An Apocalypse Foretold: Climate Shocks and Sovereign Defaults

IMF Working Papers, November 8, 2020

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Canonical URL: An Apocalypse Foretold: Climate Shocks and Sovereign Defaults

Climate change poses an existential threat to the global economy.
Research gap: prior literature documents economic consequences of climate change but research on the link between climate change and sovereign default risk is nonexistent; this paper aims to fill that gap.
Objective: estimate the impact of climate change vulnerability and resilience on the probability of sovereign debt default.
Sample: 116 countries over the period 1995–2017.
Main conclusion: climate change vulnerability and resilience have significant effects on the probability of sovereign debt default, especially among low-income countries.

Countries with greater vulnerability to climate change face a higher likelihood of sovereign debt default compared to more climate resilient countries.
The effect is particularly pronounced among low-income countries.
Findings are robust across:
- Alternative measures of sovereign debt default.
- Different model specifications.
- Different estimation methodologies.

Subject: Climate change, Debt default, Environment, External debt, Financial sector development, Public debt, Real effective exchange rates
Keywords: Climate change, climate change face, climate change pay, climate change resilience, climate change vulnerability, Debt default, government debt, resilience, South America, South Asia, sovereign default, Sub-Saharan Africa, vulnerability, WP