Chronicle of a Debt Foretold: Sovereign Debt Management Strategies for Colombia’s Climate and Biodiversity Transition

Morgane Gonon, Antoine Godin, Louis Daumas, Jeffrey Althouse and Romain Svartzman

No 20443, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: More comprehensive debt solutions are needed to leverage liabilities for environmental protection. Despite growing interest in integrated debt–environment solutions, the existing literature overlooks the macro-financial linkages that shape sovereign risk, capital flows, and fiscal space. To fill this gap, this paper explores the intersection of sovereign debt relief, green investment, and macro-financial stability by modeling green debt instruments at the macroeconomic scale and assessing their robustness under uncertainty. Using Colombia as a case study, we adapt the GEMMES macroeconomic framework—a dynamic Stock-Flow Consistent model—to simulate various debt management strategies under a multi-objective robust decision-making approach. We identify robust Pareto-optimal combinations of four debt relief levers : (1) greenium (concessional borrowing), (2) foreign investment in local currency-denominated bonds, (3) interest renegotiation and (4) principal adjustment, i.e. combinations that balance public investment, inflation control, and external stability to support Colombia's climate and biodiversity investment. Two types of Pareto-optimal strategies emerge: (1) a controlled approach aimed at reducing foreign debt-related vulnerabilities, and (2) a more ambitious strategy involving the swap of old debt for new, highly subsidized loans. While debt relief can temporarily ease trade imbalances, lasting macroeconomic stability requires structural changes in production and exports. This research contributes to the ongoing research stream on the international financial architecture and green transition support by, first, bridging post-1990s macroeconomic analyses of debt relief with contemporary sustainable development challenges, and second, highlighting the importance of integrating macroeconomic resilience into the development finance literature.

Keywords: Sovereign debt; Debt relief; Balance sheets (search for similar items in EconPapers)
JEL-codes: F34 F36 F55 Q56 (search for similar items in EconPapers)
Date: 2025-07
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