Protecting againstsovereign debt
defaults undergrowing climate
impacts
Role for parametricinsurance

Ritu Bharadwaj, Tom Mitchell and
N Karthikeyan

Working Paper
April 2023

Climate change; Social protection
Keywords:
Climate resilience, climate finance, debt management
and swaps, climate change justiceAbout the authors

Acknowledgements

Ritu Bharadwaj is a principal researcher in IIED’s Climate
Change Group (ritu.bharadwaj@iied.org).

We thank the Climate Emergency Collaboration Group for
funding this research. We would like to extend special thanks
to insurance sector experts, particularly Amitesh Ahir andhis team as well as colleagues from the Centre for DisasterProtection for providing insights that helped shape this paper.
We would like to thank Raashee Abhilashi and Ira Deulgaonkar,
who helped compile data for this research. We would also
like to thank Benedicte Piton, senior coordinator, and Martin
Cummins, coordinator, IIED, for managing the working paper’s
development.

Dr Tom Mitchell is IIED’s executive director(tom.mitchell@iied.org)
N Karthikeyan is a development economist who focuses on
climate change, natural resource management, safe drinking
water, sanitation, elderly care and microfinance.

Produced by IIED’s Climate ChangeGroup
The Climate Change Group works with partners to help
secure fair and equitable solutions to climate change by
combining appropriate support for adaptation by the poor inlow- and middle-income countries, with ambitious and practicalmitigation targets. The work of the Climate Change Groupfocuses on achieving the following objectives:• Supporting public planning processes in delivering climateresilient development outcomes for the poorest• Supporting climate change negotiators from poor andvulnerable countries for equitable, balanced and multilateralsolutions to climate change• Building capacity to act on the implications of changing
ecology and economics for equitable and climate-resilient
development in the drylands.

Published by IIED, April 2023
Bharadwaj, R, Mitchell, T and Karthikeyan N (2023) Protecting againstsovereign debt defaults under growing climate impacts: Role for parametricinsurance. IIED, London.
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IIED WORKING PAPER

The climate crisis is pushing Least Developed
Countries into over-indebtedness, amplifying theirdisparity with developed countries. Fundamental
changes are needed to re-engineer, regulate,and equalise global debt and growth. Parametricinsurance for sovereign debt can be one of thesustainable options for resolving the debt crisis.
Insurance could cover debt repayment on behalfof the country during the period of climate crisis,
helping them to focus their budget on relief andrecovery, with the provision of a global fund tocover the insurance premiums.
Contents
Summary4
1 Climate change and financial stability of LDCs

6

What this paper is trying to achieve

6

2 How climate change is affecting levels of debt, growth and development in LDCs 

8

Risks of climate impacts and sovereign debt default for LDCs
Climate impacts forcing LDCs and SIDS to layer debt on debt 
Rising cost of capital for climate-vulnerable countries threatens debt sustainability Impact of sovereign debt default on social spending of LDCs
Links between debt levels, debt default and multidimensional vulnerability in LDCs
Increasing debt crisis and problems with debt restructuring 

8
9
9
10
11
13

3 Parametric insurance for sovereign debt

14

How parametric insurance can help LDCs manage debt and climate crises 
Four essential elements of parametric insurance linked to debt support 
Delivering debt support linked to parametric insurance 

15
15
17

4. Looking ahead19

Annexes20
References23

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PROTECTING AGAINST SOVEREIGN DEBT DEFAULTS UNDER GROWING CLIMATE IMPACTS | ROLE FOR PARAMETRIC INSURANCE

Summary
Rising sea levels have submerged many coastal areas; floods are increasing
in magnitude and breaching barriers, destroying lives, livestock and property;
and more intense and frequent cyclones are leaving communities unable toprotect themselves. This loss and damage, driven by climate change, is often
felt most acutely by Least Developed Countries (LDCs) and Small Island
Developing States (SIDS). Yet such countries have limited capacity, resources
and infrastructure to invest in climate resilience. This paper provides evidence
that climate impacts are pushing LDCs and SIDS into over-indebtedness,undermining their ability to deal with climate impacts and focus on long-term
resilience. It suggests parametric insurance of sovereign debts as one of thepractical and viable options to manage the debt crisis.

Key findings
LDCs are more vulnerable to the effects of climatechange due to their low levels of development, weak
infrastructure, and reliance on agriculture and natural
resources for income. As the intensity and frequencyof extreme events keeps increasing, these countries
are more exposed to them every year. Each time, their
response creates more debt, undermining capacity
for the next crisis. They thus become trapped in anunsustainable debt cycle.
Our analysis shows that countries with a higher
Hazard and Exposure Index are likely to have a higher
sovereign default to debt ratio. The average default to
debt ratio of 30 LDCs considered for analysis is 3.45
with an average Hazard and Exposure index of 4.16.
The predicted values of regression modelling showsthat a Hazard and Exposure Index of 10 can increase
the chances of debt default for LDCs to 11.07 withcountries like Niger, Myanmar, Sudan, Mozambique, andMali most at risk. This is higher for LDCs compared todeveloped and developing countries.
Climate vulnerability also has significant implications forsovereign borrowing costs. For credit-rating agencies,
higher climate risks create a greater risk of default. This
raises the cost of capital for climate-vulnerable countries
and threatens debt sustainability. Consequently, poorer
countries exposed to climate impacts have to bear the
additional burden of higher interest rates.
This financial burden exacerbates the presentday economic challenges of poorer countries. The
magnitude of this burden is expected to at least
double over the next decade. These credit-rating4

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downgrades can be expected to increase the cost of
public borrowing, making it more expensive to makeinvestments in recovery or building resilience for future
impacts.
The increased public default to debt ratios undermine
the ability of LDCs to finance investments in social
protection programmes such as poverty reduction,
livelihood security, food, nutrition, health and education.
Resources needed to respond to the climate crisis,
the COVID-19 pandemic and other national needs are
increasingly being diverted to debt repayments.
Our analysis shows that countries with a higher
sovereign default to debt ratio are likely to spend lesson social assistance. The 27 LDCs considered for thisanalysis have an average default to debt ratio of 3.53
with average social assistance spending of 0.82% ofGDP. In the case of LDCs, the projected regression
value shows that social assistance spending decreases
to 0.14% of GDP when the sovereign default to debt
ratio is 10. The degree of negative association isparticularly stark in the case of LDCs compared todeveloped and developing countries.
These diversions can have social impacts: without
strong safety nets, the most vulnerable may not haveadequate mechanisms to cope. LDCs already havelower ratings on human development, and economic andenvironmental vulnerability. They represent around 90%of the countries with poverty rates higher than 40% in
2021. Further reductions in social spending can thus
have long-term negative impacts on human development
indicators in LDCs, such as poverty, education andhealth outcomes.

IIED WORKING PAPER

Debt restructuring efforts are limited, postponing rather
than cancelling debt payments, and making future
recovery even more difficult for these countries. The
role of climate finance is also under question. In 2020,
out of US$68.3 billion of climate finance provided bydeveloped countries, 71% or US$48.6 billion was in theform of loans (including both concessional and nonconcessional).
Around half of climate finance provided to SIDS in
2017–2018 took the form of loans, which added still
more debt. Furthermore, all SIDS received a combined
US$1.5 billion in climate finance between 2016 and2020. But in the same period, 22 SIDS paid more than
US$26.6 billion to their external creditors — almost 18
times as much as they received in loans.

