Climate And Sovereign Debt Vulnerabilities: Some Practical Solutions

How can countries in or at high risk of distress finance the urgently needed investments to adapt to and mitigate climate change, without exacerbating their debt problems?

The presence of high public debt levels along with significant climate challenges complicates the resolution of both issues, especially for financially distressed developing countries. However, the extensive mobilization around climate change could potentially make this issue less intractable, enabling the simultaneous addressing of debt and climate unsustainability.

High public debt levels generally make climate adaptation and mitigation financing via debt unadvisable. However, other alternatives exist, including climate shock-absorbing features in debt instruments, non-recourse financing solutions, and natural asset monetization. When public debt is unbearable, debt reduction is required. Adding a climate element to the solution is appealing but could complicate already protracted negotiations. Debt for nature swaps can help progress both climate and debt sustainability objectives simultaneously but won't solve low-income countries' over-indebtedness without a tax or regulation response in advanced economies.

In this policy brief, the Lazard Sovereign Advisory team shares some practical solutions based on their experience.

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