July 2020

Natural Disasters, Climate Change, and Sovereign Risk

Enrico Mallucci

Abstract:

I investigate how natural disaster can exacerbate fiscal vulnerabilities and trigger sovereign defaults. I extend a standard sovereign default model to include disaster risk and calibrate it to a sample of seven Caribbean countries that are frequently hit by hurricanes. I find that hurricane risk reduces government's ability to issue debt and that climate change may further restrict market access. Next, I show that "disaster clauses", that provide debt-servicing relief, improve government ability to borrow and mitigate the adverse impact of climate change on government's borrowing conditions.

Keywords: Sovereign risk, climate change, natural disasters.

DOI: https://doi.org/10.17016/IFDP.2020.1291

PDF: Full Paper

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Last Update: July 08, 2020