What can be done to ensuresustainable debt servicing.

The trade-offs between fiscal costs and risk to growth,debt default and costs of debt restructuring would need
to be weighed carefully. The ex post benefits of covering
the insurance premium for debt relief can far exceed
the investment in premiums. Direct support to LDCs for
insurance costs would alleviate the financial constraints
and help countries scale up financial resilience. It would
also stabilise their growth, reduce poverty and allow
them to invest in social protection.
A coordinated effort with support from G20
governments, other major developed countries and key
institutions will be needed to operationalise parametricinsurance for sovereign debts. This should cover the
points below.
Establish a global fund to enable risk pooling of all
LDCs and SIDS and offer a more diversified portfolio toinsurance companies. In addition to covering premiums
and guarantees for sovereign debts, the global fundcan support longer-term adaptation and resiliencebuilding in LDCs. This would support risk reduction andtherefore help reduce the magnitude of future losses
and bring down the cost of premiums in the long run.

High sovereign debts can lead to reduced investment
in social protection and resilience building. This, in turn,can lead to an even larger adaptation gap. It can prevent
countries from breaking out of the downward spiral of
Undertake comprehensive risk modelling andmultiple disasters that generates loss and damage anddata analytics to help in pricing, designing trigger
further debt.
thresholds and structuring the provision of adequate
insurance coverage. Improved measurement will alsoParametric insurance for sovereign debt can offer
help lower insurance costs.
a sustainable option for moving from a vicious to a
virtuous cycle and resolving the risks of a debt fallout
Establish collaboration between multiple
for LDCs. This insurance would cover a country’s debt
stakeholders, including LDC governments, major
repayment during a climate crisis, allowing them time to public and private sector lenders, Paris Club creditors,
recover without repaying debt during that period. While International Monetary Fund, World Bank and otherparametric insurance may not be suited to all types ofinternational and regional development banks; thehazards, it is considered effective for diverse climate
insurance and reinsurance industry; national technicalrisks from loss and damage.
agencies, data providers and the risk modelling
community; and academia, centres of excellence andParametric insurance for sovereign debts can help
nongovernmental organisations.
LDCs better manage the twin challenges of debt
and climate crisis. It can act as a safeguard, provide
immediate liquidity, reduce transaction costs, stabilise
credit markets and attract private investments. Such amodel has four essential elements:• A mechanism to provide anticipatory support once the‘trigger’ has been reached, regardless of losses.
• A risk-pooling approach that ensures premiums areaffordable and coverage and duration of debt relief
meet country requirements.
• Location-specific and comprehensive climate risk
modelling to define triggers and thresholds for
insurance pay-outs from a full range of events.
• A commitment from climate and other sources offinance to cover insurance premiums.

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PROTECTING AGAINST SOVEREIGN DEBT DEFAULTS UNDER GROWING CLIMATE IMPACTS | ROLE FOR PARAMETRIC INSURANCE

Climate change andfinancial stability of
LDCs
Loss and damage concerns are urgent, driven by
the increasingly harmful effects of climate change.
Many countries are facing new types and forms ofclimate impact with higher intensity, which they are
not equipped to handle. With global temperatures
increasing due to climate change, many of these
impacts are already ‘locked in’ and unavoidable. Rising
sea levels have submerged many coastal areas; floods
are increasing in magnitude and breaching the existing
barriers, destroying lives, livestock and property;
and more intense and frequent cyclones are leaving
communities unable to protect themselves.
This loss and damage, which can exceed annual grossdomestic product (GDP), is often felt most acutely
by Least Developed Countries (LDCs) (Heinrich Boll
Stiftung et al., 2021). LDCs and Small Island Developing
States (SIDS) have limited capacity, resources andinfrastructure to invest in climate resilience. This leaves
them unable to recover from loss and damage in thesame way as developed countries, exacerbating theirindebtedness. The Emergency Events Database(EM-DAT), for example, recorded US$2.97 trillion inlosses from disasters between 2000 and 2019. As apercentage of GDP, losses to LDCs were three times
greater than in high-income countries (CRED, 2020).
Countries in the global South have seen their debts
increase by 120% between 2010 and 2021, reaching
their highest level since 2001 (Jones, 2022).
1

What this paper is trying toachieve
The analysis presented in this paper has two aims:
First, it demonstrates how climate impacts are driving up
sovereign debts in LDCs compared to other countries.
It also illustrates how higher sovereign debts are having
an impact on GDP and social spending of LDCs. Thisis compromising previous development efforts andundermining those to come, enhancing vulnerability. This
co-relation helps make the case for providing vulnerable
countries with the debt relief necessary to adapt toclimate change impacts.
Second, it suggests practical solutions for managing
the debt crisis in LDCs through parametric insuranceof sovereign debts. To date, many solutions1 havebeen proposed to help LDCs manage debt, but therole of parametric insurance for helping LDCs manage
sovereign debt payment during crisis, has not been
explored. In our paper we propose it as one of the viableoptions to consider along with others, so the LDCs are
not forced into more debt for a crisis they did not create.
This paper proposes establishing and delivering a new
global financing facility to service parametric insurance
for sovereign debts.

Other existing and emerging instruments include nature for debt swaps (see more details at www.iied.org/tackling-debt-climate-nature-crises-together)6

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IIED WORKING PAPER

BOX 1. WHY THIS ANALYSIS IS NEEDED NOW
The ‘Summit for a new Global Financing Pact’ proposed in June 2023 has the mandate for increasing accessto financing for countries more exposed to shocks and/or facing debt vulnerabilities. Similarly, the Transitional
Committee created under the United Nations Framework Convention on Climate Change is looking at
establishing the modalities, structure and governance of a climate change loss and damage fund. This paper
provides evidence for LDCs and SIDS to present a stronger case on how climate impacts are pushing theminto over-indebtedness undermining ability to deal with climate impacts ­— and to push for creation of a separate
global fund (with additional, adequate funding, commensurate to LDC needs) for dealing with debt issues. It
also presents practical solutions for the Summit, Transitional Committee, governments of the G20 and key
institutions such as the International Monetary Fund and World Bank to consider for dealing with debt issues
through parametric insurance.

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PROTECTING AGAINST SOVEREIGN DEBT DEFAULTS UNDER GROWING CLIMATE IMPACTS | ROLE FOR PARAMETRIC INSURANCE

How climate change
is affecting levels ofdebt, growth anddevelopment in LDCs
Climate change is disrupting environmental, economic,
institutional and social systems in LDCs. These
disruptions are undermining poverty reduction efforts
and food security, damaging infrastructure and jobs,
and harming human health. But these impacts are
unevenly distributed, with some countries facing far
greater risks than others.

spending may also increase due to a sudden andsignificant increase in demand for its services. For
example, government may need to fund an emergency
response and invest in rebuilding and recovery.
Consequently, to bridge this gap and continue toprovide essential services and support to their citizens,governments may need to borrow money.

LDCs are more vulnerable to the effects of climatechange due to their low levels of development, weak
infrastructure, and reliance on agriculture and natural
resources for income. They are more likely to facesignificant and long-lasting impacts of climate change
on economic growth and development.

