Working Paper: NBER ID: w20042
Authors: Graciela L. Kaminsky; Pablo Vega-Garcia
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.
Keywords: No keywords provided
JEL Codes: F3; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| systemic crises (H12) | longer default spells (C41) |
| systemic crises (H12) | greater losses for investors (G33) |
| panics in financial centers (F65) | disruptions in international capital markets (F65) |
| disruptions in international capital markets (F65) | liquidity crash (G01) |
| liquidity crash (G01) | likelihood of sovereign defaults in peripheral countries (F34) |
| collapse in international liquidity (F65) | decline in investors' bargaining power (G19) |
| global liquidity conditions (F65) | likelihood of defaults (G33) |