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Cited by 355Global Financial Crisis and PoliciesFiscal Policies and Political EconomyBanking stability, regulation, efficiency

From Financial Crash to Debt Crisis

Open access
Reinhart, Carmen, Rogoff, Kenneth·2010·National Bureau of Economic Research
DOI 10.3386/w15795
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Abstract

Newly developed long historical time series on public debt, along with modern data on external debts, allow a deeper analysis of the cycles underlying serial debt and banking crises.The evidence confirms a strong link between banking crises and sovereign default across the economic history of great many countries, advanced and emerging alike.The focus of the analysis is on three related hypotheses tested with both "world" aggregate levels and on an individual country basis.First, private debt surges are a recurring antecedent to banking crises; governments quite contribute to this stage of the borrowing boom.Second, banking crises (both domestic ones and those emanating from international financial centers) often precede or accompany sovereign debt crises.Indeed, we find they help predict them.Third, public borrowing accelerates markedly ahead of a sovereign debt crisis; governments often have "hidden debts" that far exceed the better documented levels of external debt.These hidden debts encompass domestic public debts (which prior to our data were largely undocumented).

Integrity signals

Registry

Crossref · 10.3386/w15795

Cites

46 of 46 references verified0 citation errors · 0 not checkable

Statistics

Nothing to recompute.

Claims the paper makes

0 of 25 cited sources checked · 0 supported · 0 flagged

  • Findingown data

    Evidence from new long historical public debt series and modern external debt data confirms a strong association between banking crises and sovereign default across many advanced and emerging economies.

    “The evidence confirms a strong link between banking crises and sovereign default across the economic history of great many countries, advanced and emerging alike.”
    Quote in the paperSubstantial claim
  • Findingnone given

    Rapid increases in private debt, driven by bank credit expansion and foreign borrowing, repeatedly come before domestic banking crises.

    “First, private debt surges-fueled by both domestic banking credit growth and external borrowing are a recurring antecedent to domestic banking crises; governments quite often contribute to this stage of the borrowing boom.”
    Quote in the paperSubstantial claim
  • Findingown data

    Banking crises help predict sovereign debt crises.

    “Indeed, we find they help predict them.”
    Quote in the paperSubstantial claim
  • Findingnone given

    Governments frequently contribute to the borrowing boom that precedes banking crises.

    “First, private debt surges-fueled by both domestic banking credit growth and external borrowing are a recurring antecedent to domestic banking crises; governments quite often contribute to this stage of the borrowing boom.”
    Quote in the paperSubstantial claim
  • Findingnone given

    Sovereign debt crises are frequently preceded or accompanied by banking crises, whether local or coming from international financial centers.

    “Second, banking crises (domestic ones and those in international financial centers) often precede or accompany sovereign debt crises.”
    Quote in the paperSubstantial claim
  • Classified as probably not a substantial claim. 21
  • May combine two claims. 21
  • The quote only partly states this claim. 1

  • Probably not a substantial claim: may not pass S3 (load-bearing), S4 (based).

    Findingnone given

    Crises in global financial hubs have historically been useful in forecasting domestic banking crises in other countries.

    “(Banking crises in financial centers have also historically helped predict domestic banking crises elsewhere).”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Findingcitation

    In the last phase of borrowing booms that precede banking crises, debt crises, and especially hyperinflations, debt maturity composition moves sharply toward short-term instruments.

    “A fourth related hypothesis (which we document but do not test) is that during the final stages of the private and public borrowing frenzy on the eve of banking and debt crises and (most notoriously) bursts of hyperinflation, the composition of debt shifts distinctly toward short-term maturities.”
    Quote in the paperNot a substantial claim0 of 1 sources checked
    • cites [6] 6. Bordo, Michael, Barry Eichengreen, Daniela Klingebiel, Maria Soledad Martinez-Peria, "Is the Crisis Problem Growing More Severe?" Economic Policy 16, April 2001, 51-82.

      Not checked in the free run.

  • May combine two claims.

    Findingcitation

    Domestic credit rises sharply before banking crises and contracts afterward, matching other measures of indebtedness.

    “Like every other measure of indebtedness that we could find, domestic credit climbs sharply prior to the banking crisis and unwinds afterward.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingcitation

    The United Kingdom, the United States, and France had 12, 13, and 15 banking crisis episodes, respectively.