Figure 1 presents the association between the Hazard
and Exposure Index and sovereign default to debt ratio.
The Pearson’s correlation coefficient values for thevariables analysed are presented in Table 1.

This section presents how climate change is increasing
sovereign debts and risks of debt default in LDCs.
These impacts, in turn, are reducing social spending,undermining countries’ ability to cope and recover.

Risks of climate impacts
and sovereign debt default
for LDCs
Recurring and high-intensity climate disasters can leadto a shortfall in government revenue and tax collections
due to disrupted economic activities. But government

The analysis shows that countries with a higher Hazard
and Exposure Index are likely to have a higher sovereigndefault to debt ratio. The average default to debt ratioof 30 LDCs considered for this analysis is 3.45 withan average Hazard and Exposure Index of 4.16. The
predicted values of regression modelling between thesetwo variables are higher for LDCs than for the othercountries. In the case of LDCs, a Hazard and Exposure
Index of 10 can increase the chances of debt default2
to 11.07 with countries including Niger, Myanmar,
Sudan, Mozambique and Mali most at risk. Other
countries have a debt default risk of 7.66. This finding
resonates with findings by IMF (Cevik and Jalles, 2020).
According to this study, the number of countries in the
global South unable to pay their debts or at high risk

Default risk: “Sovereign default risk represents the likelihood that a particular sovereign will default on its debt. While most debt defaults involve foreign debt,
sovereigns may also default on domestic debt denominated in the national currency.” www.investopedia.com/terms/s/sovereign-default.asp
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Figure 1. Relationship between Hazard and Exposure Index to sovereign debt default

Country category

Sovereign default to debt ratio

25.00

LDC
OthersFit line for total
R2 linear = 0.324

20.00

15.00

10.00

5.00

0.00

0.00

2.00

4.00

6.00

8.00

10.00

Hazard and Exposure Index
Notes: The sovereign default to debt ratio has been calculated as average sovereign default to loans from 2016–2020/sovereign debt in 2021
(Source: International Monetary Fund’s Global Debt Database). The Hazard and Exposure index is calculated based on time series data fromINFORM Risk database 2021.
Table 1. Correlation coefficients of Hazard and Exposure Index and sovereign default to debt ratio

DEVELOPMENT CATEGORY

CORRELATION COEFFICIENT

SIG.

All countries (N=71)0.569

p=0.000

LDCs (N=30)0.601

p=0.000

Other countries (N=41)0.646

p=0.000of default increased from 17 to 39 between 2013 and2021, while the number of countries at low risk fell from21 to just 7.

Climate impacts forcing
LDCs and SIDS to layer debt
on debt
When a disaster strikes, LDCs and SIDS have toborrow additional money on top of the country’s preexisting debt load, which further increases their riskof over-indebtedness. It normally takes many years
for LDCs and SIDS to recover from an extreme event.
As the intensity and frequency of extreme events
keeps increasing, these countries are more exposedto them every year. Each time, their response creates
more debt, undermining capacity for the next crisis.
They thus become trapped in an unsustainable debt
cycle. For example, in Dominica, Tropical Storm Erika

caused damages equivalent to 96% of GDP in 2015,
which increased the country’s external debt. Two years
later, while the country was still recovering from Erika,
Hurricane Maria caused US$1.3 billion in damages.
This was equivalent to 226% of its GDP, resulting in
declining fiscal performance and increased expenditure
on recovery (Thomas and Theokritoff, 2021). Dominica
had to take on more debt not just to service previous
debts but also to spend on recovery from the hurricane.
Across Caribbean SIDS, extreme weather events
resulted in average losses of 109% per unit GDP
in 2019 (Thomas and Theokritoff, 2021). These
losses pushed the countries into a vicious cycle ofindebtedness with potential longer-term consequenceson their ability to continue servicing or repaying
additional debts. Meanwhile, without support fromclimate finance, sub-Saharan countries might be forced
to take on almost US$1 trillion in debt in the next
decade (Woolfenden, 2022).

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9PROTECTING AGAINST SOVEREIGN DEBT DEFAULTS UNDER GROWING CLIMATE IMPACTS | ROLE FOR PARAMETRIC INSURANCE

This financial burden exacerbates the present-day
Rising cost of capital for
economic challenges of poorer countries (see Box 2).
magnitude of this burden is expected to at least
climate-vulnerable countries The
double over the next decade. These credit-rating
threatens debt sustainability downgrades can be expected to increase the cost of
Climate vulnerability also has significant implications forsovereign borrowing costs. For credit-rating agencies,
higher climate risks create a greater risk of default.
This raises the cost of capital for climate-vulnerable
countries and threatens debt sustainability. Consequently,
poorer countries exposed to climate impacts have tobear the additional burden of higher interest rates. An
assessment (Buhr et al., 2018) for the members of the
Climate Vulnerable Forum3 shows that for every US$10
paid in interest by developing countries, an additional
dollar will be spent due to climate vulnerability. This
has also added more than US$40 billion to the debt
interest paid by the 40 most vulnerable nations between
2007 and 2016. Higher interest rates based on climate
vulnerability are predicted to cost the most vulnerable
countries US$168 billion over the next decade. One
study (Mohaddes et al., 2021) shows that 63 sovereigns
may see their credit ratings downgraded by 2030 due toclimate change. This could add more than US$200 billion
to their annual interest payments on public debt. An
increasing proportion of global South debt is owed to
private creditors, who tend to charge much higher interest
rates than other lenders. Almost half of external debt
and interest payments by low- and lower middle-income
countries are to private lenders (Jones, 2022).

BOX 2. WHY SUSTAINABLE
DEBT SERVICING IS
IMPORTANTFor countries, sovereign debt, or public debt, is an
important way to finance investments in growth anddevelopment. But governments must also continue
paying or servicing their debt and this debt burdenmust remain sustainable. In other words, debt
payments must be in tune with growth projections andrevenue mobilisation. This includes social spendingneeds and exposure to economic/climate shocks.
Unsustainable debt burden can lead to debt distress,
leaving a country unable to repay or service its debts.
Debt distress can be precarious for countries andthreaten their macro-economic stability, setting backtheir development for years. It can also curtail public
spending on basic services and social protection,
resulting in increased poverty and vulnerability.

public borrowing, making it more expensive to makeinvestments in recovery or building resilience for future
impacts. The rising cost of capital is expected to push
LDCs into debt distress.4

Impact of sovereign debt
default on social spending of
LDCs
The increased public default to debt ratios undermine
the ability of LDCs to finance investments in social
protection programmes such as poverty reduction,
livelihood security, food, nutrition, health and education.
Many of these investments are crucial to enhancing
climate resilience in vulnerable communities. Resources
needed to respond to the climate crisis, the COVID-19
pandemic and other national needs are increasingly
being diverted to debt repayments. These diversions
can have social impacts: without strong safety nets, themost vulnerable may not have adequate mechanisms tocope with climate crisis.
Figure 2 analyses the relationship between sovereigndefault to debt ratio and social assistance spending.
Pearson’s correlation coefficient values of these twovariables are presented in Table 2.
The correlation analysis shows that countries with ahigher sovereign default to debt ratio are likely to spend
less on social assistance. The degree of negative
association is particularly stark in the case of LDCs.
The Pearson’s correlation coefficient value for LDCs(–0.697) is significantly higher than the value fordeveloped and developing countries (–0.366). The
projected values based on the regression modelling
confirms this pattern. The 27 LDCs considered for thisanalysis have an average default to debt ratio of 3.53
with average social assistance spending of 0.82%
of GDP. In the case of LDCs, the projected value ofsocial assistance spending decreases to 0.14% of
GDP when the sovereign default to debt ratio is 10.
For the same default to debt ratio, the projected social
assistance spending is 1.08% for developed anddeveloping countries. This projection based on the
regression modelling lists Guinea-Bissau, Cambodia,
Tanzania, Togo and Myanmar (all LDCs) as the countries
most vulnerable to reducing their spending on social
assistance.

