This Time is Different: A Panoramic View of Eight Centuries of Financial Crises


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Carmen M. Reinhart, University of Maryland and NBER Kenneth S. Rogoff, Harvard University and NBER

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april 16 2008 this time is different a panoramic view of eight centuries of financial crises carmen m reinhart university of maryland and nber kenneth s rogoff harvard university and nber abstract this paper offers a panoramic analysis of the history of financial crises dating from england s fourteenth-century default to the current united states sub-prime financial crisis our study is based on a new dataset that spans all regions it incorporates a number of important credit episodes seldom covered in the literature including for example defaults and restructurings in india and china as the first paper employing this data our aim is to illustrate some of the broad insights that can be gleaned from such a sweeping historical database we find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies major default episodes are typically spaced some years or decades apart creating an illusion that this time is different among policymakers and investors a recent example of the this time is different syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape we also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses thus the recent us sub-prime financial crisis is hardly unique our data also documents other crises that often accompany default including inflation exchange rate crashes banking crises and currency debasements jel e6 f3 and n0 the authors are grateful to vincent reinhart john singleton arvind subramanian and seminar participants at columbia and harvard universities for useful comments and suggestions and ethan ilzetzki fernando im and vania stavrakeva for excellent research assistance


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i introduction the economics profession has an unfortunate tendency to view recent experience in the narrow window provided by standard datasets with a few notable exceptions crosscountry empirical studies on financial crises typically begin in 1980 and are limited in several other important respects.1 yet an event that is rare in a three decade span may not be all that rare when placed in a broader context this paper introduces a comprehensive new historical database for studying international debt and banking crises inflation currency crashes and debasements the data covers sixty-six countries in africa asia europe latin america north america and oceania the range of variables encompasses among many other dimensions external and domestic debt trade gnp inflation exchange rates interest rates and commodity prices the coverage spans eight centuries generally going back to the date of independence for most countries and well into the colonial period for some as we detail in an annotated appendix the construction of our dataset has built heavily on the work of earlier scholars however it also includes a considerable amount of new material from diverse primary and secondary sources in addition to a systematic dating of external debt and exchange rate crises the appendix to this paper also catalogues dates for domestic inflation and banking crises for the dating of sovereign defaults on domestic mostly local currency debt see reinhart and rogoff 2008 the paper is organized as follows section ii summarizes highlights from a first view of the extended dataset with special reference to the current conjuncture among other things we note that policymakers should not be overly cheered by the absence of major external defaults from 2003 to 2007 after the wave of defaults in the preceding two 1 among many important previous studies include work by bordo eichengreen lindert morton and taylor 1


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decades serial default remains the norm with international waves of defaults typically separated by many years if not decades many foreign investors and policymakers today seem lulled by the fact that many emerging market governments have become less reliant on foreign currency external borrowing than in the recent past countries have instead been relying more on domestic currency debt issued in local markets yet as we show in a companion paper reliance on domestic debt is hardly new and the view that domestic debt can be largely ignored in looking at external debt sustainability is hard to reconcile with the extensive historical experience.2 our dataset reveals that the phenomenon of serial default is a universal rite of passage through history for nearly all countries as they pass through the emerging market state of development this includes not only latin america but asia the middle east and europe we also find that high inflation currency crashes and debasements often go handin-hand with default last but not least we find that historically significant waves of increased capital mobility are often followed by a string of domestic banking crises section iii of the paper gives a brief overview of the sample and data section iv catalogues the history of serial default on external debts from england s defaults in the middle ages to spain s thirteen defaults from the 1500s on to twentieth-century defaults in asia africa and latin america our database marks the years that default episodes are resolved as well as when they began allowing us to look at the duration of default in addition to the frequency section v of the paper looks at the effect of global factors on sovereign default including commodity prices and capital flows emanating from the center countries we 2 these issues are analyzed in detail in reinhart and rogoff 2008 2


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show how shocks emanating from the center countries can lead to financial crises worldwide in this respect the 2007­2008 us sub-prime financial crisis is hardly exceptional section vi shows that episodes of high inflation and currency debasement are just as much a universal right of passage as serial default section vii introduces a composite index that aggregates the varieties of crises in the concluding section we take up the issue of how countries can graduate from the perennial problem of serial default will the early 21st century prove different appendix a gives a brief synopsis of how the database was constructed while appendices i macroeconomic series and ii debt list all the variables in the database and provide their sources on a period-by-period and country-by-country basis ii first insights the big picture what are some basic insights one gains from this panoramic view of the history of financial crises we begin by discussing sovereign default on external debt i.e a government default on its own external debt or private sector debts that were publicly guaranteed the first observation is that for the world as a whole or at least the more than 90 percent of global gdp represented by our dataset the current period can be seen as a typical lull that follows large global financial crises figure 1 plots for the years 1800 to 2006 where our dataset is most complete the percentage of all independent countries in a state of default or restructuring during any given year aside from the current lull one fact that jumps out from the figure are the long periods where a high percentage of all countries are in a state of default or restructuring indeed there are five pronounced peaks or default cycles in the figure 3