    “The world's financial centers, the United Kingdom, the United States and France stand out in this regard, with 12, 13, and 15 banking crisis episodes, respectively.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Findingown data

    The rise in debt before banking or sovereign debt crises is not a smooth linear buildup; it involves surges in capital inflows or debt.

    “The pattern that emerges is not indicative of a gradual (linear) accumulation in debt in advance of a banking crisis or a sovereign default.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingnone given

    The median inflation rate was 0.5 percent in 1500-1799 and 0.7 percent in 1800-1913, compared with roughly 5 percent in 1914-2009.

    “Median inflation rates before World War I were well below those of the more recent period: 0.5 percent for 1500-1799 and 0.7 percent for 1800-1913 versus about 5 percent for 1914-2009.”
    Quote in the paperSubstantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Findingnone given

    Arrears or payment suspensions on domestic debt are frequently mentioned only in footnotes.

    “Another feature that characterizes domestic defaults is that references to arrears or suspension of payments on domestic debt are often relegated to footnotes.”
    Quote in the paperNot a substantial claim

  • The quote only partly states this claim.

    Findingown data

    Most episodes in the Brazil and Greece timelines show a characteristic debt surge just before a debt crisis, a banking crisis, or both.

    “The”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingnone given

    Some domestic defaults that forcibly converted foreign-currency deposits into local currency took place during banking crises, hyperinflations, or both, and deposit freezes were common.

    “Lastly, some of the domestic defaults that involved the forcible conversion of foreign currency deposits into local currency have occurred during banking crises, hyperinflations, or a combination of the two; deposit freezes are also numerous.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Findingown data

    The correlation between the share of countries with inflation crises and currency crashes was 0.607 for 1800-2009, 0.240 for 1800-1940, and 0.754 for 1950-2009.

    “Figure 1 Emerging markets: Correlations of the share of countries with inflation and currency crises 1800-2009 0.607 1800-1940 0.240 1950-2009 0.754”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    Repeated sovereign default is common in emerging markets and occurs in some advanced economies too.

    “Serial default is a widespread phenomenon across emerging markets and several advanced economies.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingown data

    Before banking crises, private debts such as external debt, private capital inflows, and domestic bank debt show a recurring boom-bust cycle, with debt accumulation speeding up as the crisis approaches.

    “Ahead of banking crises, private debts (external debt, broader private capital inflows, domestic bank debt) also display a repeated cycle of boom and bust-the runup in debts accelerates as the crisis nears.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Findingreasoning

    In the aggregate, debts continue to rise after default as arrears accumulate and GDP contracts markedly.

    “In the aggregate, debts continue to rise after default, as arrears accumulate and GDP contracts markedly.”
    Quote in the paperSubstantial claim
    • Rests on an assumption: The historical data on crises and debt are sufficiently complete and comparable across countries and time to support the paper's conclusions.

  • May combine two claims.

    Findingown data

    Increases in external debt systematically help predict increases in the share of countries in default and the share of emerging markets with systemic banking crises.

    “Increases in external debt systematically help predict increases in the share of countries in default and the comparable share of emerging markets with systemic banking crises.”
    Quote in the paperSubstantial claim
    • Rests on an assumption: The historical data on crises and debt are sufficiently complete and comparable across countries and time to support the paper's conclusions.
    • Rests on an assumption: The definitions of banking crises, debt crises, and default are consistently applied across countries and over time.

  • Probably not a substantial claim: may not pass S3 (load-bearing), S4 (based).

    Findingnone given

    Thailand in 1997, before its financial crisis, concealed large forward exchange market interventions that eventually caused huge losses.

    “Famously, Thailand (1997), just prior to its financial crisis, kept hidden its massive forward exchange market interventions that ultimately led to huge losses.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Findingown data

    Both banking and debt crises are mostly multi-year phenomena.

    “both banking and debt crises are mostly multi-year phenomenon.”
    Quote in the paperSubstantial claim
    • Rests on an assumption: The historical data on crises and debt are sufficiently complete and comparable across countries and time to support the paper's conclusions.

  • May combine two claims.