The Climate Vulnerable Forum is an international partnership of countries highly vulnerable to a warming planet. The Forum serves as a South–South platform
for participating governments to act together on global climate change. https://thecvf.org/
4“Unsustainable debt can lead to debt distress — where a country is unable to fulfil its financial obligations and debt restructuring is required. Defaults can cause
borrowing countries to lose market access and suffer higher borrowing costs, in addition to harming growth and investment.” www.imf.org/en/Publications/fandd/issues/2020/09/what-is-debt-sustainability-basics
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Figure 2. Relationship between sovereign default to debt ratio and social assistance spending

Social assistance spending (% of GDP)Country category
10.00

LDC
OthersFit line for total
R2 linear = –0.197

8.00

6.00

4.00

2.00

0.00

0.00

5.00

10.00

15.00

20.00

25.00

Sovereign default to debt ratio
Note: Data on social spending were drawn from the World Bank’s ASPIRE (The Atlas of Social Protection Indicators) database for the year 2021.

Table 2. Correlation coefficients of sovereign default to debt ratio and social assistance spending

DEVELOPMENT CATEGORY

CORRELATION COEFFICIENT SIG.

All countries (N=61)–0.443p=0.000

LDCs (N=27)–0.697p=0.000

Other countries (N=34)–0.366

p=0.033

This finding is in line with experience from the
COVID-19 pandemic, which shows that governments
have differing capacity and fiscal space to respondto crises. In all cases, social spending is the first to
take the hit, contributing to a more protracted crisis in
the case of LDCs. For example, developed countries,
backstopped by their central banks, came up with hugefiscal response packages. These amounted to 18% of
their GDP and that too at low interest rates (UN Interagency Task Force on Financing for Development,
2022). Availability of fiscal space enabled them to not
only roll out measures immediately but also channel
resources towards strengthening social protection.
But developing countries, especially LDCs, wereconstrained in their social spending (Debrun, 2020).
LDCs already have lower ratings on humandevelopment, and economic and environmental
vulnerability. They represent around 90% of thecountries with poverty rates higher than 40% in 2021
(Development Initiatives, 2021). Further reductions
in social spending can thus have long-term negative
impacts on human development indicators in LDCs,
such as poverty, education and health outcomes.

Links between debt
levels, debt default
and multidimensional
vulnerability in LDCs
Poorer and marginalised groups that depend on primarysector livelihoods such as fishing and agriculture are themost affected by natural disasters. Yet these are the very
communities with the least capacity to cope. Fishers,
for example, are most likely to lose their livelihood
resource base because of disasters and cannot adapt
as quickly to changing conditions. Similarly, as climatechange affects agricultural yields and productivity, it will
increase food prices. This, in turn, can increase povertyin LDCs. For example, in Malawi, households spend on
average 63% of their income on food and beverages.
Even a small increase in food price can throw theminto deeper poverty. Exposure to cyclones, floods andother extreme events, for example, will lead to healthshocks because of increased diarrhoeal diseases anddisplacements (Hallegate and Walsh, 2020).

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PROTECTING AGAINST SOVEREIGN DEBT DEFAULTS UNDER GROWING CLIMATE IMPACTS | ROLE FOR PARAMETRIC INSURANCE

Similarly, certain communities, social groups andIndigenous Peoples may be at a higher risk of adverse
consequences of climate impacts. Jafino et al. (2020)
show that climate change will push 132 million people
into extreme poverty by 2030. Factors such as poverty,
marginalisation and lack of access to essential services
may limit their capacity to cope with climate impacts,
amplifying the impact of loss and damage.

The regression analysis presented in Figure 3 showsthat countries with a higher sovereign default to debt
ratio are likely to have a higher multidimensional risk
value. In the case of LDCs, the multidimensional risks
are expected to increase by 5.77% for a debt default
ratio of 10 compared to 4.83% in other countries.

Figure 4 further unpacks multidimensional risks of LDCs
compared to other developing countries and developed
Figure 3 analyses the relationship between sovereigncountries. It aggregates 54 core indicators acrossdefault to debt ratio and multidimensional risk. Pearson’s environmental, human, socioeconomic, institutional andcorrelation coefficient values of these two variables are
infrastructure categories. These indicators envisage
presented in Table 3.
three dimensions of risk: hazards and exposure,vulnerability and lack of coping capacity.
The correlation analysis presented in Table 3 showsthat countries with higher sovereign debt are likely to
Results from Figure 3 and 4 clearly show that social,have a higher multidimensional risk index value. The
environmental, institutional, infrastructural and economic
projection analysis of regression modelling between
development deficits in LDCs are more complex thanthese two variables shows that the multidimensional risk in other developing countries and developed countries.
index value is higher for LDCs than for developed andClimate change and associated debt levels are acting
developing countries. The projected multidimensional
as stress multipliers, compounding these deficits.
index is 5.77 in the case of LDCs when the sovereign
This makes it difficult for these countries to anticipate,
default to debt ratio is kept at 10. The same projected
respond to and recover from climate impacts resulting invalue is 4.83 at a sovereign default to debt ratio of 10 for loss and damage.
developed and developing countries.
Table 3. Correlation coefficient of sovereign default to debt ratio and multidimensional risk index

DEVELOPMENT CATEGORY CORRELATION COEFFICIENT

SIG.

All countries (N=61)0.611

p=0.000

LDCs (N=27)0.645

p=0.000

Other countries (N=34)0.644

p=0.000

Figure 3. Sovereign default to debt ratio and multidimensional risk

Country category
LDC
OthersFit line for total
R2 linear = 0.373

Multidimensional Risk Index

8.00

6.00

4.00

2.00

0.00

10.00

20.00

30.00

Sovereign default to debt ratio

12

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40.00

50.00

IIED WORKING PAPER

Figure 4. Multidimensional risks of LDCs compared to other developing countries and developed countries

Institutional Capacity Index

2.85

2.85

6.40

Vulnerable Groups Index

3.89

3.89

5.12

Socio-Economic Vulnerability Index 0.58

3.45

Human Hazard Index 0.52
Natural Hazard Index

2.63

4.24

3.10

Infrastructure Index

4.58

1.01

Economic Dependency Index
Multidimensional Risk Index

1.88

3.79

2

6

Developing countries

Countries with debt defaults also experience morepolitical instability as citizens lose faith in theirgovernment’s ability to manage the economy or with cutsin social spending. Sri Lanka and Pakistan are recent
examples of this phenomenon. Even in countries that are
not LDCs, climate disaster, debt and fragility can prove
to be a volatile combination. Together, they can lead toprotests, civil unrest and even regime change, all of which
can further hinder economic development.
The International Monetary Fund (IMF) classifies morethan 40 economies as fragile and conflict affected.
Fragile states are home to nearly 1 billion people andare on course to house 60% of the world’s poor by2030 (Corral, 2020). These countries have reduced
institutional capacity and can provide limited services
for the population during future crises. In thesevulnerable economies, per capita GDP contracted
7.5% in 2021, while public debt rose by 17 percentage
points to 78% of GDP in 2020 (Bousquet, 2022). In
all, 22 or 45% of fragile states are LDCs, which are
expected to be the worst affected by the triple crisis ofdisaster, debt and fragility.

