# 1. Introduction

Since the global financial crisis, global debt has reached an all-time high of roughly 230 percent of GDP in 2018. The increase has been driven by a synchronized buildup in debt among emerging market and developing economies (EMDEs), with total (public and private) debt in these countries reaching a record-high of almost 170 percent of GDP in 2018, an increase of 54 percentage points of GDP since 2010. The rapid increase (almost 80 percent of EMDEs have seen an increase in their debt-to-GDP ratio since 2010) has led to a lively debate about the benefits and risks of such rapid debt accumulation (Kose et al. 2020).

Borrowing can be beneficial for countries, particularly in EMDEs with substantial development challenges, if it is used to finance growth-enhancing investments in areas such as infrastructure, health care, and education. Government debt accumulation can also be appropriate temporarily as part of counter-cyclical fiscal policy, to boost demand and activity in economic downturns. For the private sector, borrowing can facilitate consumption smoothing among households, and investment for corporations.

However, particularly for EMDEs, high debt carries significant risks, since it makes them more vulnerable to external shocks. Rising or elevated debt increases a country’s vulnerability to economic and financial shocks—including increases in the costs of refinancing—which can culminate in financial crises, with large and lasting adverse effects on economic activity. Such episodes of rapid debt accumulation followed by financial crises have been a recurrent feature among EMDEs over the past fifty years.

As such, despite exceptionally low real interest rates, including at long maturities, the current post-crisis surge in debt could follow the historical pattern and eventually lead to financial crises in EMDEs. A sudden global shock, such as a sharp rise in interest rates or a spike in risk premia, could trigger financial stress in more vulnerable economies.

Against this backdrop, this paper provides a granular perspective on the consequences of debt accumulation by addressing the following questions: First, what are the main features of episodes of rapid debt accumulation? Second, what are the empirical links between debt accumulation and financial crises? Third, what are the major institutional and structural weaknesses associated with financial crises?

To shed light on these questions, this paper uses a three-pronged approach: an event study; a series of econometric models; and an examination of episodes of crises via comprehensive country case-studies. The paper reports four main findings: Debt accumulation episodes . Since 1970, there have been about 520 episodes of rapid debt accumulation in 100 EMDEs. Such episodes are therefore common: In the average year, three-quarters of EMDEs were in either a government or a private debt accumulation episode or both.

Debt and financial crises . About half of the debt accumulation episodes were accompanied by financial crises. Debt accumulation episodes that coincided with crises were typically associated with larger debt buildups (for government debt), weaker economic outcomes, and larger macroeconomic and financial vulnerabilities than non-crisis episodes. After 8 1