Are Debt Crises Adequately Defined?

Abstract

Crises on external sovereign debt are typically defined as defaults. Such a definition adequately captures debt-servicing difficulties in the 1980s, a period of numerous defaults on bank loans. However, defining defaults as debt crises is problematic for the 1990s, when sovereign bond markets emerged. Not only were there very few defaults in the 1990s, but liquidity indicators do not play any role in explaining defaults in this period. In order to overcome the resulting dearth of data on defaults and capture the evolution of debt markets in the 1990s, we define debt crises as events occurring when either a country defaults or its bond spreads are above a critical threshold. We find that, when information from bond markets is included, standard indicators—solvency and liquidity measures, as well as macroeconomic control variables—are significant. IMF Staff Papers (2007) 54, 306–337. doi:10.1057/palgrave.imfsp.9450010

Sovereign Debt Crises in Latin America: A Market Pressure Approach

“…• Pescatori and Sy (2007) define debt crises as events occurring when either a country defaults or when its bond spreads are above a critical threshold. For the critical threshold they use a rate of 1,000 basis points, based on Extreme Value Theory and the Kernel Density estimation, with the 90th percentile of the fitted distribution.…”

“…Therefore Manasse, Roubini, and Schimmelpfennig (2003 extend the debt crisis definition to account for large financial packages from the IMF (see Appendix A). According to Sy (2003) and Pescatori and Sy (2007) the relative low number of sovereign debt crises since the 1990s can partly be attributed to the definition of debt crises. Default on debt was common in the 1980s, but since bond markets developed strongly in the mid 1990s the number of debt defaults has diminished, while numerous countries faced difficulties in their debt servicing.…”

Assessing Fiscal Stress

“…A limitation of this approach is that it misses fiscal distress episodes that are severe enough to alter the attainment of macroeconomic stability and growth but do not result in defaults or near-defaults. Fiscal crises can manifest themselves differently since the mid-1990s, with the development of bond markets and a lower reliance of countries on bank loans (see Pescatori and Sy, 2007). Notably, some episodes of severe difficulties may not trigger a debt default or restructuring and would not be captured by the standard definition used in the literature.…”

“…In addition, for emerging economies periods were also included when the bond yield spreads exceeded 1,000 basis points (even if this level did not exceed two standard deviations from the mean) to capture countries that have exceptionally high credit risk spreads for long periods, reflecting high political risks and the consequences of past debt defaults (Pescatori and Sy, 2007).…”

The effect of IMF lending on the probability of sovereign debt crises

“…This approach identifies 60 credit events in our maximum sample. We decline the attempt to enrich the data by including periods with high spreads on sovereign bonds (Pescatori and Sy, 2007), private defaults (Detragiache and Spilimbergo, 2001) or large IMF drawings (Manasse and Roubini, 2009). While the decision on the last two alternatives is obvious with regard to our 14 Formerly central planned economies have been included with data from 1992 onwards.…”