Debt restructuring efforts are limited and not fit for
purpose. In response to the COVID-19 pandemic,
the IMF offered support through the Catastrophe
Containment and Relief Trust, while the G20 createdthe Debt Service Suspension Initiative (DSSI). DSSI

8

Institutional
dimensions

Socialdimensions}

Environmental
dimensions

Economic
dimensions
Risks

5.54

4

Increasing debt crisisand problems with debt
restructuring

}

6.87
3.46

Developed countries

4.47

3.43

0.22 1.76

0

}

6.37

}

10

12

14

LDCs

postponed rather than cancelling debt payments, making
future recovery even more difficult for these countries.
In November 2020, the G20 and the Paris Club5 setup the Common Framework for Debt Treatments(MEF, n.d.). This sought to restructure sovereign debt
according to traditional Paris Club terms (going beyond
the postponement of debt payments under DSSI). But
uptake of the Common Framework has been limited, with
only three countries (Chad, Ethiopia and Zambia) seeking
relief as it lacks clear steps and timelines for bringing
the parties of debt restructuring together (Aboneaaj etal., 2022). As a result, debt relief has also failed due tothe lack of consensus between the main creditors. Thisis especially true of private creditors, who own the bulkof the debts. Without this group at the table, debt relief
would only be limited.
Here, the role of climate finance is also underquestion. In 2020, out of US$68.3 billion of climate
finance provided by developed countries, 71% or
US$48.6 billion was in the form of loans (including bothconcessional and non-concessional) (OECD, 2022).
Around half of climate finance provided to SIDS in
2017–2018 was in the form of loans, which added
more debt. Furthermore, all SIDS received a combined
US$1.5 billion in climate finance between 2016 and2020. But in the same period, 22 SIDS paid more than
US$26.6 billion to their external creditors — almost 18
times as much as they received in loans (Fresnillo andCrotti, 2022).

The Paris Club is an informal group of creditor countries whose objective is to find sustainable solutions to sovereign debt payment difficulties. It operates
according to six foundational principles: solidarity, consensus, information sharing, case-by-case, conditionality and comparability of treatment.
5

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3

PROTECTING AGAINST SOVEREIGN DEBT DEFAULTS UNDER GROWING CLIMATE IMPACTS | ROLE FOR PARAMETRIC INSURANCE

Parametric insurance
for sovereign debt
Analysis in the previous section illustrates how highsovereign debts can lead to reduced investment insocial protection and resilience building. This, in turn,can lead to an even larger adaptation gap. It can prevent
countries from breaking out of the downward spiral of
multiple disasters that causes loss and damage andfurther debt. To break this cycle, sufficient government
budgets need to be freed to allow them to invest
in rebuilding after a disaster, enhancing long-term
resilience, and thereby reducing vulnerability, limiting
loss and regaining debt sustainability.
Parametric insurance for sovereign debt can offer asustainable option for moving from this vicious to a
virtuous cycle and resolving the risks of a debt fallout
for LDCs. This would involve providing parametric

BOX 3. PARAMETRIC VERSUS
TRADITIONAL INSURANCE
Parametric, or index-based, insurance, is a
non-traditional insurance that provides payouts based on a trigger event. Trigger events
can include environmental parameters such as
wind speed or rainfall measurements. Onceparameters are reached, the pay-out is processed
without the need to verify losses. In comparison,traditional indemnity insurance reimburses for the
total value of the loss after an event like a flood orstorm. To quantify loss, a representative from theinsurance company assesses the damage.
Parametric insurance is suited for hard-to-model,
low-frequency but high-intensity losses. These
include catastrophic perils, weather-related risks
or economic activities. They can also cover risks
that lack a sufficient history of losses captured as
insurance-readable data.

14

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insurance cover for debt undertaken by a country. Where
the insurance would cover debt repayment on behalf ofthe country during the period of climate crisis, allowing
countries time to recover, without worrying about debt
repayment during that period. While parametric insurance
may not be suited to all types of hazards, it is consideredeffective for diverse climate risks from loss and damage(see Box 3). Loss and damage can be applied to climate
events even without a sufficient history of losses captured
as insurance-readable data (Unnava, 2020).
Such an approach will go far beyond a debt moratorium,
where the debt remains and accumulates. Here,debt repayment would continue as usual through theinsurance mechanism. The countries would be freed
from that burden during the crisis, helping them tofocus on relief and recovery. The period of repayment
coverage through insurance can be predefined. It would
be based on the nature and intensity of the climate crisisand the time needed by the country to recover and start
repayment.
Post-disaster financial needs typically have threephases: immediate relief and support; recovery; andrehabilitation and resilience building. A country needs
funding for all three phases. In the relief and support
phase, it will require immediate access to funds forurgent rescue, shelter, food and clean water for thoseaffected or displaced. Early recovery will require
funding, within weeks, to restore livelihoods and help
communities return to some level of normality and restart
their economic activities. Reconstruction and resiliencebuilding will require mobilising more substantial funds
for repairing and rebuilding damaged assets such as
homes and infrastructure.
Different types of funding support will be needed on
different timescales. The parametric insurance support
can help countries use their budget for the first twophases of support without diverting their budgets for

IIED WORKING PAPER

debt payment. This is vital because delays in relief andrecovery in the early phase can negatively impact the
population and the economy.

Reduce transaction costs. Parametric insurance forsovereign debt can reduce transaction costs comparedto cumbersome and time-consuming sovereign
debt restructuring, which often comes with several
Support from parametric insurance pay-out can create aconditionalities. Debt relief through parametric insurance
certain level of liquidity. In this way, debt repayment will
will also reduce the post-crisis transaction costs of
not push countries into a negative spiral that undermines
humanitarian aid. Aid has high transaction costs andtheir capacity to recover and makes them lesscomes with several conditions. In contrast, debt payment
creditworthy. With a more stable economy after disaster,relief will be like cash in hand, where the countries cancountries can focus more effectively on longer-term
exercise greater control and prioritise its use as per theirrehabilitation and resilience building through access toneeds (Aboneaaj et al., 2022).
climate funds, bilateral aid and so on.
Stabilise credit markets and attract private
While parametric insurance for sovereign debt relief may
investments. Higher sovereign debt creates
only work for certain hazards, there is value in considering
uncertainty about a government’s finances and ability
it as part of the risk layering approach alongside otherto deliver macroeconomic stability, which can drive
risk mitigation and support mechanisms to create moreaway private investors. Parametric insurance will help in
fiscal flexibility and less indebtedness through thesustainable servicing of debts, bring stability in capitaldisaster cycle. Even with insurance support for debt relief,markets, improve a country’s credit worthiness andcountries will still need support from climate finance incredit rating, and effectively reduce borrowing costs
the form of grants and highly concessional loan capital toand interest rates. It would also boost the confidencebuild longer-term climate resilience.
of private investors by providing a model for de-risking
their investment. In the long run, this would help attract
private investments in climate adaptation.

