This paper contains an empirical investigation of the set of economic and political conditions that are associated with a likely occurrence of a sovereign debt crisis. We use a new statistical approach (Binary Recursive Tree) that allows us to derive a collection of rules of thumb that help identify the typical characteristics of defaulters. We find that not all crises are equal: they differ depending on whether the government faces insolvency, illiquidity, or various macroeconomic risks. We also characterize the set of fundamentals that can be associated with a relatively risk free zone. This classification is important for discussing appropriate policy options to prevent crises and improve response time and prediction.
Citation: Roubini, Nouriel and Manasse, Paolo,’Rules of Thumb’ for Sovereign Debt Crises(March 2005). IMF Working Paper No. 05/42. Available at SSRN: http://ssrn.com/abstract=874264