Chapter

Appendix IV Public Debt Ratios and Probabilities of Debt Crises

Author(s):
Harald Finger, and Mauro Mecagni
Published Date:
April 2007
Share
  • ShareShare
Show Summary Details

We analyze the relationship between the probability of a crisis and the ratio of public debt to GDP using a pooled probit model on an unbalanced sample of 55 low- and middle-income countries over 1971–2002. The countries in the sample are Algeria, Argentina, Bangladesh, Bolivia, Brazil, Burkina Faso, Cameroon, Chile, Colombia, Costa Rica, Côte d’Ivoire, the Czech Republic, the Dominican Republic, Ecuador, Egypt, El Salvador, Ethiopia, Gabon, Ghana, Guatemala, Haiti, Honduras, Hungary, India, Indonesia, Jamaica, Jordan, Kenya, Korea, Malaysia, Mexico, Morocco, Nepal, Nicaragua, Niger, Nigeria, Pakistan, Panama, Paraguay, Peru, the Philippines, Poland, Russia, South Africa, Senegal, Sri Lanka, Tanzania, Thailand, Togo, Tunisia, Turkey, Ukraine, Uruguay, Venezuela, and Zimbabwe.

The binary dependent variable (CRISIS) represents the occurrence of a public debt crisis. It takes the value of 1 when a country is classified as being in default by Standard & Poor’s. Independent variables are the lagged ratio of public debt to GDP (DEBT1), lagged GDP growth (GGDP1), and the lagged ratio of short-term external debt to GDP (ST_EXTDEBT_GDP1). All coefficients have the expected sign. DEBT1 and GGDP1 are significant at the 1 percent level, while ST_EXTDEBT_GDP1 is significant at the 10 percent level (see Table A4.1). The goodness of fit, as measured by the McFadden R-squared, is fairly low at 0.17, not untypical for this type of pooled probit regression.

Table A4.1.Probit Estimation of Crisis Probability
Dependent Variable: CRISIS
VariableCoefficientStandard Error (SE)Prob.
C–1.19840.07790.0000
DEBT10.01450.00110.0000
GGDP1–0.06410.00750.0000
ST_EXTDEBT_GDP10.00400.00210.0598
McFadden R-squared0.17SE of regression0.41
Observations1509
Source: IMF staff calculations.
Source: IMF staff calculations.

We compute in-sample forecasts from this equation to yield predicted crisis probabilities associated with the sample data points. From this, we plot inferred crisis probabilities against lagged debt ratios (see first figure in Box 1). In order to be able to associate a single probability with any given level of debt, we fit a polynomial through the data (see Table A4.2).

Table A4.2.Polynomial Fit Through In-sample Forecasts
Dependent Variable: DEBT1
VariableCoefficientStandard Error (SE)t-StatisticProb.
C1.28042.58950.49450.6210
CRISIS_FIT251.282132.03617.84370.0000
CRISIS_FIT^2–325.3811101.5895–3.20290.0014
CRISIS_FIT^3277.241887.73423.16000.0016
Adjusted R-squared0.76SE of regression17.91
Source: IMF staff calculations.
Source: IMF staff calculations.
Bibliography

This analysis is confined to comparing outcomes with IMF staff projections made after the restructurings. The staff’s analysis may have differed from private sector market participants’ views.

These may include, for example, the cost of bank recapitalization following a financial sector crisis, or principal reduction during a restructuring. The decomposition and methodology are described in more detail in IMF (2002a).

Definitions of the fiscal sector used for program monitoring differ across countries. Russia: general government; Pakistan: federal and provincial governments; Ukraine: consolidated government; Ecuador: nonfinancial public sector; and Uruguay: public sector. In all cases except Russia, projections made before the restructuring assumed a greater role for fiscal constraint than it actually played.

The medium-term projections included in the post-restructuring staff report on Ukraine are not detailed enough to allow for an analysis.

For the purpose of the debt-sustainability analysis, the primary balance including grants is considered.

Recent Occasional Papers of the International Monetary Fund

255. Sovereign Debt Restructuring and Debt Sustainability: An Analysis of Recent Cross-Country Experience, by Harald Finger and Mauro Mecagni. 2007.

254. Country Insurance: The Role of Domestic Policies, by Törbjörn Becker, Olivier Jeanne, Paolo Mauro, Jonathan D. Ostry, and Romain Rancière. 2007.

