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IMF Economic Review

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

Linking Bank Crises and Sovereign Defaults: Evidence from Emerging Markets

  • Irina Balteanu
  • Aitor Erce
Research Article
  • 60 Downloads

Abstract

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 

Notes

Acknowledgements

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

41308_2018_66_MOESM1_ESM.zip (619 kb)
Supplementary material 1 (ZIP 619 kb)

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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

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