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 hur-ricane risk reduces governments' ability to issue debt and depresses welfare. Climate change will further restrict governments' access to financial markets and weigh on welfare. Disaster clauses, especially those allowing governments to write off debt, improve governments' borrowing terms and mitigate the impact of climate change on governments' access to financial markets and households' welfare.(c) Published by Elsevier B.V.

Automated summary

This article investigates how natural disasters can worsen fiscal vulnerabilities and lead to sovereign defaults. By extending a standard sovereign default model to incorporate disaster risk and calibrating it to a sample of seven Caribbean countries frequently hit by hurricanes, the study finds that hurricane risk reduces governments' debt issuance capability and depresses welfare. Climate change will further restrict governments' access to financial markets and negatively impact welfare. However, disaster clauses, especially those allowing governments to write off debt, can improve governments' borrowing terms and mitigate the effects of climate change on governments' access to financial markets and households' welfare.