253. The Macroeconomics of Scaling Up Aid: Lessons from Recent Experience, by Andrew Berg, Shekhar Aiyar, Mumtaz Hussain, Shaun Roache, Tokhir Mirzoev, and Amber Mahone. 2007.

252. Growth in the Central and Eastern European Countries of the European Union, by Susan Schadler, Ashoka Mody, Abdul Abiad, and Daniel Leigh. 2006.

251. The Design and Implementation of Deposit Insurance Systems, by David S. Hoelscher, Michael Taylor, and Ulrich H. Klueh. 2006.

250. Designing Monetary and Fiscal Policy in Low-Income Countries, by Abebe Aemro Selassie, Benedict Clements, Shamsuddin Tareq, Jan Kees Martijn, and Gabriel Di Bella. 2006.

249. Official Foreign Exchange Intervention, by Shogo Ishi, Jorge Iván Canales-Kriljenko, Roberto Guimarães, and Cem Karacadag. 2006.

248. Labor Market Performance in Transition: The Experience of Central and Eastern European Countries, by Jerald Schiff, Philippe Egoumé-Bossogo, Miho Ihara, Tetsuya Konuki, and Kornélia Krajnyák. 2006.

247. Rebuilding Fiscal Institutions in Post-Conflict Countries, by Sanjeev Gupta, Shamsuddin Tareq, Benedict Clements, Alex Segura-Ubiergo, Rina Bhattacharya, and Todd Mattina. 2005.

246. Experience with Large Fiscal Adjustments, by George C. Tsibouris, Mark A. Horton, Mark J. Flanagan, and Wojciech S. Maliszewski. 2005.

245. Budget System Reform in Emerging Economies: The Challenges and the Reform Agenda, by Jack Diamond. 2005.

244. Monetary Policy Implementation at Different Stages of Market Development, by a staff team led by Bernard J. Laurens. 2005.

243. Central America: Global Integration and Regional Cooperation, edited by Markus Rodlauer and Alfred Schipke. 2005.

242. Turkey at the Crossroads: From Crisis Resolution to EU Accession, by a staff team led by Reza Moghadam. 2005.

241. The Design of IMF-Supported Programs, by Atish Ghosh, Charis Christofides, Jun Kim, Laura Papi, Uma Ramakrishnan, Alun Thomas, and Juan Zalduendo. 2005.

240. Debt-Related Vulnerabilities and Financial Crises: An Application of the Balance Sheet Approach to Emerging Market Countries, by Christoph Rosenberg, Ioannis Halikias, Brett House, Christian Keller, Jens Nystedt, Alexander Pitt, and Brad Setser. 2005.

239. GEM: A New International Macroeconomic Model, by Tamim Bayoumi, with assistance from Douglas Laxton, Hamid Faruqee, Benjamin Hunt, Philippe Karam, Jaewoo Lee, Alessandro Rebucci, and Ivan Tchakarov. 2004.

238. Stabilization and Reforms in Latin America: A Macroeconomic Perspective on the Experience Since the Early 1990s, by Anoop Singh, Agnès Belaisch, Charles Collyns, Paula De Masi, Reva Krieger, Guy Meredith, and Robert Rennhack. 2005.

237. Sovereign Debt Structure for Crisis Prevention, by Eduardo Borensztein, Marcos Chamon, Olivier Jeanne, Paolo Mauro, and Jeromin Zettelmeyer. 2004.

236. Lessons from the Crisis in Argentina, by Christina Daseking, Atish R. Ghosh, Alun Thomas, and Timothy Lane. 2004.

235. A New Look at Exchange Rate Volatility and Trade Flows, by Peter B. Clark, Natalia Tamirisa, and Shang-Jin Wei, with Azim Sadikov and Li Zeng. 2004.

234. Adopting the Euro in Central Europe: Challenges of the Next Step in European Integration, by Susan M. Schadler, Paulo F. Drummond, Louis Kuijs, Zuzana Murgasova, and Rachel N. van Elkan. 2004.

233. Germany’s Three-Pillar Banking System: Cross-Country Perspectives in Europe, by Allan Brunner, Jörg Decressin, Daniel Hardy, and Beata Kudela. 2004.

