This paper assesses the effects of disaster risk on the risk premium of sovereign debt of emerging economies prone to disaster shocks. Countries have strong ex ante incentives to build up assets for insurance by obliging the contracts but are likely to default ex post when a disaster shock strikes. We demonstrates the effects by distinguishing between two types of disaster shock: natural disaster and economic disaster. First, we provide empirical estimates of the likelihoods that countries transit between a boom, a recession and a disaster state. We understand that the severe output contractions are largely accounted for by economic disasters. We also understand a positive correlation between countries' disaster risk and spread on external debt. Second, we develop a small open economy DSGE model that explains the empirical facts. We analyse how the ex ante insurance motive and ex post incentive to default interact in the cases of two disaster shocks. The model predicts that the presence of economic disaster increases a debtor government's average risk premium whereas natural disaster risk reduces it. We also look at measures to improve debtor's ability to insure themselves in the presence of disaster risk. The model is extended to incorporate debt negotiation upon default and debt extension if a natural disaster occurs. The model features endogenous debt recovery rates and they decrease with the level of debt. We _nd that the option of debt extension improves the debtor's repayment incentives and improves the debtor's welfare.