Debt and Financial Crises
Emerging market and developing economies have experienced recurrent episodes of rapid debt accumulation over the past fifty years. This paper examines the consequences of debt accumulation using a three-pronged approach: an event study of debt accumulation episodes in 100 emerging market and developing economies since 1970; a series of econometric models examining the linkages between debt and the probability of financial crises; and a set of case studies of rapid debt buildup that ended in crises. The paper reports four main results. First, episodes of debt accumulation are common, with more than 500 episodes occurring since 1970. Second, around half of these episodes were associated with financial crises which typically had worse economic outcomes than those without crises -- after 8 years output per capita was typically 6-10 percent lower and investment 15-22 percent weaker in crisis episodes. Third, a rapid buildup of debt, whether public or private, increased the likelihood of a financial crisis, as did a larger share of short-term external debt, higher debt service cover, and lower reserves cover. Fourth, countries that experienced financial crises frequently employed combinations of unsustainable fiscal, monetary and financial sector policies, and often suffered from structural and institutional weaknesses.
| Main Authors: | , , , , |
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| Format: | Working Paper biblioteca |
| Language: | English |
| Published: |
World Bank, Washington, DC
2020-01
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| Subjects: | FINANCIAL CRISIS, DEBT CRISIS, BANKING CRISIS, PUBLIC DEBT, CURRENCY CRISIS, PRIVATE DEBT, EXTERNAL DEBT, DEBT ACCUMULATION, MONETARY POLICY, FISCAL POLICY, DEBT SUSTAINABILITY, FISCAL SUSTAINABILITY, |
| Online Access: | http://documents.worldbank.org/curated/en/560291579701550183/Debt-and-Financial-Crises https://hdl.handle.net/10986/33230 |
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| Summary: | Emerging market and developing economies
have experienced recurrent episodes of rapid debt
accumulation over the past fifty years. This paper examines
the consequences of debt accumulation using a three-pronged
approach: an event study of debt accumulation episodes in
100 emerging market and developing economies since 1970; a
series of econometric models examining the linkages between
debt and the probability of financial crises; and a set of
case studies of rapid debt buildup that ended in crises. The
paper reports four main results. First, episodes of debt
accumulation are common, with more than 500 episodes
occurring since 1970. Second, around half of these episodes
were associated with financial crises which typically had
worse economic outcomes than those without crises -- after 8
years output per capita was typically 6-10 percent lower and
investment 15-22 percent weaker in crisis episodes. Third, a
rapid buildup of debt, whether public or private, increased
the likelihood of a financial crisis, as did a larger share
of short-term external debt, higher debt service cover, and
lower reserves cover. Fourth, countries that experienced
financial crises frequently employed combinations of
unsustainable fiscal, monetary and financial sector
policies, and often suffered from structural and
institutional weaknesses. |
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