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Climate and sovereign default risk

Author

Listed:
  • Balzer, Lukas
  • Miftakhova, Alena

Abstract

Does climate risk necessarily raise sovereign default risk? While a growing literature documents adverse effects from realized disasters, the implications of long-term (chronic) climate risk remain unclear. Using an endogenous default model with climate shocks, we isolate chronic physical risk from acute disaster realizations. We show that higher climate risk can increase sovereign bond prices by reducing default incentives. Risk-averse governments value continued market access as insurance against future shocks, strengthening repayment motives. While acute disasters still depress prices on impact, chronic risk can operate through a precautionary channel.

Suggested Citation

  • Balzer, Lukas & Miftakhova, Alena, 2026. "Climate and sovereign default risk," Economics Letters, Elsevier, vol. 267(C).
    • Handle: RePEc:eee:ecolet:v:267:y:2026:i:c:s0165176526002727
    DOI: 10.1016/j.econlet.2026.113078
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    Keywords

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    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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