    Premisecitation

    Even without large bailouts, government debt usually increases by about 86 percent in the three years after a systemic financial crisis, mainly because revenues collapse, which can lead to rating downgrades and default.

    “Even absent large scale bailouts (and without counting the post-crisis new government guarantees), Reinhart and Rogoff (2009a and b) argue that, largely owing to collapsing revenues, government debts typically rise about 86 percent in the three years following a systemic financial crisis, setting the stage for rating downgrades and, in the worst scenario, default.”
    Quote in the paperSubstantial claim0 of 1 sources checked
    • cites Reinhart and Rogoff (2009a and b)

      Not checked in the free run.

  • May combine two claims.

    Interpretationnone given

    Debt intolerance probably stems from weak institutions and politics that make foreign borrowing attractive for governments avoiding tough fiscal choices, while investors distrust their motives.

    “Debt intolerance likely owes to weak institutional structures and a problematic political system that makes external borrowing a useful device for developing country governments to avoid hard decisions about spending and taxing and global investors rightly suspicious about the government's motives.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Interpretationreasoning

    Multiple equilibria are common in financial markets, especially debt markets, which is consistent with crises being nearly universal.

    “Multiple equilibria in financial markets, especially debt markets, is fairly generic, and therefore consistent with the near universality of crises.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Premisecitation

    Before World War II, advanced economies had repeated banking crises, and larger emerging markets began having them after developing financial sectors in the late 1800s.

    “Prior to World War II, serial banking crises in the advanced economies were the norm; as the larger emerging markets developed a financial sector in the late 1800s-these economies joined the “serial banking” crisis club.”
    Quote in the paperNot a substantial claim0 of 1 sources checked
    • cites Reinhart and Rogoff (2009)

      Not checked in the free run.

  • Probably not a substantial claim: may not pass S2 (checkable), S3 (load-bearing), S4 (based).

    Study design and conductnone given

    The crisis definitions used here broadly match those in prior empirical economics research.

    “The boundaries drawn are generally consistent with the existing empirical economics literature, which by and large is segmented across the various types of crises considered (e.g., sovereign debt, exchange rate).”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Premisecitation

    Amador (2002), building on Laibson (1997), shows that politicians' limited horizons can fundamentally alter the market for sovereign debt.

    “Amador (2002), building on Laibson (1997), shows how politicians' limited horizons can fundamentally change the market for sovereign debt.”
    Quote in the paperNot a substantial claim0 of 2 sources checked
    • cites Amador (2002)

      Not checked in the free run.

    • cites Laibson (1997)

      Not checked in the free run.

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Interpretationreasoning

    Sunspot triggers related to investor confidence could cause crises in many countries simultaneously.

    “Moreover, sunspot triggers to such crises, as they may be related to investor confidence, could potentially hit many countries at once.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Interpretationreasoning

    During a boom, politicians and investors may mistake a high-trade outcome for evidence that circumstances have permanently changed, leading to a This Time is Different mentality and delayed recognition of vulnerability.

    “During the boom, politicians and investors could misinterpret a “high-trade” outcome among a set of potential equilibria as evidence of permanently changed circumstances.”
    Quote in the paperSubstantial claim

  • May combine two claims.

    Interpretationreasoning

    Because domestic debt crises typically leave external creditors untouched, many such episodes may escape notice.

    “Domestic debt crises do not usually involve external creditors, which may help explain why so many episodes go unnoticed.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Interpretationreasoning

    Since World War I, default via inflation has become more common as fiat money spread and gold links weakened.

    “Default through inflation is more prevalent since World War I, as fiat money became the norm and links to gold eroded.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S4 (based).

    Premisenone given

    Successive global default waves usually lie many years, sometimes decades, apart.

    “Given that international waves of defaults are typically separated by many years, if not decades, there is no reason to suppose that serial default is dead.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Study design and conductcitation

    A companion Chartbook covering over two centuries and all 70 countries' crisis and debt histories supports the descriptive analysis.

    “The robustness of the descriptive analysis is grounded in a related Chartbook that spans more than two centuries of data and documents the crisis experience and debt history of each and every one of the seventy countries that make up our sample.”
    Quote in the paperNot a substantial claim0 of 1 sources checked
    • cites [7] 7. Cagan, Philip, "The Monetary Dynamics of Hyperinflation," in Milton Friedman, ed. Studies in the Quantity Theory of Money (University of Chicago Press,1956), 25-117.

