Climate Shocks, Debt Defaults and Investment in Climate Adaptation – Squaring an Impossible Trilemma

Constance de Soyres, Emmanuella Obeng and Joanne Tan

No 2026/128, IMF Working Papers from International Monetary Fund

Abstract: Climate disasters tend to be associated with increased sovereign default risk. Countries face an “impossible trilemma”: scale up adaptation investment, keep debt sustainable amidst high borrowing costs and avoid the higher risk of default from delayed adaptation. Using a global panel of disaster event-level shocks, we find that a 1pp increase in disaster related losses as a share of GDP raises the odds of sovereign default by approximately 2-3 percent. An additional US$1 billion in cumulative Official Development Assistance (ODA) is associated with a 0.13 point gain in a country’s adaptive capacity. Using average marginal effects and our predicted margins we then map concessional ODA finance to default probability and translate these relationships into a practical budgeting yardstick for calibrating needed ODA to sovereign default risk reduction targets. In a context of declining ODA, our findings highlight the crucial role of well-designed support in climate adaptation policies.

Keywords: Climate shocks; sovereign defaults; climate adaptation; concessional finance; IMF working papers; adaptation investment; concessional ODA finance; default probability; Climate change; Climate finance; Natural disasters; Debt default; Global; Sub-Saharan Africa; Central America; Southeast Asia; East Asia; Asia and Pacific; Caribbean (search for similar items in EconPapers)
Pages: 27
Date: 2026-06-26
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