The determinants of sovereign default: A sensitivity analysis

Chakrabarti, Avik; Zeaiter, Hussein

doi:10.1016/j.iref.2014.06.003

Cited by 37 publications

(25 citation statements)

References 35 publications

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“…Due to data limitations, the focus is de facto mainly on external debt. This criterion relates the most to the literature on sovereign defaults (e.g., Detragiache and Spilimbergo, 2001;or Chakrabarti and Zeaiter, 2014). However, apart from publicly disclosed outright defaults, it can be difficult to determine if a sovereign debt operation (such as a debt equity swap, buybacks, or re-denomination of the currency) reduced the present value of debt and made creditors incur a loss.…”

Section: Identification Criteriamentioning

confidence: 99%

“…The literature, with rare exceptions, focuses on sovereign debt defaults. The research has been directed predominantly to identifying public debt crises triggered by external default episodes (e.g., Detragiache and Spilimbergo, 2001;Chakrabarti and Zeaiter, 2014). This has been later complemented by large-scale official financing (e.g., Manasse, Roubini, and Schimmelpfennig, 2003) and, to a very limited degree given data constraints, evidence on domestic public default 2 For example, a financial crisis may put the budget under pressure either directly due to a need to bail out banks (e.g., Ireland in 2010 or Brazil in 1998) or via a sharp economic deterioration and subsequent fall in tax revenues (e.g., Paraguay in 2002).…”

Section: Introductionmentioning

confidence: 99%

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Fiscal Crises

Gerling¹,

Medas²,

Poghosyan³

et al. 2017

IMF Working Papers

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A key objective of fiscal policy is to maintain the sustainability of public finances and avoid crises. Remarkably, there is very limited analysis on fiscal crises. This paper presents a new database of fiscal crises covering different country groups, including low-income developing countries (LIDCs) that have been mostly ignored in the past. Countries faced on average two crises since 1970, with the highest frequency in LIDCs and lowest in advanced economies. The data sheds some light on policies and economic dynamics around crises. LIDCs, which are usually seen as more vulnerable to shocks, appear to suffer the least in crisis periods. Surprisingly, advanced economies face greater turbulence (growth declines sharply in the first two years of the crisis), with half of them experiencing economic contractions. Fiscal policy is usually procyclical as countries curtail expenditure growth when economic activity weakens. We also find that the decline in economic growth is magnified if accompanied by a financial crisis.

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Section: Identification Criteriamentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Fiscal Crises

Gerling¹,

Medas²,

Poghosyan³

et al. 2017

IMF Working Papers

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“…Early warning studies using the extreme bound methodology (or its Bayesian equivalent) include Chakrabarti and Zeaiter (2014), Ho (2014), and Christofides et al (2015). However, to our best knowledge no study used this approach to analyze determinants of fiscal distress, which is the gap we would like to fill in our paper.…”

Section: Extreme Bound Methodologymentioning

confidence: 99%

“…However, to our best knowledge no study used this approach to analyze determinants of fiscal distress, which is the gap we would like to fill in our paper. The closest paper to ours is Chakrabarti and Zeaiter (2014), which analyzes determinants of external debt arrears using a linear regression model. The results suggest that a range of fiscal and non-fiscal indicators, including growth, inflation, trade deficit, foreign reserves, and exchange rate, are robust predictors of external debt arrears.…”

Section: Extreme Bound Methodologymentioning

confidence: 99%

Leading indicators of fiscal distress: evidence from extreme bounds analysis

Bruns

Poghosyan

2017

Applied Economics

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Early warning systems (EWS) are widely used for assessing countries' vulnerability to fiscal distress. A fiscal distress episode is identified as a period when government experiences extreme funding difficulties. Most EWS employ a specific set of only fiscal leading indicators predetermined by the researchers, which casts doubt on their robustness. We revisit this issue by using the Extreme Bound Analysis, which allows identifying robust leading indicators of fiscal distress from a large set. A robust leading indicator's effect does not strongly depend on the model specification. Consistent with the theoretical predictions of latest generation crisis models, we find that both and non-fiscal leading are robust. In addition, we find that a fiscal vulnerability indicator based on fiscal and non-fiscal leading indicators offers a 29% gain in predictive power compared to a traditional one based on fiscal leading indicators only. This suggests that both fiscal and non-fiscal leading indicators should be taken into account when assessing country's vulnerability to fiscal distress.

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“…Our work is related to the extensive early warning literature on sovereign debt crises (see, for example, Detragiache and Spilimbergo 2001;Manasse, Roubini, and Schimmelpfennig 2003;and Chakrabarti and Zeaiter 2014). Relative to that literature, our contribution is twofold.…”

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confidence: 99%

Debt Is Not Free

Badia¹,

Medas²,

Gupta³

et al. 2020

IMF Working Papers

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With public debt soaring across the world, a growing concern is whether current debt levels are a harbinger of fiscal crises, thereby restricting the policy space in a downturn. The empirical evidence to date is however inconclusive, and the true cost of debt may be overstated if interest rates remain low. To shed light into this debate, this paper re-examines the importance of public debt as a leading indicator of fiscal crises using machine learning techniques to account for complex interactions previously ignored in the literature. We find that public debt is the most important predictor of crises, showing strong non-linearities. Moreover, beyond certain debt levels, the likelihood of crises increases sharply regardless of the interest-growth differential. Our analysis also reveals that the interactions of public debt with inflation and external imbalances can be as important as debt levels. These results, while not necessarily implying causality, show governments should be wary of high public debt even when borrowing costs seem low.

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The determinants of sovereign default: A sensitivity analysis

Cited by 37 publications

References 35 publications

Fiscal Crises

Fiscal Crises

Leading indicators of fiscal distress: evidence from extreme bounds analysis

Debt Is Not Free

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