Debt Sustainability Under Catastrophic Risk: The Case for Government Budget Insurance |
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| Authors: | Eduardo Borensztein Eduardo Cavallo Patricio Valenzuela |
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| Institution: | Eduardo Borensztein is with Inter-American Development Bank, 1300 New York Ave., N.W., Washington, DC 20577;phone: 202-623-2717;fax: 202-623-2268;e-mail: . Eduardo Cavallo is with Inter-American Development Bank, 1300 New York Ave., N.W., Washington, DC 20577;phone: 202-623-2817;fax: 202-623-2481;e-mail: . Patricio Valenzuela is with the European University Institute, Villa San Paolo, Via della Piazzuola 43, Florence 50133, Italy;phone: 39 333-856-5527;fax : 39 055-4685-928;e-mail: . The views expressed here are strictly the views of the authors and do not necessarily represent the views of the International Monetary Fund (IMF), the Inter-American Development Bank (IDB), the boards of these institutions or the countries they represent, or any other institution. The authors thank Pelin Berkmen, Andre Faria, Francis Ghesquiere, Diego Vilán, Federico Mandelman, and Romina Bandura for their help with the data and useful suggestions, and two anonymous referees for their suggestions. Fidel Jaramillo and Matteo Bobba kindly provided us with their data. All errors are ours. This article was subject to double-blind peer review. |
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| Abstract: | Natural disasters are an important source of vulnerability in the Caribbean region. Despite being one of the more disaster-prone areas of the world, it has the lowest levels of insurance coverage. This article examines the vulnerability of Belize's public finance to the occurrence of hurricanes and the potential impact of insurance instruments in reducing that vulnerability. The article finds that catastrophic risk insurance significantly improves Belize's debt sustainability. In addition, the methodology employed makes it possible to estimate the appropriate level of insurance, which for the case of Belize is a maximum coverage of US$120 million per year. International organizations can play a role in assisting countries to overcome distortions in insurance markets, as well as in helping to relax internal political resistance to the purchase of insurance policies. |
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