Systemic and Idiosyncratic Sovereign Debt Crises

58 Pages Posted: 14 Apr 2014

See all articles by Graciela Kaminsky

Graciela Kaminsky

National Bureau of Economic Research (NBER); George Washington University - Department of Economics

Pablo Vega-Garcia

George Washington University

Date Written: April 2014

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.

Suggested Citation

Kaminsky, Graciela and Vega-Garcia, Pablo, Systemic and Idiosyncratic Sovereign Debt Crises (April 2014). NBER Working Paper No. w20042. Available at SSRN: https://ssrn.com/abstract=2424613

Graciela Kaminsky (Contact Author)

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Pablo Vega-Garcia

George Washington University

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Washington, DC 20052
United States

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