Physical climate impacts strain public finances through direct economic effects, yet interconnected economies also face indirect climate exposure via global value chains. These climate spillovers can amplify fiscal costs and deteriorate sovereign financing conditions but are widely ignored. We investigate whether domestic climate impacts affect sovereign financing conditions, the degree of foreign climate transmission to financing conditions, and the relative magnitude of local versus global channels. We contribute through two innovations: First, deploying climate metrics based on daily data weighted by gridded economic activity, moving beyond current risk proxies. Second, constructing a novel spillover measure systematically mapping international linkages. Combining temperature, precipitation, and drought data with countries’ value-added origins from Inter-Country Input-Output tables, we attribute financing condition changes to domestic and foreign climate. Financing conditions are measured by sovereign credit ratings from three major agencies. Deploying standard and quantile regression models for a panel of 75 countries for 2000-2022, we estimate average and heterogeneous local effects. We then disentangle domestic and foreign impacts to quantify climate spillovers through global value chains. Results are threefold. First, local temperature anomalies and drought conditions show significant negative relationships with sovereign ratings, with a one-unit increase associated with a 0.2 notch downgrade. Second, quantile analysis reveals temperature effects are approximately 10 times larger for countries at the 10th percentile than at the 90th, revealing climate risks disproportionately burden lower-rated sovereigns. Third, incorporating foreign climate exposure increases estimated effects by approximately 40% compared to local-only baselines. For some highly globalised economies, foreign spillovers even dominate domestic impacts. Thus, ignoring global climate spillovers can lead to a systemic misestimation of total climate costs. Findings reveal a critical blind spot for financial actors and have policy implications for developing risk mitigation strategies that weather-proof public finances against local and global climate shocks.
