Natural disasters and (future) government debt

Natural disaster relief and reconstruction are core tasks of the government because there is no well-functioning private market, and for macroeconomic stability reasons. Providing disaster relief and reconstruction is not without consequences for the level of government debt. The debt increase ranges from 23 percentage points to 37 percentage points. For climate disaster, this chanper finds an even larger effect. This is particularly worrisome because climate change makes the occurrence of climate disasters more frequent. A country might be effectively shut out of the bond market in the aftermath of a natural disaster because investors are concerned about government debt sustainability. In that case, the government cannot fulfil its core task of natural disaster relief and reconstruction. Therefore, this chapter proposes to issue catastrophe bonds (cat bonds) and to utilize some of the fund in the Paris Agreement to mitigate the issue of debt sustainability.