'Rules of Thumb' for Sovereign Debt Crises
33 Pages Posted: 10 Jan 2006
Date Written: March 2005
This paper contains an empirical investigation of the set of economic and political conditions that are associated with a likely occurrence of a sovereign debt crisis. We use a new statistical approach (Binary Recursive Tree) that allows us to derive a collection of rules of thumb that help identify the typical characteristics of defaulters. We find that not all crises are equal: they differ depending on whether the government faces insolvency, illiquidity, or various macroeconomic risks. We also characterize the set of fundamentals that can be associated with a relatively risk free zone. This classification is important for discussing appropriate policy options to prevent crises and improve response time and prediction.
Keywords: Sovereign debft, crises, default
JEL Classification: F33, F34, F37
Suggested Citation: Suggested Citation