      Not checked in the free run.

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Premisecitation

    Amador (2008) argues that competition among interest groups can create a tragedy of the commons that favors short-term spending over long-term fiscal sustainability.

    “In a related approach, Amador (2008) argues that contemporaneous competition by different interest groups can lead to a “tragedy of the commons” situation in which short term expenditures are favored at the expense of longer term fiscal sustainability.”
    Quote in the paperNot a substantial claim0 of 1 sources checked
    • cites Amador (2008)

      Not checked in the free run.

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Interpretationnone given

    Without a model of the underlying sunspots, assessing risk levels across economies is difficult.

    “Absent a model of the underlying sunspots, it is difficult to assess the degree of risks across different economies.”
    Quote in the paperNot a substantial claim

  • Classified as probably not a substantial claim. May combine two claims.

    Study design and conductnone given

    The dataset was assembled from earlier scholarly work plus substantial new evidence from primary and secondary sources.

    “The construction of our dataset builds on the work of many scholars; it also includes a considerable amount of new material from diverse primary and secondary sources.”
    Quote in the paperSubstantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Interpretationnone given

    Apart from a small group of experts, few people fully understand how universal financial crises are.

    “Outside a small number of experts, few people fully appreciate the universality of financial crises.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing), S4 (based).

    Premisenone given

    At the time of writing, Greece's hidden debts were facilitated by Goldman Sachs.

    “At the time of this writing one only has to read the debacle in the financial press concerning Greece's hidden debts conveniently facilitated by its underwriter Goldman Sachs.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Study design and conductnone given

    The accounting of financial crises in poorer countries may be incomplete, especially for earlier periods.

    “As already acknowledged, our accounting of financial crises in poorer countries may be incomplete, especially for earlier periods, despite our best efforts.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Premisecitation

    During a boom, the financial sector becomes richer and more influential, often leading to reduced regulation that increases its profits while raising crisis risk for society.

    “Often the result is reduced regulation that raises the financial sector's profitability at the expense of greater crisis risk for society as a whole.”
    Quote in the paperNot a substantial claim0 of 1 sources checked
    • cites Reinhart and Rogoff (2009)

      Not checked in the free run.

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Interpretationnone given

    The ignorance behind financial crises comes from the belief that crises happen to other people at other times and places.

    “The ignorance, of course, stems from the belief that financial crises happen to other people at other times in other places.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S2 (checkable), S3 (load-bearing).

    Interpretationnone given

    Even combining the political economy and financial crisis literatures, large gaps remain in understanding the arrogance and ignorance behind most financial crises.

    “Even taking together all these promising strands of the political economy and financial crisis literature, one suspects there are still large gaps in our understanding of the arrogance and ignorance that underlie most financial crises”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing), S4 (based).

    Interpretationcitation

    Private information about debt can in principle be included in models.

    “Private information on debt can, in principle, be incorporated into models.”
    Quote in the paperNot a substantial claim

  • Probably not a substantial claim: may not pass S3 (load-bearing).

    Interpretationnone given

    The many ways governments can cheat are a significant complication.

    “However, the many different margins on which governments can cheat are a significant complicating factor.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Interpretationcitation

    False confidence could lead agents to hold too few buffer assets or too much debt.

    “Such false confidence could lead agents to hold insufficient buffer stocks of assets, or equivalently, to hold too much debt.”
    Quote in the paperNot a substantial claim

  • May combine two claims.

    Interpretationown data

    In crises, government debt burdens often emerge unexpectedly, revealing solvency problems that the public had not recognized.

    “In a crisis, government debt burdens often come pouring of out the woodwork, exposing solvency issues about which the public seemed blissfully unaware.”
    Quote in the paperSubstantial claim

  • Probably not a substantial claim: may not pass S2 (checkable), S3 (load-bearing).

    Interpretationnone given

    The arrogance behind financial crises belongs to those who believe they have learned to keep a boom going without a crisis.

    “The arrogance is of those who believe they have figured out how to do things better and smarter so that the boom can long continue without a crisis.”
    Quote in the paperNot a substantial claim
42 of 42

  • The paper relies on this without support.