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the first is during the napoleonic war the second runs from the 1820s through the late 1840s when at times nearly half the countries in the world were in default including all of latin america the third episode begins in the early 1870s and lasts for two decades figure 1 sovereign external debt 1800-2006 percent of countries in default or restructuring 60 50 40 percent of countries 30 20 10 0 1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 year sources lindert and morton 1989 macdonald 2003 purcell and kaufman 1993 reinhart rogoff and savastano 2003 suter 1992 and standard and poor s various years notes sample size includes all countries out of a total of sixty six listed in table 1 that were independent states in the given year the fourth episode begins in the great depression of the 1930s and extends through the early 1950s when again nearly half of all countries stood in default.3 the most recent default cycle encompasses the emerging market debt crises of the 1980s and 1990s indeed when one weights countries by their share of global gdp as in figure 2 below the current lull stands out even more against the preceding century only the two decades before world war i the halcyon days of the gold standard exhibited tranquility kindleberger 1988 is among the few scholars who emphasize that the 1950s can be viewed as a financial crisis era 3 4


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anywhere close to that of the 2003-to-2007 period.4 looking forward once cannot fail to note that whereas one and two decade lulls in defaults are not at all uncommon each lull has invariably been followed by a new wave of default figure 2 is interesting because it shows the years after world war ii as marking the peak of by far the largest default era in modern world history with countries representing almost 40 percent of global gdp in a state of default or rescheduling this is partly a result of new defaults produced by the war but also due to the fact that many countries never emerged from the defaults surrounding the great depression of the 1930s.5 by the same token the napoleonic war defaults become as important as any other period outside world war ii only the peak of the 1980s debt crisis nears the levels of the early 1800 s as we shall see when we tabulate individual country experiences in section iv serial default on external debt that is repeated sovereign default is the norm throughout every region in the world even including asia and europe this comparison weights defaulting countries by share of world income on an unweighted basis so for example the poorest countries in africa and south asia receive the same weight as brazil or the united states the late 1960s until 1982 had an even lower percentage of independent countries in default 5 kindleberger 1989 emphasizes the prevalence of default after world war ii though he does not provide quantification 4 5


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figure 2 sovereign external debt 1800-2006 countries in default weighted by their share of world income 45 40 35 all countries in sample percent of world income 30 25 20 15 excluding china 10 5 0 sources lindert and morton 1989 macdonald 2003 maddison 2003 purcell and kaufman 1993 reinhart rogoff and savastano 2003 suter 1992 and standard and poor s various years notes sample size includes all countries out of a total of sixty six listed in table 1 that were independent states in the given year three sets of gdp weights are used 1913 weights for the period 1800­1913 1990 for the period 1914­1990 and finally 2003 weights for the period 1991­2006 in generating waves of defaults our extensive new dataset also confirms the prevailing view among economists that global economic factors including commodity prices and center country interest rates play a major role in precipitating sovereign debt crises.6 we take up this issue in section v making use of a range of real global commodity price indices we show that over the period 1800 to 2006 peaks and troughs in commodity price cycles appear to be leading indicators of peaks and troughs in the capital flow cycle with troughs typically resulting in multiple defaults 6 see bulow and rogoff 1990 and mauro sussman and yafeh 2006 18 00 18 07 18 14 18 21 18 28 18 35 18 42 18 49 18 56 18 63 18 70 18 77 18 84 18 91 18 98 19 05 19 12 19 19 19 26 19 33 19 40 19 47 19 54 19 61 19 68 19 75 19 82 19 89 19 96 20 03 ye ar we have already seen from figure 2 that global conflagration can be a huge factor 6


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an even stronger regularity found in the literature on modern financial crises e.g kaminsky and reinhart 1999 and reinhart and rogoff 2008b is that countries experiencing sudden large capital inflows are at a high risk of having a debt crisis the preliminary evidence here suggests the same to be true over a much broader sweep of history with surges in capital inflows often preceding external debt crises at the country regional and global level since 1800 if not before also consonant with the modern theory of crises is the striking correlation between freer capital mobility and the incidence of banking crises as illustrated in figure 3 periods of high international capital mobility have repeatedly produced international banking crises not only famously as they did in the 1990s but historically the figure plots a three-year moving average of the share of all countries experiencing banking crises on the right scale on the left scale we employ our favored index of capital mobility due to obstfeld and taylor 2003 updated and backcast using their same design principle to cover our full sample period while the obstfeld­taylor index may have its limitations we feel it nevertheless provides a concise summary of complicated forces by emphasizing de facto capital mobility based on actual flows the dating of banking crises episodes is discussed in detail in the appendix what separates this study from previous efforts that we are aware of is that for so many countries our dating of crises extends back to far before the much-studied modern post­ world war ii era specifically we start in 1800 see table a.3 for details our work was greatly simplified back to 1880 by the careful study of bordo et al 2001 but for the earlier period we had to resort to archeological work the earliest advanced economy banking crisis in our sample is denmark in 1813 the two earliest ones we clock in emerging markets are india 1863 and peru 10 years later 7


