## External Liabilities and Crises

_IMF Working Papers, May 16, 2013_

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## Bibliographic details
- Authors: Luis Catão, Gian M Milesi-Ferretti
- Published: May 16, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484315910.001

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### Overview
- Title: External Liabilities and Crises
- Authors: Luis Catão, Gian M Milesi-Ferretti
- Date: May 16, 2013
- Series: IMF Working Papers, Working Paper No. 2013/113
- Pages: 37
- Volume: 2013
- Issue: 113
- DOI: https://doi.org/10.5089/9781484315910.001
- ISBN: 9781484315910
- ISSN: 1018-5941
- Sample period: 1970-2011
- Primary subject areas: Balance of payments; Current account; Current account balance; External debt; Financial crises; Foreign direct investment

### Key empirical findings
- The ratio of net foreign liabilities (NFL) to GDP is a significant predictor of external crises.
- Predictive thresholds identified:
  - NFL to GDP is particularly predictive when it exceeds 50 percent in absolute terms.
  - NFL to GDP is also particularly predictive when it exceeds 20 percent of the country-specific historical mean.
- Composition matters:
  - The predictive power stems primarily from net external debt.
  - Net equity liabilities have a weaker effect.
  - Net FDI liabilities appear, if anything, to be an offset factor.
- Additional empirical results:
  - Breaking down net external debt into gross asset and liability counterparts does not add significant explanatory power for crisis prediction.
  - The current account is a powerful predictor of crises, whether measured unconditionally or as deviations from conventionally estimated “norms”.
  - Foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings.
- Model performance:
  - A parsimonious probit model that includes NFL, current account measures, foreign exchange reserves, and a handful of other variables has good predictive performance both in-sample and out-of-sample.
  - The strong performance is attributed largely to the paper’s focus on external crises stricto sensu.

### Methodology and data scope
- Data span: 1970-2011.
- Empirical approach: variety of statistical tools applied to comprehensive cross-country data.
- Crisis focus: external crises (external crises stricto sensu).

### Implications for monitoring and risk assessment
- Monitoring net foreign liabilities to GDP, with attention to the 50 percent absolute threshold and the 20 percent of historical-mean benchmark, can improve early detection of external crisis risk.
- Emphasize net external debt in vulnerability assessments rather than net equity or net FDI liabilities.
- Track current account levels and deviations from estimated norms as central indicators of crisis probability.
- Maintain foreign exchange reserves as a buffer, given their relatively stronger association with reduced crisis likelihood.

*Source: External Liabilities and Crises, Luis Catão and Gian M Milesi-Ferretti; IMF Working Papers No. 2013/113; May 16, 2013.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/external-liabilities-and-crises-40545_