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Banking crises and sovereign defaults in emerging markets: exploring the links

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  • Irina Balteanu

    ()
    (Banco de España)

  • Aitor Erce

    ()
    (Banco de España)

Abstract

This paper provides a set of stylised facts on the mechanisms through which banking and sovereign distress feed into each other, using a large sample of emerging economies over three decades. We first define “twin crises” as events where banking crises and sovereign defaults combine, and further distinguish between those banking crises that end in sovereign debt crises, and vice-versa. We then assess what differentiates “single” episodes from “twin” ones. Using an event analysis methodology, we study the behaviour around crises of variables describing the balance sheet interconnection between the banking and public sectors, the characteristics of the banking sector, the state of public finances and the macroeconomic context. We find that there are systematic differences between “single” and “twin” crises across all these dimensions. Additionally, we find that “twin” crises are heterogeneous events: taking into account the proper time sequence of crises within “twin” episodes is important for understanding their drivers, transmission channels and economic consequences. Our results shed light on the mechanisms surrounding feedback loops of sovereign and banking stress

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/14/Fich/dt1414e.pdf
File Function: First version, July 2014
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1414.

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Length: 46 pages
Date of creation: Jul 2014
Date of revision:
Handle: RePEc:bde:wpaper:1414

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Keywords: banking crises; sovereign defaults; feedback loops; balance sheets;

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  1. Reinhart, Carmen & Reinhart, Vincent, 2009. "Fiscal stimulus for debt intolerant countries?," MPRA Paper 16937, University Library of Munich, Germany.
  2. Alter, Adrian & Beyer, Andreas, 2013. "The dynamics of spillover effects during the European sovereign debt crisis," Working Paper Series, European Central Bank 1558, European Central Bank.
  3. Stephen G. Cecchetti & Marion Kohler & Christian Upper, 2009. "Financial crises and economic activity," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 89-135.
  4. Frigyes F Heinz & Yan Sun, 2014. "Sovereign CDS Spreads in Europe: The Role of Global Risk Aversion, Economic Fundamentals, Liquidity, and Spillovers," IMF Working Papers 14/17, International Monetary Fund.
  5. Javier Díaz-Cassou & Aitor Erce-Domínguez & Juan J. Vázquez-Zamora, 2008. "Recent episodes of sovereign debt restructurings. A case-study approach," Banco de Espa�a Occasional Papers 0804, Banco de Espa�a.
  6. Dale F. Gray, 2013. "Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR," IMF Working Papers 13/218, International Monetary Fund.
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