International Finance Discussion Papers (IFDP)
July 2020 (Revised October 2020)
Natural Disasters, Climate Change, and Sovereign Risk
I investigate how natural disasters 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 disaster risk reduces government's ability to issue debt and that climate change further restricts government's access to financial markets. Next, I show that "disaster clauses", that provide debt-servicing relief, allow governments to borrow more and preserve government's access to financial markets, amid rising risk of disasters. Yet, debt limits may need to be adopted to avoid overborrowing and a decline of welfare.
Original paper: PDF
Keywords: Sovereign risk, climate change, natural disasters.
PDF: Full Paper