Climate resilient debt clause
A clause in a sovereign loan or bond that allows the borrower to suspend debt service for a defined period after a qualifying natural catastrophe.
A small country hit by a major hurricane must fund relief and reconstruction at the very moment its revenue collapses, while its debt payments fall due as if nothing had happened. The climate resilient debt clause reverses that logic: a defined event, often established by a parametric indicator or by a catastrophe insurance payout, gives the right to defer interest and principal for a set period, usually one to two years, without the deferral counting as a default. Creditors accept a cash flow delay, not a loss, since the deferred amounts remain owed. The clause complements parametric insurance rather than replacing it: one brings in fresh money, the other frees up money that was going to repayments. It has a cost, which the lender builds into the rate.
Grenada introduced a hurricane clause into its bonds during its 2015 restructuring. On July 1, 2024, Hurricane Beryl struck the island of Carriacou as a Category 4 storm, with winds of about 150 miles per hour, and the government activated the clause to defer service on the debt concerned. Creditors received their payments later, without the deferral being treated as a default.
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