Balance Sheets and Debt Crises – Empirical Regularities for Modern Cases of Sovereign Distress

Abstract

Sovereign debt crises are more than just a story about debt levels and primary balances. Sectoral balance sheets, and in particular the net worth of households and banks, play an important role in determining whether an episode of increased rollover risk will deteriorate into full-blown default. This paper characterizes the stylized facts surrounding debt crises from 1990 to 2019: the behavior of government finances, aggregate macroeconomic variables, and the accompanying changes in the net worth of the private sector. We then use a logistic model to estimate the probability of undergoing default for a panel of 75 countries, and find that the net worth of the household and banking sectors is a significant predictor in addition to the usual flow variables included in standard debt sustainability analyses.