Sovereign Debt Default and Climate Risk
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arXiv
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| Auteurs principaux: | , , |
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| Format: | Preprint |
| Publié: |
2025
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| _version_ | 1866913658720747520 |
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| author | Barucci, Emilio Marazzina, Daniele Nassigh, Aldo |
| author_facet | Barucci, Emilio Marazzina, Daniele Nassigh, Aldo |
| contents | We explore the interplay between sovereign debt default/renegotiation and environmental factors (e.g., pollution from land use, natural resource exploitation). Pollution contributes to the likelihood of natural disasters and influences economic growth rates. The country can default on its debt at any time while also deciding whether to invest in pollution abatement. The framework provides insights into the credit spreads of sovereign bonds and explains the observed relationship between bond spread and a country's climate vulnerability. Through calibration for developing and low-income countries, we demonstrate that there is limited incentive for these countries to address climate risk, and the sensitivity of bond spreads to climate vulnerability remains modest. Climate risk does not play a relevant role on the decision to default on sovereign debt. Financial support for climate abatement expenditures can effectively foster climate adaptation actions, instead renegotiation conditional upon pollution abatement does not produce any effect. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2501_11552 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Sovereign Debt Default and Climate Risk Barucci, Emilio Marazzina, Daniele Nassigh, Aldo General Economics Economics General Finance Pricing of Securities Risk Management We explore the interplay between sovereign debt default/renegotiation and environmental factors (e.g., pollution from land use, natural resource exploitation). Pollution contributes to the likelihood of natural disasters and influences economic growth rates. The country can default on its debt at any time while also deciding whether to invest in pollution abatement. The framework provides insights into the credit spreads of sovereign bonds and explains the observed relationship between bond spread and a country's climate vulnerability. Through calibration for developing and low-income countries, we demonstrate that there is limited incentive for these countries to address climate risk, and the sensitivity of bond spreads to climate vulnerability remains modest. Climate risk does not play a relevant role on the decision to default on sovereign debt. Financial support for climate abatement expenditures can effectively foster climate adaptation actions, instead renegotiation conditional upon pollution abatement does not produce any effect. |
| title | Sovereign Debt Default and Climate Risk |
| topic | General Economics Economics General Finance Pricing of Securities Risk Management |
| url | https://arxiv.org/abs/2501.11552 |