Natural disasters and sovereigns' exclusion from international capital markets

We use a continuous-time Weibull model and a large panel of countries over the period 1970–2022 to investigate the link between natural disasters and the length of sovereigns' exclusions from international capital markets. We find that the occurrence of natural disasters is associated with longer spells of sovereigns' exclusion from financial markets regardless of (i) the typology, (ii) the frequency, and (iii) the monetary damages of such rare events. Additionally, we show that stronger economic growth and agreements on substantial debt rescheduling are significantly associated with a reduction of the length of exclusions. Moreover, our empirical results confirm that, as time goes by, sovereigns can build their reputation as good borrowers. These findings are robust to timing-sensitive specifications using fixed beginning-of-spell exposure windows, annual within-spell disaster covariates, and cumulative-to-date disaster exposure. From a policy perspective, our findings give support to the provision of debt relief to countries hit by such rare events.