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figure 3 capital mobility and the incidence of banking crisis all countries 18002007 1914 high 1 0.9 0.8 0.7 0.6 index 0.5 0.4 0.3 0.2 share of countries in banking crisis 3-year sum right scale 35 30 25 20 capital mobility left scale 1825 15 1860 1980 10 1945 0.1 low 0 1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 1918 5 0 sources bordo et al 2001 caprio et al 2005 kaminsky and reinhart 1999 obstfeld and taylor 2004 and these authors notes as with external debt crises sample size includes all countries out of a total of sixty six listed in table 1 that were independent states in the given year on the right scale we updated our favorite index of capital mobility admittedly arbitrary but a concise summary of complicated forces the smooth red line shows the judgmental index of the extent of capital mobility given by obstfeld and taylor 2003 backcast from 1800 to 1859 using their same design principle the aforementioned peruvian case comes from a little-known 1957 book published in lima by carlos camprubi alcazar entitled historia de los bancos en el peru 1860­1879 there are many more such case studies in our references that were a vital source of information on banking crises as noted our database includes long time series on domestic public debt.7 because historical data on domestic debt is so difficult to come by it has been ignored in the empirical studies on debt and inflation in developing countries indeed many generally knowledgeable observers have argued that the recent shift by many emerging market for most emerging market economies over most of the time period considered domestically issued debt was in local currency and held principally by local residents external debt on the other hand was typically in foreign currency and held by foreign residents 7 percent 8


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governments from external to domestic bond issues is revolutionary and unprecedented.8 as we shall argue nothing could be further from the truth with implications for today s markets and for historical analyses of debt and inflation until very recently domestic debt was not on the radar screen of the multilateral institutions neither the international monetary fund nor the world bank systematically collected such data in fact cross-country historical time series on domestically issued debt are also absent from private data collections reinhart rogoff and savastano 2003 with extensive help from imf staff and country sources put together an annual series going back to 1990 for a limited number of emerging market countries.9 the topic of domestic debt is so important and the implications for existing empirical studies on inflation and external default are so profound that we have broken out our data analysis into an independent companion piece reinhart and rogoff 2008 here we focus on a few major points the first is that contrary to much contemporary opinion domestic debt constituted an important part of government debt in most countries including emerging markets over most of their existence figure 4 plots domestic debt as a share of total public debt over 1900 to 2006 for our entire sample of sixty-six countries domestically issued debt averages more than 50 percent of total debt for most of the period this figure is an unweighted average of the individual country ratios even for latin america the domestic debt share is typically over 30 percent and has been at times over 50 percent furthermore contrary to the received wisdom this data reveal that a very important share of domestic debt even in emerging markets was long-term maturity see the imf global financial stability report april 2007 many private investment-bank reports also trumpet the rise of domestic debt as a harbinger of stability 9 since then jeanne and guscina 2008 have extended them both back to 1980 and up to 2005 8 9


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figure 4 domestic public debt as a share of total debt 1900-2006 1.00 0.90 0.80 0.70 0.60 share 0.50 0.40 0.30 0.20 0.10 0.00 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 of which north america all countries of which latin america sources the league of nations the united nations and others sources listed in appendix ii reinhart and rogoff 2008a in that paper we also present a variety of evidence to support the view that at the very least domestic debt does not appear to be junior to external debt even factoring in a government s ability to default via inflation as payments on domestic debt must come from the same revenue stream as payments on foreign debt the implication is that the extent of domestic debt can be quite important in assessing the sustainability of a country s external debt payments yet because it has not been possible to obtain extensive historical time series on domestic debt until now most empirical researchers have ignored the issue entirely reinhart and rogoff find that the same issue arises in the analysis of high inflation most of the empirical literature since cagan s classic 1956 paper has focused on the seignorage gains from inflation which are entirely levered off the real money base yet the government s gain to unexpected inflation often derives at least as much from capital losses that are inflicted on holders of long-term government bonds figure 5 on inflation and external 10


