IMF Economic Review

, Volume 66, Issue 4, pp 617–664 | Cite as

Linking Bank Crises and Sovereign Defaults: Evidence from Emerging Markets

  • Irina BalteanuEmail author
  • Aitor Erce
Research Article


We analyze the mechanisms through which bank and sovereign distress feed into each other, using a large sample of emerging market economies over three decades. After defining “twin crises” as events where bank crises and sovereign defaults combine, and further distinguishing between those bank crises that end up in sovereign defaults and vice versa, we study what differentiates “single” and “twin” events. Using an event analysis methodology, we document systematic differences between “single” and “twin” crises across various dimensions including the balance sheet interconnection between banks and the sovereign, banking sector characteristics, the state of public finances, the macroeconomic environment and financial openness. The importance of these characteristics in shaping the transmission of stress between banks and sovereigns is confirmed by two alternative discrete-variable multivariate approaches. We also show that “twin” crises themselves are heterogeneous events: taking into account the actual time sequence of crises that compose “twin” episodes is important for understanding their channels of transmission and economic consequences. These findings inform the flourishing theoretical literature on the mechanisms surrounding feedback loops of sovereign and bank stress.

JEL Classification

E44 F34 G01 H63 



We thank M. Bussière, G. Cheng, J. Frost, J. Jimeno, E. Kharroubi, G. Perez-Quirós, R. Portes, P. Rabanal, two anonymous referees and seminar participants at European Stability Mechanism, 2014 Emerging Market Finance Workshop, Bank of Spain, Bank for International Settlements, Workshop for the Sixth High-Level Seminar of the Euro-system and Latin American Central Banks, Tenth Emerging Markets Workshop, CEMLA Meetings, and 2012 European Summer Symposium in International Macroeconomics, for their comments, and K. Siskind for excellent editorial assistance. J. Estefania, L. Fernandez, I. Gramatki, M. Gomez, L. Sanchez and B. Urquizu provided excellent research assistance.

Supplementary material (619 kb)
Supplementary material 1 (ZIP 619 kb)


