Sovereign Risk and Fiscal Sustainability: A Cross Country Analysis

Abstract

This study examines how sovereign risk and fiscal sustainability interact across advanced and emerging economies in an environment of high public debt and recurrent shocks. Using a systematic literature review, it synthesizes evidence on how public debt dynamics, fiscal reaction behaviour, institutional frameworks, and climate related factors are reflected in market based measures of sovereign risk such as bond yields and credit default swap spreads. The findings indicate that high and rising debt levels, weak or delayed fiscal adjustment, and fragile institutions are associated with higher sovereign borrowing costs and greater vulnerability to fiscal crises. At the same time, climate vulnerability, natural disasters, and the transition to a low carbon economy increasingly affect sovereign creditworthiness by depressing growth, eroding tax bases, and raising contingent liabilities. Overall, the review highlights that meaningful assessments of fiscal sustainability must integrate debt dynamics, fiscal policy responses, institutional credibility, and long horizon climate risks and robust well designed fiscal rules in order to identify policy configurations that support sustainable public finances and resilient market access.