^*Andrea Pescatori is at the Federal Reserve Bank of Cleveland and Pompeu Fabra University. Amadou N.R. Sy is a senior economist at the IMF. We wish to thank the editors, an anonymous referee, Giancarlo Corsetti, Arnaud Jobert, and Enrica Detragiache as well as seminar participants at the IMF and Pompeu Fabra University for their comments. We also thank Axel Schimmelpfennig for making available the macroeconomic data set, Peter Tran for research assistance, and Graham Colin-Jones for editorial suggestions.

Abstract

Crises on external sovereign debt are typically defined as defaults. Such a definition adequately captures debt-servicing difficulties in the 1980s, a period of numerous defaults on bank loans. However, defining defaults as debt crises is problematic for the 1990s, when sovereign bond markets emerged. Not only were there very few defaults in the 1990s, but liquidity indicators do not play any role in explaining defaults in this period. In order to overcome the resulting dearth of data on defaults and capture the evolution of debt markets in the 1990s, we define debt crises as events occurring when either a country defaults or its bond spreads are above a critical threshold. We find that, when information from bond markets is included, standard indicators—solvency and liquidity measures, as well as macroeconomic control variables—are significant.