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

  • Irina Balteanu

    ()

    (Banco de España)

  • Aitor Erce

    ()

    (Banco de España)

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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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
Contact details of provider: Web page: http://www.bde.es/
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  1. Robert Kollmann & Werner Roeger & Jan in'tVeld, 2012. "Fiscal Policy in a Financial Crisis: Standard Policy vs. Bank Rescue Measure," Working Papers ECARES ECARES 2012-008, ULB -- Universite Libre de Bruxelles.
  2. 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.
  3. Carmen Broto & Gabriel Perez-Quiros, 2013. "Disentangling contagion among sovereign cds spreads during the european debt crisis," Banco de Espa�a Working Papers 1314, Banco de Espa�a.
  4. 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, pages 89-135.
  5. Francis X. Diebold & Kamil Yilmaz, 2007. "Measuring Financial Asset Return and Volatility Spillovers, With Application to Global Equity Markets," PIER Working Paper Archive 07-002, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. Darracq Pariès, Matthieu & Maurin, Laurent & Moccero, Diego, 2014. "Financial conditions index and credit supply shocks for the euro area," Working Paper Series 1644, European Central Bank.
  7. Jochen R. Andritzky, 2012. "Government Bonds and their Investors; What Are the Facts and Do they Matter?," IMF Working Papers 12/158, International Monetary Fund.
  8. Dale F. Gray, 2013. "Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR," IMF Working Papers 13/218, International Monetary Fund.
  9. Brutti, Filippo, 2008. "Legal enforcement, public supply of liquidity and sovereign risk," MPRA Paper 13949, University Library of Munich, Germany.
  10. 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.
  11. Alter, Adrian & Beyer, Andreas, 2013. "The dynamics of spillover effects during the European sovereign debt crisis," Working Paper Series 1558, European Central Bank.
  12. Alexander Popov & Neeltje van Horen, 2013. "The impact of sovereign debt exposure on bank lending: Evidence from the European debt crisis," DNB Working Papers 382, Netherlands Central Bank, Research Department.
  13. Reinhart, Carmen & Reinhart, Vincent, 2009. "Fiscal stimulus for debt intolerant countries?," MPRA Paper 16937, University Library of Munich, Germany.
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