An Apocalypse Foretold: Climate Shocks and Sovereign Defaults

Volume/Issue: Volume 2020 Issue 231

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Exports and Imports , Finance , Public Finance , Environmental Economics , vulnerability , resilience , government debt , sovereign default , WP , climate change vulnerability , climate change resilience , climate change face , climate change pay , Climate change , Debt default , South Asia , South America , Sub-Saharan Africa

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Summary

Climate change poses an existential threat to the global economy. While there is a growing body of literature on the economic consequences of climate change, research on the link between climate change and sovereign default risk is nonexistent. We aim to fill this gap in the literature by estimating the impact of climate change vulnerability and resilience on the probability of sovereign debt default. Using a sample of 116 countries over the period 1995–2017, we find that climate change vulnerability and resilience have significant effects on the probability of sovereign debt default, especially among low-income countries. That is, countries with greater vulnerability to climate change face a higher likelihood of debt default compared to more climate resilient countries. These findings remain robust to a battery of sensitivity checks, including alternative measures of sovereign debt default, model specifications, and estimation methodologies.