  1. Abad, J. 2018. Breaking the feedback loop: Macroprudential regulation of banks’ sovereign exposures, Centro de Estudios Monetarios y Financieros, mimeo.Google Scholar
  2. Abbas, S.A., N. Belhocine, A. El-Ganainy, and M. Horton. 2010. A historical public debt database. IMF working paper no. 10/245.Google Scholar
  3. Acharya, V., and R. Rajan. 2013. Sovereign debt, government myopia and the financial sector. Review of Financial Studies 26(6): 1526–1560.CrossRefGoogle Scholar
  4. Acharya, V., I. Drechsler, and P. Schnabl. 2014. A pyrrhic victory: Bank bailouts and sovereign credit risk. Journal of Finance 69(6): 2689–2739.CrossRefGoogle Scholar
  5. Acharya, V. V., and S. Steffen. 2015. The “Greatest” carry trade ever? Understanding Eurozone bank risks. Journal of Financial Economics 115(2): 215–236.Google Scholar
  6. Adams, J.D. 2006. Learning, internal research and spillovers. The Economic of Innovation and New Technology 15: 5–36.CrossRefGoogle Scholar
  7. Alessandri, P., and A. Haldane. 2009. Banking on the state, mimeo. Bank of England.Google Scholar
  8. Alter, A., and A. Beyer. 2013. The dynamics of spillover effects during the European sovereign debt turmoil. Journal of Banking and Finance 42: 134–153.CrossRefGoogle Scholar
  9. Andritzky, J.R. 2012. Government bonds and their investors: What are the facts and do they matter? IMF working paper no. 12/158.Google Scholar
  10. Angeloni, C., and W. Wolff. 2012. Are banks affected by their holdings of government debt? Bruegel working paper no. 2012/07.Google Scholar
  11. Arellano, C. 2008. Default risk and income fluctuations in emerging economies. American Economic Review 98(3): 690–712.CrossRefGoogle Scholar
  12. Arellano, C., and N.R. Kocherlakota. 2014. Internal debt crises and sovereign defaults. Journal of Monetary Economics 68(S): 68–80.CrossRefGoogle Scholar
  13. Asonuma, T., S.A. Bakhache, and H. Hesse. 2015. Is banks’ home bias good or bad for public debt sustainability? IMF Working Papers 15/44.Google Scholar
  14. Baldacci, E., and S. Gupta. 2009. Fiscal expansions: What works. Finance and Development 46(4): 35–37.Google Scholar
  15. Balteanu, I., and A. Erce. 2014. Bank crises and sovereign defaults in emerging markets: Exploring the links. Bank of Spain working paper no. 1414.Google Scholar
  16. Battistini, N., M. Pagano, and S. Simonelli. 2014. Systemic risk, sovereign yields and bank exposure in the euro crisis. Economic Policy April: 203–251.CrossRefGoogle Scholar
  17. Bianchi, J., and E. Mendoza. 2018. Optimal time-consistent macroprudential policy. Journal of Political Economy 126(2): 588–634.CrossRefGoogle Scholar
  18. Bordo, M., and C. Meissner. 2016. Fiscal and financial crises. NBER working paper 22059.Google Scholar
  19. Borensztein, E., and U. Panizza. 2009. The costs of sovereign default. IMF Staff Papers 56(4): 683–741.CrossRefGoogle Scholar
  20. Broner, F., T. Didier, A. Erce, and S. Schmukler. 2013. Gross capital flows: Dynamics and crises. Journal of Monetary Economics 60(1): 113–133.CrossRefGoogle Scholar
  21. Broner, F., A. Erce, A. Martin, and J. Ventura. 2014. Sovereign debt markets in turbulent times: Creditor discrimination and crowding out. Journal of Monetary Economics 61(C): 114–142.CrossRefGoogle Scholar
  22. Brunnermeier, M., and Y. Sannikov. 2014. A macroeconomic model with a financial sector. American Economic Review 104(2): 379–421.CrossRefGoogle Scholar
  23. Brutti, F. 2010. Legal enforcement, public supply of liquidity and sovereign risk. Institute for Empirical Research in Economics, University of Zurich working paper no. 464.Google Scholar
  24. Candelon, B., and F.C. Palm. 2010. Banking and debt crises in Europe. The dangerous liaisons? De Economist 158(1): 81–99.CrossRefGoogle Scholar
  25. Caprio, G. Jr., and P. Honohan. 2008. Banking crises. Institute for international integration studies discussion paper no. 242.Google Scholar
  26. Cavallo, E., and A. Izquierdo. 2009. Dealing with an international credit crunch: Policy responses to sudden stops in Latin America, Inter-American Development Bank, mimeo.Google Scholar
  27. Cesa-Bianchi, A, A. Ferrero, and A. Rebucci. 2017. International credit cycles. NBER working paper no. 23841.Google Scholar
  28. Chari, V.V., A. Dovis, and P. Kehoe. 2016. On the optimality of financial repression, federal reserve bank of Minneapolis, Research Department staff report 1000.Google Scholar
