The Debt Web

Author:Mark De Broeck, Era Dabla-Norris, Nicolas End, and Marina Marinkov
Pages:30-33
SUMMARY

The interwar period shows how a complex network of sovereign debt can aggravate financial crises

 
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30 FINANCE & DEVELOPMENT | March 2018
DEBT
The interwar period shows how a
complex network of sovereign debt
can aggravate financial crises
Mark De Broeck, Era Dabla-Norris, Nicolas End,
and Marina Marinkov
THE
WEB
I
n the early 1930s, as the Great Depression
took hold, the international capital flows that
were critical to the functioning of the world
economy dried up. e reasons are still debate d:
reckless behavior of specu lators and banks, m is-
guided monetary policies, a nd severe exchange rate
misalignments a re among the usual suspects. Few
would argue that unsu stainable fiscal policies and
sovereign debt write-offs were the main rea sons for
the collapse of asset ma rkets and global financial
flows. Yet, in Europe in the 1920s and early 1930s,
governments often received larger capita l inflows
than the private sector (see Char t 1).
Using a unique new set of data compiled by the
IMF that records sovereign debt at the i nstrument
level, we took a close look at the web of debt—most
of it incurred because of World War I—that linked
the world’s major economies in the interwar period.
We found that concerns among investors about
the credibility of fisca l policies and sovereign debt
service contributed to the severity a nd persistence
of the financial disruptions associated with the
Great Depression, even if they were not the trigger.
Our study of the interwar p eriod shows how exter-
nal sovereign debts can play a n aggravating role in
global financia l cycles, especially when they represent
the nodes of a complex financial web. As w ith the
global crisis of 2008 and t he euro area crisis of 2010,
loss of investor confidence, sovereign debt market
disruptions led by liquidity drought, a nd govern-
ment intervention in the financial sector added to
the external debt burden. us, t he interwar period
offers a telling lens not only for understand ing the
2008 crisis, but also for identif ying and interpreting
present-day vulnerabilities.
In the years af ter World War I, countries faced
very high levels of sovereign debt and a n unforgiv-
ing macroeconomic environment. Most took steps
to reduce deficits and spur growth. e United
ART: ISTOC K / HAVANA1234
DEBT

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