From Financial Crash to Debt Crisis

TLDR

New historical time series on public and external debt enable deeper analysis of debt cycles underlying serial debt and banking crises. The study tests three related hypotheses at both world aggregate levels and individual country levels. The methodology involves testing these hypotheses across global aggregates and individual countries. The results show that external debt surges precede banking crises, banking crises often precede or accompany sovereign debt crises, and public borrowing surges before external sovereign default due to hidden domestic debts. JEL classification codes: E44, F34, F44, G01, H63, N20.

Abstract

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)