How parametric insurance
can help LDCs manage debt Four essential elements
and climate crisesof parametric insurance
Parametric insurance for sovereign debts can help
linked to debt support
LDCs better manage the twin challenges of debt andclimate crisis in several ways.

Act as a safeguarding mechanism. Countries will
not have to worry about bad surprises such as droughts,
floods and so on that require emergency borrowing.
Debt reduction through insurance will safeguard against
financial-sector stress and strengthen contingency
planning and crisis management capabilities. It will
help in maintaining debts at levels that countries will
be able to reasonably pay back. Being able to manage
the unexpected and potentially large one-off costs ofdisasters will reduce the volatility of financial losses.
This, in turn, will help governments cope more easily
with the consequences of disasters.

Anticipatory support

The insurance mechanisms can provide pre-agreed
debt repayment relief in a timely and predictable manner.
Based on reliable early warning information, the relief
would kick in once a certain measure or ‘trigger’ isreached, regardless of actual losses. This mechanism
may only work in the case of hazards where triggers
can be adequately defined. These trigger events can
include flood, cyclones or droughts of a certain intensity
or frequency. Once the predefined trigger points arereached based on advanced warning the insurer cancover debt repayment on behalf of the country for acertain pre-agreed time frame depending on what
Provide immediate liquidity. Parametric insurance
has been agreed in the policy. The pre-agreed debt
can initiate debt repayment pay-out quickly as it is easier
repayment period will need to be tailored and costed
to verify if the trigger event has reached the thresholdbased on diverse contexts, including what is needed to
specified in the policy. These quick pay-outs can behelp countries recover from a climate crisis.
especially beneficial to free up a country’s resourcesthat they would have otherwise used to repay debts.
Anticipatory support will enable countries to be better
This would be the best way to help countries as the
prepared for a climate crisis. In this way, they can use
funds will remain in their budgets and can be invested
finance freed-up by debt relief for pre-emptive support
directly and without delay to expand social protection
under existing social protection programmes or otherand rescue support, among other priorities. While these relief measures. Such ex ante efforts can also help
funds may not be sufficient to meet all the relief andramp up support before a crisis — a more cost-effective
response measures needed by a country during crisis,
approach than providing humanitarian assistanceit can save existing budgets from being diverted forafter disaster strikes. Ex post support can cost adebt servicing and provide immediate liquidity.
lot more because the disaster has already inflicted

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PROTECTING AGAINST SOVEREIGN DEBT DEFAULTS UNDER GROWING CLIMATE IMPACTS | ROLE FOR PARAMETRIC INSURANCE

damage. Apart from financial costs associated withdisplaced communities, outbreak of diseases and foodinsecurity, disaster brings an unmeasurable human cost.
Anticipatory parametric insurance will allow countries toavert the impacts of these disasters on both people andthe economy.

Risk pooling
As the intensity, scale and frequency of many disasters
are increasing due to climate change, insurance
premiums are getting pushed up, making it unaffordable,
and many of these events are also being deemed
as uninsurable. In response, several countries haveestablished insurance risk pools. In many cases,
these programmes have been established to provide
affordable insurance coverage for ‘uninsurable’ risks
through private markets. In others, they promotesolidarity by establishing regional risk pools to spreadout the impact of losses. The Caribbean, Pacificislands and African Union, for example, have set up the
Caribbean Catastrophe Risk Insurance Facility (CCRIF
SPC), the Pacific Catastrophe Risk Assessment and
Financing Initiative (PCRAFI) and African Risk Capacity(ARC) Insurance Programme (see Box 4). These
regional pools provide significant advantages (Cebotari
and Youssef, 2020). First, they provide insurance
coverage at significantly lower cost than if countries
had to purchase it individually. Second, they provide
quick pay-outs following disasters, which help members
maintain essential government functions. Third, policy
holders own the facility (CCRIF, PCRAFI, ARC), whichallows benefits to accrue to members either throughdividend payments or lower premiums.
Parametric insurance for debt relief will need a similar
risk-pooling approach to ensure that the premiums
are affordable, and that the coverage and duration ofdebt relief meets the requirements of the countries.
By offloading some portion of risk, the insurancecompany reduces its overall risk and can keep premium
costs lower for all of its clients (Cebotari and Youssef,2020). As risk pools grow, the cost of operation andreinsurance in global capital markets drops, which

could in turn help lower premiums. Regional pools canalso facilitate access of smaller countries to insurance
and reinsurance markets by increasing the size ofthe aggregate portfolio, offering country-specific risk
models and reducing administrative costs.

Optimum coverage of risks
Parametric insurance, while has advantages, will only
pay after a certain level of risk is reached. This trigger
might not happen for several reasons. For example, thestrength of a disaster might be measured in a different
location from where it occurred. As a result, it might notreach the level needed to trigger the insurance. Similarly,
the risk of actual losses might also exceed modelled
losses. To address these issues, parametric insurance
needs better location-specific and comprehensive
climate risk modelling to define triggers and thresholds
for insurance pay-outs.
The distribution of future climate impacts and theirassociated damages, from both slow-onset and extreme
weather events in climate models, are generally shown
as averages. High probability events, for example, tend
to appear as a huge peak on a graph. Conversely, rare
events with potentially disastrous effects appear withlow probability as a tail to the curve. But even withrelatively low probability, the outcomes of these rare tailevents can be catastrophic and cause loss and damage.
Thus, countries need insurance protection against a fullrange of events. To do this, insurance products need tochange how they consider climate modelling outputs.
Taking an average of different global climate models
is common practice, but this does not always provide
the true scale of impacts. Averaging all the results
obscures the range of likely impacts, and the range ofless likely, more catastrophic events — the very ones
that usually cause greater loss and damage — tend to
get neglected.
The trigger measurement and design for insurance
coverage should be fit for purpose for a range of these
possible extreme weather events. The probability ofthese major disasters is small, but the fast — andBOX 4. RISK POOLING
Participating countries in the Caribbean, the Pacific islands and African Union have transferred their risks tothree well-established regional pools that provide lower insurance premiums:

16

RISK-POOLING INITIATIVESHAZARDS INSURED

CCRIF (2007)

Earthquake, tropical cyclone (hurricanes), excess
rainfall, drought

PCRAFI (2013)

Tropical cyclone, earthquake/tsunami, excess rainfall

ARC (2013)

Drought, extreme weather (excess rainfall, heatwaves
and tropical cyclones)

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IIED WORKING PAPER

potentially large — insurance pay-outs are morevaluable in mitigating their effects on possible debt
default and its cascading effect on growth. Similarly,
the higher frequency of smaller disasters may also
require coverage to help countries rebuild becauseeven recurring moderate events can cause significant
damage. The design of the triggers will need to consider
all the types of events that could have an impact on the
country’s fiscal performance.

