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Ms. Marialuz Moreno Badia, Juliana Gamboa-Arbelaez, and Yuan Xiang
In the wake of the COVID-19 pandemic, debt levels in emerging and developing economies have surged raising concerns about fiscal sustainability. Historically, negative interest-growth differentials in these countries have played a debt-stabilizing role. But is this enough to prevent countries from falling into debt distress? Drawing from a sample of 150 emerging and developing economies going back to the 1970s, we find that interest-growth differentials have remained relatively low, dampening debt increases in the run up to a crisis. But in the face of persistent primary deficits, debt service tends to rise abruptly—particularly in emerging markets—and a fiscal crisis ensues. There is also evidence that a large part of the debt build-up around crises stems from valuation effects associated with external debt and the materialization of contingent liabilities. These findings underscore that, though not necessarily a red-herring, low interest-growth differentials cannot fully offset the deleterious effects of large fiscal deficits, forex exposures, or hidden debts.
Ms. Marialuz Moreno Badia, Juliana Gamboa-Arbelaez, and Yuan Xiang

REFERENCES APPENDIX. DATA: DEFINITIONS AND SOURCES FIGURES 1. Debt and Interest Expense in Emerging and Developing Economies 2. Interest-Growth Differentials in Emerging and Developing Economies 3. Share of Countries with Negative Interest-Growth Differentials 4. Persistence and Volatility of Interest-Growth Differentials 5. Real Interest Rates in Emerging and Developing Economies 6. Real Growth in Emerging and Developing Economies 7. Financial Openness in Emerging and Developing Economies 8. Debt Decomposition in Emerging and Developing Economies 9

Laura Jaramillo, Mr. Carlos Mulas-Granados, and Elijah Kimani
What explains public debt spikes since the end of WWII? To answer this question, this paper identifies 179 debt spike episodes from 1945 to 2014 across advanced and developing countries. We find that debt spikes are not rare events and their probability increases with time. We then show that large public debt spikes are neither driven by high primary deficits nor by output declines but instead by sizable stock-flow adjustments (SFAs). We also find that SFAs are poorly forecasted, which can affect debt sustainability analyses, and are associated with a higher probability of suffering non-declining debt paths in the aftermath of public debt spikes.
Xuehui Han, Mr. Paolo Mauro, and Mr. John Ralyea
The Global Financial Crisis (GFC) and the COVID-19 pandemic are associated with the largest increases in public debt ratios since World War II. We decompose unexpected changes in debt ratios into the role of surprises in economic growth, interest costs, policy measures, and other factors. During both crises, lower-than-expected output contributed the most to higher-than-expected debt ratios. Fiscal policy measures recorded in the public deficit were similar in the two episodes. We also analyze the decade-long interlude (2010-19). Rather than declining as foreseen in a normative scenario, debt ratios remained stable on average, as interest rates, policy adjustment and, in some countries, economic growth turned out lower than expected.