Debt Intolerance

This paper introduces the concept of "debt intolerance," which manifests itself in the extreme duress many emerging market economies experience at levels of indebtedness that would seem manageable by advanced country standards. The paper argues that "safe" external debt-to-GNP thresholds for debt-intolerant countries depend on the country's default and inflation history and may be as low as 15 percent in some cases. Debt intolerance is linked to the phenomenon of serial default that has plagued many countries over the past two centuries. Understanding and measuring debt intolerance is fundamental to assessing the problems of debt sustainability, debt restructuring, capital market integration, and the scope for international lending to ameliorate crises. The paper makes a first pass at quantifying debt intolerance, including delineating debtors' "clubs" and regions of vulnerability, based on a history of credit events for a large number of countries going back to the 1820s.