Look up and ahead: how climate scenarios affect European sovereign risk
We study the impact of climate scenarios on sovereign credit risk, analysing the interplay of climate risk exposure, fiscal and financial characteristics of European countries. We develop and estimate a panel threshold model using annual data from 2010 to 2022 for 24 European countries. The country’s indebtedness level defines the threshold of the estimated regimes. We project the path of sovereign risk up to 2050 using the climate scenarios of NGFS. Results show a temporal and structural dimension of climate sovereign risks and the importance of European governments credibly committing to an orderly and early Net Zero transition to preserve sovereign financial stability.
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Keywords: Climate sovereign risk; NGFS climate scenarios; CDS spread; Panel threshold model; Sovereign financial stability
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