Climate and other sources of finance tocover insurance cost
Under the proposed model, parametric insurance is notexpected to cover the full debt. Rather, it would provide
emergency liquidity to help countries recover fromdisasters. But this coverage might be inadequate forseveral reasons. First, it might only cover debt payment
for a short time. Second, it may not provide enoughprotection to help a country recover fully from a disaster.
Insurance coverage that adequately covers these
possibilities would cost more. Conversely, lesscoverage would cost less but also provide limited
protection in terms of debt relief. This is why LDCs
and SIDS would need optimal financial protection.
These countries are already facing tighter borrowing

BOX 5. HOW MUCH INSURING
GDP LOSSES CAN COST
To estimate the average insurance premium for arisk pool, we used the data of 49 LDCs on fatalities;
absolute losses (in million US$ purchasing power
parity (PPP)); losses per unit GDP in percentage
and Climate Risk Index (CRI); core from Global
Climate Risk Index, 2021; and IMF estimate of actual
GDP (in million US$) and their forecasted GDP
based on PPP (in million US$) of these countries.
The risk premiums were assigned by assuming
probabilities for frequency of losses to GDP andhazard and vulnerability exposure based on CRI
score. Based on composite function of thesefactors, the risk premium (for loss in GDP PPP) for
49 LDCs comes to US$135 million. Using the same
approach, the risk premium for Mozambique comesto US$58.42 million (highest CRI score), if insured
individually. The premium calculation has assumed
factors like vulnerability to climate impacts, expected
losses, expenses and profit margin of insurancecompany and deductibles. Although standardised
rates have been assumed for calculation, the actual
estimate of the probabilities of occurrence of climate
events, as well as the resulting loss estimate, would
require building complex and sophisticated models.
These values should thus be viewed with thoselimitations in mind.

constraints with higher interest rates and poor credit
ratings because of their climate vulnerability. The
benefits of risk transfer for debt sustainability arehigher for them, but insurance costs can be prohibitive
and would only add to their debt burden.
The cost of insurance premiums will therefore need
to be covered through climate finance, members of
the Paris Club and other sources proposed to provide
debt relief to countries, such as the IMF and multilateraldevelopment banks, under the principles of climate
justice and solidarity. The Global Shield initiative
announced at COP 27 also opens up opportunities
for piloting and scaling up parametric insurance forsovereign debt relief.
The trade-offs between fiscal costs and risk to growth,debt default and costs of debt restructuring would need
to be weighed carefully. The ex post benefits of covering
the insurance premium for debt relief can far exceed
the investment in premiums. Direct support to LDCs for
insurance costs would alleviate the financial constraints
and help countries scale up financial resilience. It would
also stabilise their growth, reduce poverty and allow
them to invest in social protection.

Delivering debt support
linked to parametricinsurance
A coordinated effort with support from G20
governments, other major developed countries andkey institutions such as the IMF and World Bank will
be needed to operationalise parametric insurance forsovereign debts. This should cover the points below.

Establish a global fundA global fund based on contribution from G20
countries, debt relief funds of the IMF and World Bank,and climate finance pledges from developed countries
will be needed to service the insurance premium for
LDCs. This fund will enable risk pooling of all LDCs
and SIDS and offer a more diversified portfolio toinsurance companies.
The fund may need to respond to some criticalquestions to make such a model work at scale,particularly for LDCs and SIDS:• What conditions would be attractive to insurers andreinsurers to keep premiums as low as possible?
• How can the risk pool work for a diversified portfolioof countries given some will be at higher risk thanothers and may need access to insurance support
more often than others?
• What conditions would allow international climate
finance to support risk-pooled debt finance at scale?

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PROTECTING AGAINST SOVEREIGN DEBT DEFAULTS UNDER GROWING CLIMATE IMPACTS | ROLE FOR PARAMETRIC INSURANCE• How can non-insurability of some events be
Establish collaboration between
addressed? How might reinsurance or guarantee from multiple stakeholders
the global fund work for high-severity events to limit
the magnitude of potential losses for insurers?
Collective buy-in will be crucial to make such a global
fund work. Key partners, and their roles, are noted
In addition to covering premiums and guarantees forbelow:
sovereign debts, the global fund can support longerterm adaptation and resilience building in LDCs. This(i) Participating LDC governments, and their relevant
would support risk reduction and therefore help reduce
finance and environment ministries — to understandthe magnitude of future losses and bring down the cost
their needs and requirements for debt relief and howof premiums in the long run.
to structure the debt relief to support adequate time
for recovery from disasters.

Undertake comprehensive risk
modelling and data analytics(ii) Major public and private sector creditors, Paris Club
creditors, IMF, World Bank and other internationaland regional development banks — to bring them onboard, seek funding support and design the structure
and modality for retrofitting insurance with existingdebts or imbedding it with those planned in future.

The global fund will also need to play a leading role indeveloping risk analytics and modelling tools. Whatrisks should insurance cover? What is the likely
frequency and size of losses that will need to becovered? This assessment will help in pricing, designing (iii) Insurance and reinsurance industry — to help
trigger thresholds and structuring the provision of
co-design the insurance product and risk-poolingadequate insurance coverage. Improved measurement
arrangements that provide optimum coverage ofwill also help lower insurance costs.
risks.
Catastrophe risk modelling, developed by the insurance
industry, uses data on parameters that describe themagnitude, frequency and geographic distribution ofpotential losses. This enables insurance companies
to price and structure coverage correctly. The
development, calibration and use of such models require
multidisciplinary technical expertise and experience
with interpretation of model output, and the input data
for such models are often unavailable or incomplete(UNISDR, 2017). Incomplete knowledge of hazard
events and their impact means more uncertainty forinsurance pricing. To address these needs and reduce
uncertainties, the global fund will need to invest
in collecting and modelling hazard, exposure andvulnerability data. This would support the design ofappropriate trigger mechanisms and avoid basis risks.
The data collection and models could be developed incollaboration with national meteorological and climate
modelling experts. These could include academics;
national meteorological, hydrological and geologicalservices; and other government and nongovernmental
agencies that collect and maintain sectoral data such as
national bureaus of statistics. The process could build
capacity to promote sustainable maintenance of therisk data. Further, engaging in-country stakeholders will
ensure that LDC government needs and requirements
are considered in design of the triggers and thresholds.
Stakeholders can also ensure that development of
in-country technical and operational capacities fordata collection and risk analytics feeds in to design oftriggers and insurance coverage. Finally, an inclusive
approach will help ensure transparency on source andanalysis of risk parameters.

18

www.iied.org(iv) National technical agencies, data providers and therisk modelling community — to support availability ofdata and more accurate risk modelling.
(v) Academia, centres of excellence andnongovernmental organisations — to bring in a local/
grassroots perspective to understand the needs,
vulnerabilities and priorities of local communities andincorporate them in design of insurance cover.
A range of creditors must come on board. In previous
eras, the multilateral and Paris Club lenders owned
the LDCs’ debt, but today private creditors and China
own the bulk of it. The participation of private creditors
will increase capital and bring down insurance costs.
But more than that, it is essential for success. If somecreditors do not sign on and collect their debt payment
in full when other parties provide relief, it would not freeup all debt. This, in turn, would prevent LDCs/SIDS
from focusing their budget on relief and rehabilitation
following the disasters.

