach an agreement. This week, the Senate passed a sweeping economic bill that includes major legislation on healthcare, taxes, and climate change. While the bill is significantly scaled back from the original $3.5 trillion proposal, the now $700 billion economic package – named the Inflation Reduction Act – seeks to lower the cost of some medicines, increase corporate taxes, and reduce carbon emissions. The bill allocates $369 billion for climate action measures, including tax credits for buying electric cars, aid for communities that have suffered the most from pollution, and investment in the production of clean energy technologies. The legislation is expected to pass through the House of Representatives tomorrow.

‘Financial Monsters’: China’s Bad Banks Complicate Property Crisis

Edward White and Cheng Leng, Financial Times

China Banks May Face $350 Billion in Losses from Property Crisis

Bloomberg 

As China’s property debt crisis continues to spiral out of control, the overweight balance sheets of its four largest “bad banks” have prevented China’s biggest lenders from offloading potentially toxic assets. The largest of these, China Huarong Asset Management, had to be bailed out in 2021 after hiding a $16 billion loss, taking China’s credit rating down with it. With over $740 billion in total assets and approximately one-fifth of the Chinese property market on their balance sheets, China’s bad debt conglomerates pose a significant risk to the health of China’s strained debt market. As the nationalized banks struggle to respond, the burden of rescuing the property sector may fall to smaller regional banks, which have close ties to local governments. With an estimated 6.4% of mortgages categorized as “at risk” of delinquency, China’s financial system is struggling to find answers before the dam breaks. While permitting building projects to default would remove risky assets from balance sheets and prevent the crisis from spiraling further, it would also destroy profits and credibility. On the other hand, borrowing additional funds to continue development adds debt exposure and kicks the can further down the road. Chinese banks are already borrowing at record rates in anticipation of the next round of defaults. Further straining the already tense balance is a secular decline in disposable income, throttling consumers’ purchases of new homes. With China’s broader economy struggling to maintain its growth, the rot at the core of many of its financial institution’s holdings may catalyze a broad economic crisis.

Germany Plans for a Winter Without Gas from Russia

Spiegel International

Read the full article here

Earlier this week, Russian state-owned energy giant Gazprom cut gas volumes through the Nord Stream 1 pipeline to Germany to 20% of normal volume, citing technical issues. The going assumption that the reduction is a political weapon being used by the Kremlin to combat EU sanctions over the Ukrainian crisis has forced German policymakers to begin making tough decisions about gas rationing as the country approaches winter. Klaus Müller, the president of Germany’s Federal Network Agency, characterized the shortage by stating he “won’t be able to make good choices…I hope it’s just going to be fewer bad choices.” Echoing debates heard early in the Covid-19 pandemic, industries from paper production to glassmakers are clamoring to have their operations categorized as “essential business” to prevent gas being cut off from their facilities. The fragile network of the supply chain is at risk of further disruption as gas-starved industries will be forced to shutter production, causing ripple effects throughout the Germany and European markets. With EU regulations ensuring gas supplies to private residences and certain small-to-medium businesses, German regulators have few tools to enforce reduced consumption other than persuasion. Many companies are already preparing for the worst, scrambling to find alternatives for gas in their operations. The blow to the German economy could be as high as a six-point reduction in output, with stagflation and possibly recession choking production even as inflation batters industry. With Russian supplies constrained, the country has looked to other partners in the EU, the US, and Asia to supply gas, but even with support it would be difficult to import enough gas to meet demand without Russian supply. As Germany moves towards a difficult winter, its economic fate may rest in the vicissitudes of temperature and Vladimir Putin’s actions.

Trouble is Coming for Emerging Markets Beyond Sri Lanka

Megan Greene, Financial Times

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Sri Lanka’s debt troubles foreshadow a global debt crisis that is getting ready to spread throughout emerging and developing markets. The International Monetary Fund (IMF) recently proclaimed Sri Lanka’s public debt unsustainable, and Sri Lanka defaulted on their debt in May after having chosen to use its remaining foreign reserves on food and fuel instead of paying off debt. While some aspects of Sri Lanka’s crisis are specific to its leadership and governance, it reflects the struggles of many other emerging economies in other ways. The surge in energy and food prices sparked by Russia’s invasion of Ukraine has forced already heavily indebted countries to choose between subsidizing essential goods and paying creditors. Per the most recent IMF growth forecast, emerging markets and developing economies are now expected to grow only 3.6% this year as compared to 6.8% last year. Growth is weakening and borrowing costs are rising. While a downturn in the US may reduce global borrowing costs and push the dollar down, recessions in the US and Eurozone would hardly be good news and there would likely be less opportunities for positive spillover effects into emerging economies as in previous downturns that spurred demand for commodities. Another major concern is that an estimated 25% of emerging and developing countries’ external debt is owed to China, which so far, has been unwilling to entertain restructuring. In conclusion, “Sri Lanka’s crisis suggests trouble is coming in emerging markets, and there isn’t much they can do about it.”