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default 1900­2006 illustrates the striking correlation between the share of countries in default on debt at one point and the number of countries experiencing high inflation which we define to be inflation over 20 percent per annum since world war ii inflation and default have gone hand-in-hand figure 5 inflation and external default 1900-2006 50 45 40 35 share of countries in default correlations 1900-2006 0.39 excluding the great depression 0.60 1940-2006 0.75 percent of countries 30 25 20 15 10 5 0 1900 1904 1908 1912 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 share of countries with inflation above 20 percent ye ar sources for share of countries in default see figure 1 for high inflation episodes see appendix i notes both the inflation and default probabilities are simple unweighted averages the forgotten history of domestic debt has important lessons for the present as we have already noted most investment banks not to mention official bodies such as the international monetary fund and the world bank have argued that even though total public debt remains quite high today early 2008 in many emerging markets the risk of default on external debt has dropped dramatically especially as the share of external debt has fallen this conclusion seems to be built on the faulty premise that countries will treat domestic debt as junior bullying domestics into accepting lower repayments or simply 11


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defaulting via inflation the historical record however suggests that a high ratio of domestic to external debt in overall public debt is cold comfort to external debt holders default probabilities probably depend much more on the overall level of debt reinhart and rogoff 2008b discuss the interesting example of india who in 1958 rescheduled its foreign debts when it stood at only1/4 percent of revenues the sums were so minor that the event did not draw great attention in the western press the explanation as it turns out is that india at this time had a significant claim on revenue from the service of domestic debt in effect the total debt-to revenue ratio was 4.4 to summarize many investors appear to be justifying still relatively low external debt credit spreads because this time is different and emerging market governments are now relying more on domestic public debt if so they are deeply mistaken another noteworthy insight from the panoramic view is than that the median duration of default spells in the post­world war ii period is one-half the length of what it was during 1800­1945 3 years versus 6 years as shown in figure 6 the charitable interpretation of this fact is that crisis resolution mechanisms have improved since the bygone days of gun-boat diplomacy after all newfoundland lost nothing less than her sovereignty when it defaulted on its external debts in 1936 and ultimately became a canadian province egypt among others became british protectorates following their defaults a more cynical explanation points to the possibility that when bail-outs are facilitated by the likes of the international monetary fund creditors are willing to cut more slack to their serial-defaulting clients the fact remains that as bordo and eichengreen 2001 observe the number of years separating default episodes in the more recent period is much lower once debt is restructured 12


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countries are quick to releverage see reinhart rogoff and savastano 2003 for empirical evidence on this pattern figure 6 duration of default episodes 1800-2006 frequency of occurrence percent 20 15 10 5 0 1 4 1946-2006 169 episodes median is 3 years 1800-1945 127 episodes median is 6 years 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 years in default sources lindert and morton 1989 macdonald 2003 purcell and kaufman 1993 reinhart rogoff and savastano 2003 suter 1992 standard and poor s various years and authors calculations notes the duration of a default spell is the number of years from the year of default to the year of resolution be it through restructuring repayment or debt forgiveness the kolmogorov­smirnoff test for comparing the equality of two distributions rejects the null hypothesis of equal distributions at the 1 significance level iii a global database on financial crises with a long-term view in this section we provide a slim outline of the character of the sample and the building blocks of this database extensive detail is provided in three appendices country coverage table 1 lists the sixty-six countries in our sample importantly we include a large number or asian and african economies whereas previous studies of the same era typically included at most a couple of each overall our dataset includes thirteen african 13


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countries twelve asian countries nineteen european countries eighteen latin american countries plus north america and oceana as the final column in table 1 illustrates our sample of sixty-six countries indeed accounts for about 90 percent of world gdp of course many of these countries particularly those in africa and asia have become independent nations only relatively recently column 2 these recently independent countries have not been exposed to the risk of default for nearly as long as say the latin american countries and we will have to calibrate our inter-country comparisons accordingly.10 table 1 flags which countries in our sample may be considered default virgins at least in the narrow sense that they have never failed to meet their debt repayment or rescheduled one conspicuous grouping of countries includes the high-income anglophone nations the united states canada australia and new zealand the mother country england defaulted in earlier eras as we shall see also included are all of the scandinavian countries norway sweden finland and denmark also in europe there is belgium in asia there is hong kong malaysia singapore taiwan thailand and korea admittedly the latter two countries especially managed to avoid default only through massive international monetary fund loan packages during the last 1990s debt crisis and otherwise suffered much of the same trauma as a typical defaulting country also of default-free countries only thailand existed as an independent state before the end of world war ii for others the potential opportunity for default has been relatively short lastly several of the sovereign default virgins notably the united states qualify as such only because we are excluding events such as lowering the gold content of 10 our sample excludes many of the world s poorest countries who by and large cannot borrow meaningful amounts from private sector lenders and who have virtually all effectively defaulted even on heavily subsidized government-to-government loans this is an interesting subject for another study but here we are mainly interested in financial flows that at least in the first instance had a substantial market element 14



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