I would like to pass on a research paper that addresses eight centuries of financial crises: Click to download the research paper.
This paper, by two professors (one from Harvard the other from University of Maryland), takes a look at the history of financial crises dating from England's fourteenth-century default to the current United States sub-prime financial crisis. It spans all regions of the world and incorporates lessor known credit episodes, including the defaults and restructurings in India and China.
Here are 10 facts found by their research:
- 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."
- Crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses.
- US sub-prime financial crisis is not unique.
- Other crises that often accompany default: inflation, exchange rate crashes, banking crises, and currency debasements.
- Periods of high international capital mobility have repeatedly produced international banking crises.
- Crisis-prone countries, particularly serial defaulters, tend to over-borrow in good times, leaving them vulnerable during the inevitable downturns.
- Domestic debt buildups often happen in the aftermath of external default, precisely because countries have difficulty borrowing abroad
- Spikes in commodity prices are almost invariably followed by waves of new sovereign defaults.
- The notion that today's emerging markets are breaking new ground in their extensive reliance on domestic debt markets, is hardly new.