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On the Potential of Sovereign State-Contingent Debt in Contributing to Better Public Debt Management and Enhancing Sustainability Outcomes

  • Ulrich Volz EMAIL logo


Sovereign state-contingent instruments (SCDIs) have been suggested as complements or alternatives to traditional sovereign debt instruments for a long time, but with little uptake. Markets for SCDIs have suffered from low liquidity and issues around measurement. This article argues that the escalating climate and ecological crises provide a strong rationale to reconsider the use of sovereign SCDIs as the physical and transition impacts of climate change and environmental degradation are increasingly altering the risk profile of sovereigns. The use of risk-linked sovereign instruments such as cat bonds or resilience bonds and embedding disaster risk clauses in sovereign debt contracts would be an important way for governments, especially in highly climate-vulnerable countries, to mitigate climate risks and scale up investment in resilience. Moreover, instruments such as sustainability-linked bonds that incentivise sustainability-oriented policies and investments could help to bring about better sustainability outcomes and contribute to greater debt sustainability. SCDIs can also play an important role in facilitating debt restructurings. The international community, supported by key institutions like the IMF and the major multilateral development banks, should make a concerted effort to promote the widespread adoption of sovereign SCDIs to support better public debt management, the climate-proofing of public finances, and the achievement of more ambitious sustainability outcomes.

JEL Classification: F34; H63; Q54

Corresponding author: Ulrich Volz, SOAS, University of London, London, England; London School of Economics and Political Science, London, England; and German Institute of Development and Sustainability, Bonn, Germany, E-mail:

This article was written for a special issue of the Journal of Globalization and Development on Sovereign Debt and Development. I am grateful to Ugo Panizza and Andrea Presbitero for inviting me to contribute to the special issue and for very helpful comments received from Tito Cordella, Anna Gelpern, Ugo Panizza, Andrea Presbitero and Miranda Xafa during a workshop hosted by the Graduate Institute and Johns Hopkins University in May 2021. I am also grateful for feedback received from participants at the Asian Development Bank Institute workshop on ‘Effective Public Debt Management and Fiscal Sustainability in the Post-COVID-19 Era’ in March 2022 and two anonymous referees.


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Received: 2021-10-28
Accepted: 2022-12-02
Published Online: 2022-12-16

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