  29. Chinn, M.D., and H. Ito. 2006. What matters for financial development? Capital controls, institutions, and interactions. Journal of Development Economics 81(1): 163–192.CrossRefGoogle Scholar
  30. Claessens, S., and N. Van Horen. 2015. The impact of the global financial crisis on banking globalization. IMF Economic Review 63(4): 868–918.CrossRefGoogle Scholar
  31. Corsetti, G., and L. Dedola. 2016. The mystery of the printing press: Self-fulfilling debt crises and monetary sovereignty. CEPR discussion paper no. 9358.Google Scholar
  32. Darracq-Pariès, M., L. Maurin, and D. Moccero. 2014. Financial conditions index and credit supply shocks for the euro area. ECB working paper no. 1644.Google Scholar
  33. Das, U., M. Papaioannou, and C. Trebesch. 2009. Sovereign default risk and private sector access to capital in emerging markets. In Debt relief and beyond: Lessons learned and challenges ahead, ed. C.A. Primo Braga and D. Dömeland. Washington: World Bank.Google Scholar
  34. De Marco, F., and M. Macchiavelli. 2016. The political origin of home bias: The case of Europe, Federal Reserve Board. Finance and economics discussion papers 060-2016.Google Scholar
  35. De Paoli, B., G. Hoggarth, and V. Saporta. 2009. Output costs of sovereign crises: Some empirical estimates. Bank of England working paper no. 362.Google Scholar
  36. Diaz-Alejandro, C. 1985. Good-bye financial repression, hello financial crash. Journal of Development Economics 19(1–2): 1–24.CrossRefGoogle Scholar
  37. Diaz-Cassou, J., A. Erce, and J. Vazquez. 2008. Recent episodes of sovereign debt restructuring: A case-study approach. Bank of Spain occasional document no. 0804.Google Scholar
  38. Drechsler, I., T. Drechsler, D. Marques-Ibanez, and P. Schnabl. 2016. Who borrows from the lender of last resort? Journal of Finance 71(5): 1933–1974.CrossRefGoogle Scholar
  39. Engler, P., and C. Grosse-Steffen. 2016. Sovereign risk, interbank freezes and aggregate fluctuations. European Economic Review 87: 34–61.CrossRefGoogle Scholar
  40. Farhi, E., and J. Tirole. 2018. Deadly embrace: Sovereign and financial balance sheets doom loops. Review of Economic Studies 85(3): 1781–1823.CrossRefGoogle Scholar
  41. Feenstra, R.C., and A.M. Taylor. 2012. International economics, 2nd ed. New York: Worth Publishers.Google Scholar
  42. Forni, L., G. Palomba, J. Pereira, and C. Richmond. 2016. Sovereign debt restructuring and growth. IMF working paper 16/147.Google Scholar
  43. Gennaioli, N., A. Martin, and S. Rossi. 2014b. Banks, government bonds and default: What do the data say? IMF working paper no. 14/120.Google Scholar
  44. Gennaioli, N., A. Martin, and S. Rossi. 2014a. Sovereign default, domestic banks and financial institutions. Journal of Finance 69(2): 819–866.CrossRefGoogle Scholar
  45. Goldstein, M. 2003. Debt sustainability, Brazil and the IMF. Peterson Institute working paper no. WP03-1.Google Scholar
  46. Gourinchas, P.O., and M. Obstfeld. 2012. Stories of the twentieth century for the twenty-first. American Economic Journal: Macroeconomics 4(1): 226–265.Google Scholar
  47. Gray, D., and A. Jobst. 2013. Systemic contingent claims analysis—estimating market-implied systemic risk. IMF working paper no. 13/54.Google Scholar
  48. Gray, D., M. Gross, J. Paredes, and M. Sydow. 2013. Modelling banking, sovereign and macro risk in a CCA global VAR. IMF working paper no. 13/218.Google Scholar
  49. Greene, W.H. 2012. Econometric analysis, 7th ed. Upper Saddle River: Prentice Hall.Google Scholar
  50. Hanke, S.H., and N. Krus. 2013. World hyperinflations. In The handbook of major events in economic history, ed. R. Parker and R. Whaples. London: Routledge.Google Scholar
  51. Honohan, P. 2008. Risk management and the costs of the banking crisis. National Institute Economic Review 206(1): 15–24.CrossRefGoogle Scholar
  52. IMF. 2002. Sovereign debt restructurings and the domestic economy experience in four recent cases. Policy Development and Review Department.Google Scholar
  53. Jácome, L. I. 2008. Central bank involvement in banking crises in latin America. IMF Working Papers 08(135): 1.CrossRefGoogle Scholar
  54. Jordà, Ò., M. Schularick, and A. Taylor. 2016. Sovereigns versus banks: Credit, crises and consequences. Journal of the European Economic Association 14: 45–79.CrossRefGoogle Scholar
  55. Kaminsky, G., and C. Reinhart. 1999. The twin crises: The causes of banking and balance-of-payments problems. American Economic Review 89(3): 473–500.CrossRefGoogle Scholar