232. China’s Growth and Integration into the World Economy: Prospects and Challenges, edited by Eswar Prasad. 2004.

231. Chile: Policies and Institutions Underpinning Stability and Growth, by Eliot Kalter, Steven Phillips, Marco A. Espinosa-Vega, Rodolfo Luzio, Mauricio Villafuerte, and Manmohan Singh. 2004.

230. Financial Stability in Dollarized Countries, by Anne-Marie Gulde, David Hoelscher, Alain Ize, David Marston, and Gianni De Nicoló. 2004.

229. Evolution and Performance of Exchange Rate Regimes, by Kenneth S. Rogoff, Aasim M. Husain, Ashoka Mody, Robin Brooks, and Nienke Oomes. 2004.

228. Capital Markets and Financial Intermediation in The Baltics, by Alfred Schipke, Christian Beddies, Susan M. George, and Niamh Sheridan. 2004.

227. U.S. Fiscal Policies and Priorities for Long-Run Sustainability, edited by Martin Mühleisen and Christopher Towe. 2004.

226. Hong Kong SAR: Meeting the Challenges of Integration with the Mainland, edited by Eswar Prasad, with contributions from Jorge Chan-Lau, Dora Iakova, William Lee, Hong Liang, Ida Liu, Papa N’Diaye, and Tao Wang. 2004.

225. Rules-Based Fiscal Policy in France, Germany, Italy, and Spain, by Teresa Dában, Enrica Detragiache, Gabriel di Bella, Gian Maria Milesi-Ferretti, and Steven Symansky. 2003.

224. Managing Systemic Banking Crises, by a staff team led by David S. Hoelscher and Marc Quintyn. 2003.

223. Monetary Union Among Member Countries of the Gulf Cooperation Council, by a staff team led by Ugo Fasano. 2003.

222. Informal Funds Transfer Systems: An Analysis of the Informal Hawala System, by Mohammed El Qorchi, Samuel Munzele Maimbo, and John F. Wilson. 2003.

221. Deflation: Determinants, Risks, and Policy Options, by Manmohan S. Kumar. 2003.

220. Effects of Financial Globalization on Developing Countries: Some Empirical Evidence, by Eswar S. Prasad, Kenneth Rogoff, Shang-Jin Wei, and Ayhan Kose. 2003.

219. Economic Policy in a Highly Dollarized Economy: The Case of Cambodia, by Mario de Zamaroczy and Sopanha Sa. 2003.

218. Fiscal Vulnerability and Financial Crises in Emerging Market Economies, by Richard Hemming, Michael Kell, and Axel Schimmelpfennig. 2003.

217. Managing Financial Crises: Recent Experience and Lessons for Latin America, edited by Charles Collyns and G. Russell Kincaid. 2003.

216. Is the PRGF Living Up to Expectations? An Assessment of Program Design, by Sanjeev Gupta, Mark Plant, Benedict Clements, Thomas Dorsey, Emanuele Baldacci, Gabriela Inchauste, Shamsuddin Tareq, and Nita Thacker. 2002.

215. Improving Large Taxpayers’ Compliance: A Review of Country Experience, by Katherine Baer. 2002.

214. Advanced Country Experiences with Capital Account Liberalization, by Age Bakker and Bryan Chapple. 2002.

213. The Baltic Countries: Medium-Term Fiscal Issues Related to EU and NATO Accession, by Johannes Mueller, Christian Beddies, Robert Burgess, Vitali Kramarenko, and Joannes Mongardini. 2002.

212. Financial Soundness Indicators: Analytical Aspects and Country Practices, by V. Sundararajan, Charles Enoch, Armida San José, Paul Hilbers, Russell Krueger, Marina Moretti, and Graham Slack. 2002.

211. Capital Account Liberalization and Financial Sector Stability, by a staff team led by Shogo Ishii and Karl Habermeier. 2002.

210. IMF-Supported Programs in Capital Account Crises, by Atish Ghosh, Timothy Lane, Marianne Schulze-Ghattas, Ales̆ Bulír˘, Javier Hamann, and Alex Mourmouras. 2002.

209. Methodology for Current Account and Exchange Rate Assessments, by Peter Isard, Hamid Faruqee, G. Russell Kincaid, and Martin Fetherston. 2001.

Note: For information on the titles and availability of Occasional Papers not listed, please consult the IMF’s Publications Catalog or contact IMF Publication Services.

    Other Resources Citing This Publication