“Rules of Thumb” for Sovereign Debt Crises
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Summary:
This paper contains an empirical investigation of the set of economic and political conditions that are associated with a likely occurrence of a sovereign debt crisis. We use a new statistical approach (Binary Recursive Tree) that allows us to derive a collection of "rules of thumb" that help identify the typical characteristics of defaulters. We find that not all crises are equal: they differ depending on whether the government faces insolvency, illiquidity, or various macroeconomic risks. We also characterize the set of fundamentals that can be associated with a relatively "risk free" zone. This classification is important for discussing appropriate policy options to prevent crises and improve response time and prediction.
Series:
Working Paper No. 2005/042
Subject:
Debt default Debt service External debt Financial crises Public debt
English
Publication Date:
March 1, 2005
ISBN/ISSN:
9781451860610/1018-5941
Stock No:
WPIEA2005042
Pages:
32
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