    The direction of causality between banking crises and sovereign debt crises may run in either direction or both.

    “The causal direction between banking and debt crises can potentially run in either or both directions.”

  • The paper relies on this without support.

    The causes of serial default and serial financial crises are almost certainly rooted in human and social behavior.

    “As such, the roots are almost surely buried deep in human and social behavior, in areas where modern economics has only scratched the surface.”

  • The paper relies on this without support.

    Having public or private debt is a necessary condition for default.

    “It is certainly true that having debts (public or private) is a prerequisite to default.”

  • The paper relies on this without support.

    The historical data on crises and debt are sufficiently complete and comparable across countries and time to support the paper's conclusions.

    “As already acknowledged, our accounting of financial crises in poorer countries may be incomplete, especially for earlier periods, despite our best efforts.”

  • The paper relies on this without support.

    The definitions of banking crises, debt crises, and default are consistently applied across countries and over time.

    “External Debt: total liabilities of a country with foreign creditors, both official (public) and private.”
5 of 5

Self-check

Percentages, sums and reported differences re-computed from the paper’s own numbers.

Each contradiction between two passages listed here was confirmed by an independent check.

  • Default episodes are attributed to the wrong figure

    Minor

    The passage attributes shaded sovereign-default episodes to Figure 1, but the paper labels Figure 1 as a chart of currency crashes and inflation crises.

  • Figure 11 notes disagree about which crises are counted

    Minor

    One note says the bottom panel counts banking and currency crises. The same notes say exchange-rate crashes are excluded and describe the count as banking crises and defaults instead.

2 of 2

Cites

Flagged first, then by citations

11 of the 57 references couldn’t be matched to a known paper.

Research works printed but not linked: 6

  1. [8]8. Calvo, Guillermo, "Servicing the Public Debt: The Role of Expecations," American Economic Review 78 (September): 647-661.
  2. [10]10. Caprio, Gerard and Daniela Klingebiel, Luc Laeven and Guillermo Noguera, "Banking Crisis Database." In Patrick Honohan and Luc Laeven (eds.), Systemic Financial Crises, Cambridge: Cambridge University Press, 2005.
  3. [18]18. Gopinath, Gita, and Mark Aguiar, "Defaultable Risk, Interest Rates and the Current Account," Journal of International Economics 69 vol 1 (June 2006).
  4. [27]27. Morris, Stephen, and Hyun Song Shin, "Rethinking Multiple Equilibria in Macreconomic Modelling," in Kenneth Rogoff and Ben S Bernanke (eds.) NBER Macroeconomics Annual 2000 (Cambridge, National Bureau of Economic Research).
  5. [34]34. Reinhart, Carmen M., Kenneth S. Rogoff, and Miguel A. Savastano, "Debt Intolerance," Brookings Papers on Economic Activity, Vol.1, Spring 2003, 1-74.
  6. [43]43. Wynne, William H., State Insolvency and Foreign Bondholders: Selected Case Histories of Governmental Foreign Bond Defaults and Debt Readjustments Vol. II (London: Oxford University Press, 1951).

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Authors
Reinhart, C., & Rogoff, K.
Affiliations
National Bureau of Economic Research (US)
ORCID
Venue
National Bureau of Economic Research
Publisher
National Bureau of Economic Research
Published
2010-03
DOI
10.3386/w15795
OpenAlex
W3121956495
Cited by
355
References
57
Citations by year
2026: 1 · 2025: 4 · 2024: 7 · 2023: 19 · 2022: 15 · 2021: 20 · 2020: 41 · 2019: 18 · 2018: 19 · 2017: 25 · 2016: 39 · 2015: 35 · 2014: 19 · 2013: 35 · 2012: 23
Type
report
Language
en
Open access
Locations
National Bureau of Economic Research (publishedVersion)
Funders
National Science Foundation (0849224)
Topics
  • Social Sciences › Economics, Econometrics and Finance › Finance › Global Financial Crisis and Policies
  • Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Fiscal Policies and Political Economy
  • Social Sciences › Economics, Econometrics and Finance › Finance › Banking stability, regulation, efficiency
Keywords
financial crisis, debt crisis, banking crisis, sovereign default, public debt, private debt, hidden debt, external debt, debt cycles

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