Header and navigation menu

Page content

Financial Crises and Sovereign Debt Sustainability Risks: Exploring the Link

This paper is the first to empirically examine the link between financial crises and the total public debt burden, that is, the interaction between the level of debt and the unit cost of servicing the debt r-g. We do this for 18 advanced economies over 150 years. Our analysis reveals three novel findings. First, we document that the level of public debt and the interest-growth differential exhibited contrasting patterns over extended periods of time. Second, we uncover a plausible causal effect that runs from the total burden of public borrowing prior to a financial crisis to the severity of the crisis. Third, we show that, whilst sovereign debt sustainability risks do not systematically precede financial crises, these crises, when they occur, do systematically worsen both the level and the cost of public debt, thus increasing the likelihood of sovereign debt crises in the aftermath of financial crises.