The European currency crises of 1992-93, the Mexican crisis of 1994-95, and especially the Asian/global crisis of 1997-98, have all contributed to a heightened interest in the early warning signals of financial crises. This pathbreaking study presents a comprehensive battery of empirical tests on the performance of alternative early warning indicators for emerging-market economies that should prove useful in the construction of a more effective global warning system. Not only are the authors able to draw conclusions about which specific indicators have sent the most reliable early warning signals of currency and banking crises in emerging economies, they also test the out-of-sample performance of the model during the Asian crisis and find that it does a good job of identifying the most vulnerable economies. In addition, they show how the early warning system can be used to construct a "composite" crisis indicator to weigh the importance of alternative channels of cross-country "contagion" of crises, and to generate information about the recovery path from crises. This timely study comes on the eve of impending changes at the International Monetary Fund as that institution reexamines how it reacts to financial crises. Moreover, the study provides "... a wealth of valuable elements for anyone investigating and forecasting adverse developments in emerging markets as well as industrial countries," according to Ewoud Schuitemaker, vice president of the economics department at ABN AMRO Bank.

Assessing Financial Vulnerability: An Early Warning System for Emerging Markets

Business & Money

Goldstein, Morris

Reinhart, Carmen

Kaminsky, Graciela

Economics

Peterson Institute for International Economics

This book presents evidence that public debts in the advanced economies have surged in recent years to levels not recorded since the end of World War II, surpassing the heights reached during the First World War and the Great Depression. At the same time, private debt levels, particularly those of financial institutions and households, are in uncharted territory and are (in varying degrees) a contingent liability of the public sector in many countries. Historically, high leverage episodes have been associated with slower economic growth and a higher incidence of default or, more generally, restructuring of public and private debts. A more subtle form of debt restructuring in the guise of "financial repression" (which had its heyday during the tightly regulated Bretton Woods system) also importantly facilitated sharper and more rapid debt reduction than would have otherwise been the case from the late 1940s to the 1970s. It is conjectured here that the pressing needs of governments to reduce debt rollover risks and curb rising interest expenditures in light of the substantial debt overhang (combined with the widespread "official aversion" to explicit restructuring) are leading to a revival of financial repression―including more directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, and tighter regulation on cross-border capital movements.

A Decade of Debt (Policy Analyses in International Economics)

Rogoff, Kenneth

Ratings, Rating Agencies and the Global Financial System brings together the research of economists at New York University and the University of Maryland, along with those from the private sector, government bodies, and other universities. The first section of the volume focuses on the historical origins of the credit rating business and its present day industrial organization structure. The second section presents several empirical studies crafted largely around individual firm-level or bank-level data. These studies examine (a) the relationship between ratings and the default and recovery experience of corporate borrowers, (b) the comparability of credit ratings made by domestic and foreign rating agencies, and (c) the usefulness of financial market indicators for rating banks, among other topics. In the third section, the record of sovereign credit ratings in predicting financial crises and the reaction of financial markets to changes in credit ratings is examined. The final section of the volume emphasizes policy issues now facing regulators and credit rating agencies.

Ratings, Rating Agencies and the Global Financial System (The New York University Salomon Center Series on Financial Markets and Institutions, 9)

Levich, Richard M.

Majnoni, Giovanni

Springer

Ratings, Rating Agencies and the Global Financial System brings together the research of economists at New York University and the University of Maryland, along with those from the private sector, government bodies, and other universities. The first section of the volume focuses on the historical origins of the credit rating business and its present day industrial organization structure. The second section presents several empirical studies crafted largely around individual firm-level or bank-level data. These studies examine (a) the relationship between ratings and the default and recovery experience of corporate borrowers, (b) the comparability of credit ratings made by domestic and foreign rating agencies, and (c) the usefulness of financial market indicators for rating banks, among other topics. In the third section, the record of sovereign credit ratings in predicting financial crises and the reaction of financial markets to changes in credit ratings is examined. The final section of the volume emphasizes policy issues now facing regulators and credit rating agencies.

Ratings, Rating Agencies and the Global Financial System (The New York University Salomon Center Series on Financial Markets and Institutions)

Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. This book proves that premise wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned. Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur. This Time Is Different exposes centuries of financial missteps.

This Time is Different: Eight Centuries of Financial Folly

Rogoff, Kenneth S.

Gildan Media