Environmental Risks Threaten Government Debt Markets, UNEP Says

Depleting natural resources such as water and forests could reduce government revenue within the next five years, adding to the risk of investments in sovereign bonds, the United Nations Environment Program said.

Competition for resources such as metals and minerals is increasing as more countries depend on goods they can’t provide themselves, UNEP said in a report drawn up with the Global Footprint Network. Government finances will start to feel the strain as these resources decline, it said.

“The whole risk of environmental change connected with the loss of natural resources such as forests and freshwater has until very recently been at the fringes of economic discords and economic planning,” Nick Nuttall, a spokesman from UNEP, said by phone from Nairobi. “The issue of ecosystems, of natural resources that keep the planet functioning, have until now been almost invisible in accounts of profit and loss of nations.”

The E-RISC, or Environmental Risk in Sovereign Credit Analysis tool can be used to incorporate natural resource risks into sovereign credit risk assessments. Investors want to better understand emerging risks in the bond market, the report said, because concerns that debt levels in Europe and the U.S. have shaken the perception government bonds are risk free.

The report analyzed five countries -- Brazil, France, India, Japan and Turkey. It found a 10 percent fluctuation in commodity prices can shift a country’s trade balance equivalent to 0.2 percent and 0.5 percent of a nation’s gross domestic product.

A 10 percent reduction in resources, assuming other things remain the same, may cause a reduction in trade balance equal to 1 percent and more than 4 percent of a country’s GDP. Sovereign debt at the end of 2010 was $41 trillion.

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