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Linking Bank Crises and Sovereign Defaults: Evidence from Emerging Markets

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  • Irina Balteanu

    (Bank of Spain)

  • Aitor Erce

    (ESM)

Abstract

We analyze the mechanisms through which bank and sovereign distress feed into each other, using a large sample of emerging market economies over three decades. After defining “twin crises” as events where bank crises and sovereign defaults combine, and further distinguishing between those bank crises that end up in sovereign defaults and vice-versa, we study what differentiates “single” and “twin” events. Using an event analysis methodology, we document systematic differences between “single” and “twin” crises across various dimensions. We show that many of the regularities often associated with either “bank” or “debt” crises are present in twin events only. We further show that “twin” crises themselves are heterogeneous events: the proper time sequence of crises that compose “twin” episodes is important for understanding these events. Guided by these facts, we use discrete-variable econometric techniques to assess the main channels of distress transmission between crises. We find that balance sheet interconnections, credit dynamics, financial openness and economic growth are important drivers of twin crises. Our results inform the flourishing theoretical literature on the mechanisms surrounding feedback loops of sovereign and bank stress.

Suggested Citation

  • Irina Balteanu & Aitor Erce, 2017. "Linking Bank Crises and Sovereign Defaults: Evidence from Emerging Markets," Working Papers 22, European Stability Mechanism.
  • Handle: RePEc:stm:wpaper:22
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    Cited by:

    1. Mr. Marcos d Chamon & Mr. Tamon Asonuma & Aitor Erce & Akira Sasahara, 2019. "Costs of Sovereign Defaults: Restructuring Strategies, Bank Distress and the Capital Inflow-Credit Channel," IMF Working Papers 2019/069, International Monetary Fund.
    2. Enrico Mallucci, 2020. "Natural Disasters, Climate Change, and Sovereign Risk," FEDS Notes 2020-12-18-1, Board of Governors of the Federal Reserve System (U.S.).
    3. Dominik Thaler, 2018. "Sovereign default, domestic banks and exclusion from international capital markets," Working Papers 1824, Banco de España.
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    6. Aitor Erce & Xu Jiang & Diana Zigraiova, 2020. "Quantifying Risks to Sovereign Market Access: Methods and Challenges," Globalization Institute Working Papers 377, Federal Reserve Bank of Dallas.

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    More about this item

    Keywords

    Banking Crises; Sovereign Defaults; Feedback Loops; Balance Sheets;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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