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Looking ahead
The climate crisis is pushing vulnerable LDCs into overindebtedness, amplifying their disparity with developed
countries. A deeply unequal global system makes it
difficult for them to graduate out of debt and poverty.
Fundamental changes are needed to re-engineer,
regulate and equalise global debt and growth.
The Global Financing Pact agenda and the commitment
to create a loss and damage fund under the United
Nations Framework Convention on Climate Change
offer an opportunity to create a global fund forsupporting debt relief of LDCs and SIDS. Such a fundcould better respond to the needs of communities at thefrontline of the crisis. Automatic debt payments before
or in the aftermath of extreme weather events would
cover both public and private lenders. In addition, sucha mechanism would provide adequate and appropriate
grant-based climate finance to help countries develop
long-term resilience. We call upon the IMF, World Bank,
G20 countries and developed countries to channel theneeded climate finance and technical assistance into
this global fund to help LDCs and SIDS better manage
the twin challenges of climate and debt risks.

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PROTECTING AGAINST SOVEREIGN DEBT DEFAULTS UNDER GROWING CLIMATE IMPACTS | ROLE FOR PARAMETRIC INSURANCE

Annexes

List of countries considered for the correlation/regression
analysis
ANALYSIS: RELATIONSHIP BETWEEN HAZARD AND EXPOSURE INDEXAND SOVEREIGN DEFAULT TO DEBT RATIOLDCsOther countries
AngolaAlbania

SerbiaBenin

Argentina

Seychelles

Burkina Faso

Belarus

St Vincent and the Grenadines

BurundiBelizeSyrian Arab Republic

Cambodia

Bolivia

Tajikistan

Congo, Rep.

Bosnia and Herzegovina

Tonga

Djibouti

Botswana

Tunisia

Equatorial Guinea

Cameroon

UkraineEthiopia

Dominica

Uzbekistan

Gambia, The

Dominican Republic

VietnamGuineaEcuadorZimbabwe

Guinea-Bissau

Fiji

Haiti

Gabon

Liberia

Georgia

Madagascar

Ghana

MalawiIran, Islamic Republic of

Maldives

Iraq

Mali

Jamaica

Mauritania

JordanMozambique

Kazakhstan

Myanmar

Kenya

Niger

Korea, Republic of

RwandaKyrgyz Republic

Senegal

Libya

Sierra Leone

Mauritius

Sudan

Mongolia

Tanzania

Nicaragua

Togo

Papua New Guinea

UgandaPeru

VanuatuRomania20

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IIED WORKING PAPERANALYSIS: RELATIONSHIP BETWEEN SOVEREIGN DEFAULT TO DEBTRATIO AND SOCIAL ASSISTANCE SPENDING
LDCs
Other countries
Afghanistan

Albania

AngolaArgentina

Benin

Belarus

Burkina Faso

Bolivia

BurundiBosnia and Herzegovina

Cambodia

Botswana

Congo, Democratic Republic of

BrazilCongo, Republic of

Cameroon

Djibouti

Dominica

Ethiopia

Dominican Republic

GuineaEcuadorGuinea-Bissau

Egypt, Arab Republic of

Maldives

Fiji

Mali

Georgia

Mauritania

GrenadaMozambique

Iraq

MyanmarJamaica

Niger

JordanRwandaKazakhstan

SenegalKenya

Sierra Leone

Kyrgyz Republic

Sudan

Libya

Tanzania

Mauritius

Togo

Mongolia

UgandaPapua New Guinea

ZambiaPeru
Romania
SerbiaSeychelles
Tajikistan
Tonga
Tunisia
UkraineVietnamZimbabwewww.iied.org

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PROTECTING AGAINST SOVEREIGN DEBT DEFAULTS UNDER GROWING CLIMATE IMPACTS | ROLE FOR PARAMETRIC INSURANCEANALYSIS: RELATIONSHIP BETWEEN SOVEREIGN DEFAULT TO DEBTRATIO AND MULTIDIMENSIONAL RISK INDEXLDCsOther countries
Afghanistan

Albania

Kyrgyz Republic

AngolaArgentina

LebanonBenin

Barbados

Libya

Burkina Faso

Belarus

Mauritius

BurundiBelizeMongolia

Cambodia

Bolivia

Nauru

Congo, Democratic Republic of

Bosnia and Herzegovina

Nicaragua

Djibouti

Botswana

Papua New Guinea

Equatorial Guinea

BrazilPeru

Ethiopia

Cameroon

Romania

Gambia, The

Congo, Rep.

SerbiaHaiti

Dominica

Seychelles

Liberia

Dominican Republic

St Vincent and the Grenadines

Madagascar

EcuadorSyrian Arab Republic

MalawiEgypt, Arab Republic of

Tajikistan

Maldives

Fiji

Tonga

Mali

Gabon

Tunisia

Mauritania

Georgia

UkraineMozambique

Ghana

Uzbekistan

Myanmar

GreeceVietnam

Niger

GrenadaZimbabwe

RwandaGuineaUkraineSenegalGuinea-Bissau

Uzbekistan

Sierra Leone

Iran, Islamic Republic ofVietnam

Sudan

Iraq

Zimbabwe

Tanzania

Jamaica

Togo

JordanUgandaKazakhstan

Vanuatu

Kenya

ZambiaKorea, Republic of

Database sources
Hazard and exposure index: INFORM Report 2021: https://drmkc.jrc.ec.europa.eu/inform-index/Portals/0/
InfoRM/2021/INFORM%20Annual%20Report%202021.pdf (retrieved on 10 April 2023).
Sovereign default: Boc and BoE Sovereign Default Database: https://centerforfinancialstability.org/BoC_BoE_
Debt.php (retrieved on 9 April 2023).
Sovereign debt: Global Debt Database of IMF: www.imf.org/external/datamapper/datasets/GDD (retrieved on 8
April 2023).
Social assistance spending: ASPIRE database of The World Bank: www.worldbank.org/en/data/datatopics/aspire(retrieved on 10 February 2021).
Multidimensional risk index: INFORM Report 2021: https://drmkc.jrc.ec.europa.eu/inform-index/Portals/0/
InfoRM/2021/INFORM%20Annual%20Report%202021.pdf (retrieved on 10 April 2023).
22

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www.iied.org

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The climate crisis is pushing Least Developed Countries
into over-indebtedness, amplifying their disparity with
developed countries. Fundamental changes are needed to
re-engineer, regulate, and equalise global debt and growth.
Parametric insurance for sovereign debt can be one of thesustainable options for resolving the debt crisis. Insurance
could cover debt repayment on behalf of the country during
the period of climate crisis, helping them to focus theirbudget on relief and recovery, with the provision of a global
fund to cover the insurance premiums.

IIED is a policy and action researchorganisation. We promote sustainable
development to improve livelihoods
and protect the environments on whichthese livelihoods are built. We specialisein linking local priorities to global
challenges. IIED is based in London andworks in Africa, Asia, Latin America, theMiddle East and the Pacific, with someof the world’s most vulnerable people.
We work with them to strengthen their
voice in the decision-making arenas that
affect them — from village councils tointernational conventions.

International Institute for Environment and Development
Third Floor, 235 High Holborn, London WC1V 7DN, UK
Tel: +44 (0)20 3463 7399
Fax: +44 (0)20 3514 9055
www.iied.org
Funded by:This work was made possible through the support of the
Climate Emergency Collaboration Group, a sponsored
project of Rockefeller Philanthropy Advisors.

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