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Systemic and Idiosyncratic Sovereign Debt Crises

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  • Kaminsky, Graciela
  • Vega-Garcia, Pablo

Abstract

The theoretical literature on sovereign defaults has focused on adverse shocks to debtors’ economies, suggesting that defaults are of an idiosyncratic nature. Still, sovereign debt crises are also of a systemic nature, clustered around panics in the financial center such as the European Sovereign Debt Crisis in the aftermath of the U.S. Subprime Crisis in 2008. Crises in the financial centers are rare disasters and thus, their effects on the periphery can only be captured by examining long episodes. This paper examines sovereign defaults from 1820 to the Great Depression, with a focus on Latin America. We find that 63% of the crises are of a systemic nature. These crises are different. Both the international collapse of liquidity and the growth slowdown in the financial centers are at their core. These global shocks trigger longer default spells and larger investors’ losses.

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  • Kaminsky, Graciela & Vega-Garcia, Pablo, 2015. "Systemic and Idiosyncratic Sovereign Debt Crises," MPRA Paper 65996, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:65996
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    Cited by:

    1. Carmen M. Reinhart & Vincent Reinhart & Christoph Trebesch, 2016. "Global Cycles: Capital Flows, Commodities, and Sovereign Defaults, 1815-2015," American Economic Review, American Economic Association, vol. 106(5), pages 574-580, May.
    2. Graciela L. Kaminsky, 2017. "The Center and the Periphery: Two Hundred Years of International Borrowing Cycles," NBER Working Papers 23975, National Bureau of Economic Research, Inc.
    3. Serhan Cevik & João Tovar Jalles, 2022. "An Apocalypse Foretold: Climate Shocks and Sovereign Defaults," Open Economies Review, Springer, vol. 33(1), pages 89-108, February.
    4. Aloisio Araujo & Marcia Leon & Rafael Santos, 2017. "Bargained haircuts and debt policy implications," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 635-656, December.
    5. Shahed Khan & Cesar Sosa-Padilla & Alok Johri, 2016. "Interest Rate Uncertainty and Sovereign Default Risk," 2016 Meeting Papers 1676, Society for Economic Dynamics.
    6. Antonio Bassanetti & Carlo Cottarelli & Andrea F Presbitero, 2019. "Lost and found: market access and public debt dynamics," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 445-471.
    7. Ricardo Sabbadini, 2018. "Loss Aversion and Search for Yield in Emerging Markets Sovereign Debt," Working Papers, Department of Economics 2018_16, University of São Paulo (FEA-USP).
    8. Josefin Meyer & Carmen M Reinhart & Christoph Trebesch, 2022. "Sovereign Bonds Since Waterloo," The Quarterly Journal of Economics, Oxford University Press, vol. 137(3), pages 1615-1680.
    9. Tamon Asonuma & Marcos Chamon & Aitor Erce & Akira Sasahara, 2019. "Costs of sovereign defaults: Restructuring strategies, bank distress and the capital inflow-credit channel," Working Papers 37, European Stability Mechanism.
    10. Carmen M. Reinhart & Christoph Trebesch, 2015. "The Pitfalls of External Dependence: Greece, 1829–2015," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 307-328.
    11. Li Liu & Yu-Min Liu & Jong-Min Kim & Rui Zhong & Guang-Qian Ren, 2020. "Analysis of Tail Dependence between Sovereign Debt Distress and Bank Non-Performing Loans," Sustainability, MDPI, vol. 12(2), pages 1-20, January.
    12. Eberhardt, Markus, 2018. "(At Least) Four Theories for Sovereign Default," CEPR Discussion Papers 13084, C.E.P.R. Discussion Papers.
    13. Tamás Kristóf, 2021. "Sovereign Default Forecasting in the Era of the COVID-19 Crisis," JRFM, MDPI, vol. 14(10), pages 1-24, October.
    14. Tamon Asonuma & Hyungseok Joo, 2021. "Public Capital and Fiscal Constraint in Sovereign Debt Crises," School of Economics Discussion Papers 0621, School of Economics, University of Surrey.
    15. Bordo, M.D. & Meissner, C.M., 2016. "Fiscal and Financial Crises," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 355-412, Elsevier.
    16. Anastasios Petropoulos & Vasilis Siakoulis & Evangelos Stavroulakis, 2022. "Towards an early warning system for sovereign defaults leveraging on machine learning methodologies," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 29(2), pages 118-129, April.

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    More about this item

    Keywords

    Sovereign debt crises; debt restructuring; defaults; default spells; debt reduction rates; debt sustainability; liquidity crises; systemic and idiosyncratic crises.;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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