Balance Sheets and Debt Crises – Empirical Regularities for Modern Cases of Sovereign Distress

IMF Working Papers, May 4, 2021

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Canonical URL: Balance Sheets and Debt Crises – Empirical Regularities for Modern Cases of Sovereign Distress

Authors: Alexis Meyer-Cirkel, Gonzalo Huertas
Publication date: May 4, 2021
Paper series: IMF Working Papers, Working Paper No. 2021/125
Core focus: Documenting empirical regularities in the behavior of macroeconomic variables during debt crises and demonstrating how macroeconomic fundamentals and sectoral net worth affect default likelihood.
Framing: Public and private sector balance sheets as key components in debt sustainability analysis; private sector vulnerability can become a government liability, while resilient household and bank balance sheets may provide funding sources for the sovereign during fiscal distress.

Balance sheet dynamics matter for sovereign distress:
- A vulnerable and indebted private sector can become a sudden liability for the government.
- Resilient household and bank balance sheets may reveal potential sources of funding for the sovereign during times of fiscal distress.
The paper documents empirical regularities in macroeconomic behavior during debt crises.
Both macroeconomic fundamentals and sectoral net worth influence the likelihood of undergoing default.