Determinants of External-Debt Crises. A Probit Model

This paper presents a theory of the maturity of international sovereign debt, and derives its implications for the reform of the international financial architecture. The analysis is based on a model in which the need to roll over external debt disciplines the policies of debtor countries, but makes them vulnerable to unwarranted debt crises due to bad shocks. The paper presents a welfare analysis of several measures that have been discussed in recent debates, such as international lending-in-last-resort or the establishment of a mechanism for suspending payments on the external debt of crisis countries. (JEL F34, O19)

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From Financial Crash to Debt Crisis

The American Economic Review ◽

10.1257/aer.101.5.1676 ◽

2011 ◽

Vol 101 (5) ◽

pp. 1676-1706 ◽

Cited By ~ 561

Author(s):

Carmen M Reinhart ◽

Kenneth S Rogoff

Keyword(s):

Time Series ◽

Public Debt ◽

Sovereign Debt ◽

Debt Crisis ◽

External Debt ◽

Banking Crises ◽

Sovereign Default ◽

Historical Time ◽

Individual Country ◽

Debt Crises

Newly developed historical time series on public debt, along with data on external debts, allow a deeper analysis of the debt cycles underlying serial debt and banking crises. We test three related hypotheses at both “world” aggregate levels and on an individual country basis. First, external debt surges are an antecedent to banking crises. Second, banking crises (domestic and those in financial centers) often precede or accompany sovereign debt crises; we find they help predict them. Third, public borrowing surges ahead of external sovereign default, as governments have “hidden domestic debts” that exceed the better documented levels of external debt. (JEL E44, F34, F44, G01, H63, N20)

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