Climate Vulnerability, Sovereign Debt Risks and the Role of MDBs’ Climate Finance

• In Event: Climate Change and Development

Abstract

Developing countries are experiencing the mutually reinforcing storms of climate risks and sovereign debt risks. The redistribution of financial resources to cope with the climate change across developing countries have become a debatable issue during COP28. Previous studies well illustrate the impact of unexpected economic and political shocks on sovereign debt risks. However, less studied is the relationship between climate change and sovereign debt risks. Leveraging a time-series cross-sectional dataset for 136 developing countries, ranging from 2016 to 2021, this study investigates how climate change affects sovereign debt risks in developing countries and if Multilateral Development Banks (MDBs)’ climate finance mitigates the impact. The statistical findings indicate that indebted developing countries face a “vicious circle” of climate vulnerability and financial vulnerability and that, to break the “vicious circle”, MDB’s climate finance plays a crucial role. Two cases further suggest that MDBs function as a platform for the reallocation of global public goods,peer competition and peer learning in addressing climate change.

Author

• Yanjun Lu, Johns Hopkins University