Climate Risk Pricing in Sovereign Debt: Evidence from Developing European Countries

Abstract

This study investigates the extent to which climate risk is reflected in sovereign debt pricing in ten Eastern European economies between 2007 and 2023. Using a maturity-matched measure of sovereign borrowing cost spreads and panel data estimation techniques, the analysis captures both cross-country heterogeneity and time variation. The results reveal a statistically significant and economically meaningful relationship between climate vulnerability and borrowing costs. Countries that are more exposed to physical climate risks systematically face higher interest rates in domestic credit markets. The findings further indicate that this relationship is shaped by country-specific characteristics rather than operating mechanically. Institutional quality and access to climate-related financial resources play an important mitigating role in the pricing of climate risk. Economies with stronger governance frameworks and greater access to climate finance tend to exhibit lower borrowing cost spreads, even at comparable levels of climate vulnerability. This suggests that adaptive capacity can partially offset the financial impact of physical climate risks. Overall, the study highlights that climate adaptation is not only an environmental priority but also a key determinant of fiscal sustainability and sovereign financing conditions in an era of intensifying climate change.