  56. Kollmann, R., W. Roeger, and J. in’t Veld. 2012. Fiscal policy in a financial crisis: Standard policy vs. bank rescue measures. American Economic Review 102(3): 77–81.CrossRefGoogle Scholar
  57. Laeven, L., and F. Valencia. 2012b. Systemic banking crises database: An update. IMF working paper no. 12/163.Google Scholar
  58. Laeven, L., and F. Valencia. 2012a. The use of blanket guarantees in banking crises. Journal of International Money and Finance 31(5): 1220–1248.CrossRefGoogle Scholar
  59. Laeven, L., and F. Valencia. 2013. The real effects of financial sector interventions during crises. Journal of Money, Credit and Banking 45(1): 147–177.CrossRefGoogle Scholar
  60. Livshits, I., and K. Schoors. 2009. Sovereign default and banking. BEROC working paper series no. 005.Google Scholar
  61. Malucci, E. 2015. Domestic debt and sovereign defaults. International finance discussion papers no. 1153, Board of Governors.Google Scholar
  62. Mendoza, E., and V. Yue. 2012. A general equilibrium model of sovereign default and business cycles. Quarterly Journal of Economics 127: 889–946.CrossRefGoogle Scholar
  63. Mitchell, B.R. 2007. International historical statistics: 1750–2005. London: Palgrave MacMillan.Google Scholar
  64. Mody, A., and D. Sandri. 2012. The Eurozone crisis: How banks came to be joined at the hip. Economic Policy 27(70): 199–230.CrossRefGoogle Scholar
  65. Moody’s. 2011. Sovereign default and recovery rates, 1983–2011, mimeo.Google Scholar
  66. Moody’s. 2014. European sovereign debt and banking crises: Contagion, spillovers and causality. Moody’s investors service, credit policy.Google Scholar
  67. Noyer, C.. 2010. Sovereign crisis, risk contagion and the response of the central bank, mimeo.Google Scholar
  68. Obstfeld, M. 2011. Financial flows, financial crises, and global imbalances. Journal of International Money and Finance 31: 469–480.CrossRefGoogle Scholar
  69. Ongena, S., A. Popov, and N. Van Horen. 2016. The invisible hand of the government: Moral suasion during the European sovereign debt crisis. CEPR discussion papers 11153.Google Scholar
  70. Popov, A., and N. Van Horen. 2013. The impact of sovereign debt exposure on bank lending: Evidence from the European debt crisis. DNB working paper no. 382.Google Scholar
  71. Reinhart, C.M., and K.S. Rogoff. 2008. This time is different: A panoramic view of eight centuries of financial crises. NBER working paper no. 13882.Google Scholar
  72. Reinhart, C.M., and V. Reinhart. 2009. Fiscal stimulus for debt intolerant countries? MPRA paper no. 16937.Google Scholar
  73. Reinhart, C.M. 2012. The return of financial repression. CEPR discussion paper no. 8947.Google Scholar
  74. Reinhart, C.M., and K.S. Rogoff. 2009. The aftermath of financial crises. American Economic Review 99(2): 466–472.CrossRefGoogle Scholar
  75. Reinhart, C.M., and K.S. Rogoff. 2011. From financial crash to debt crisis. American Economic Review 101(5): 1676–1706.CrossRefGoogle Scholar
  76. Reinhart, C.M., and K.S. Rogoff. 2013. Banking crises: An equal opportunity menace. Journal of Banking and Finance 37(11): 4557–4573.CrossRefGoogle Scholar
  77. Reinhart, C.M., and M.B. Sbrancia. 2015. The liquidation of government debt. Economic Policy 30(82): 291–333.CrossRefGoogle Scholar
  78. Reinhart, C.M., and C. Trebesch. 2016a. The international monetary fund: 70 years of reinvention. Journal of Economic Perspectives 30(1): 3–28.CrossRefGoogle Scholar
  79. Reinhart, C.M., and C. Trebesch. 2016b. Sovereign debt relief and its aftermath. Journal of the European Economic Association 14: 215–251.CrossRefGoogle Scholar
  80. Rosas, G. 2006. Bagehot or bailout? An analysis of government responses to banking crises. American Journal of Political Science 50(1): 175–191.CrossRefGoogle Scholar
  81. Sosa-Padilla, C. 2012. Sovereign defaults and banking crises. MPRA Paper 41074, University Library of Munich, Germany.Google Scholar
  82. Standard and Poor’s. 2006. Sovereign defaults At 26-year low, to show little change in 2007, mimeo.Google Scholar
  83. Van Rixtel, A., and G. Gasperini. 2013. Financial crises and bank funding: Recent experience in the euro area. BIS working paper no. 40.Google Scholar

Copyright information

© International Monetary Fund 2018

Authors and Affiliations

  1. 1.Bank of SpainMadridSpain
  2. 2.European Central BankFrankfurt am MainGermany
  3. 3.European Stability MechanismLuxembourg CityLuxembourg

Personalised recommendations