External Liabilities and Crises

38 Pages Posted: 8 Jun 2013

See all articles by Luis Catão

Luis Catão

International Monetary Fund (IMF)

Gian Maria Milesi-Ferretti

National Bureau of Economic Research (NBER); Senior Fellow; Centre for Economic Policy Research (CEPR)

Date Written: May 2013


We examine the determinants of external crises, focusing on the role of foreign liabilities and their composition. Using a variety of statistical tools and comprehensive data spanning 1970-2011, we find that the ratio of net foreign liabilities (NFL) to GDP is a significant crisis predictor, and the more so when it exceeds 50 percent in absolute terms and 20 percent of the country-specific historical mean. This is primarily due to net external debt--the effect of net equity liabilities is weaker and net FDI liabilities seem if anything an offset factor. We also find that: i) breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction; ii) the current account is a powerful predictor, either measured unconditionally or as deviations from conventionally estimated “norms”; iii) foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings; iv) a parsimonious probit containing those and a handful of other variables has good predictive performance in- and out-of-sample. The latter result stems largely from our focus on external crises stricto sensu.

Keywords: External debt, Financial crisis, Current account, Foreign exchange, Foreign direct investment, Economic models, International Investment Positions, Sovereign Debt, Currency Crises, Current Account Imbalances, Foreign Exchange Reserves., net external debt, net debt, current account balance, external liabilities, reserve accumulation, fiscal gap, current account deficits, debt crises, sovereign default, sovereign defaults, external liability, central bank, public debt, net external liabilities, current accounts, repayments, current account surpluses, private external debt, reserve assets, debt accumulation, foreign debt, external financing, budget balance, current account deficit, debt managem

JEL Classification: E44, F32, F34, G15, H63

Suggested Citation

Catão, Luis and Milesi-Ferretti, Gian Maria and Milesi-Ferretti, Gian Maria, External Liabilities and Crises (May 2013). IMF Working Paper No. 13/113, Available at SSRN: https://ssrn.com/abstract=2276348

Luis Catão (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Gian Maria Milesi-Ferretti

Senior Fellow ( email )

1775 Massachusetts Avenue, NW
Washington, DC 20036
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

United Kingdom

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