12 because of major recapitalizations of banks.<sup>24</sup> Moreover, after the restructurings, the governments typically did not increase primary fiscal surpluses enough to offset the associated rise in interest costs. Hence, a secondary rise in the government debt to GDP ratio occurred because the recapitalization bonds raised government deficits.

Excluding the three major restructuring countries — Brazil, Indonesia, and Mexico — substantially reduces the increase in the average ratio of (net) government debt to GDP (by almost 50 percent) and government debt to deposits (by 38 percent). Specifically, the average ratio of net government debt in the banks to GDP rises from 5.6 percent in 1993 to 7.1 percent in 2000 without the three major restructuring countries, compared to a rise from 5.2 percent to 8.4 percent, including the three countries. The average ratio of net government debt to deposits rises from 13.5 percent in 1993 to 17.6 percent without the three countries, compared to a rise from 12.9 percent in 1993 to 21.4 percent in 2000 with them.

In some non-crisis countries, the government deficit was an important factor in the rise in banks’ holdings of government debt in the 1990s. In Turkey, government deficits contributed to a rise in government debt over the decade, from a small fraction of GDP in 1990 (1 percent of deposits) to nearly 10 percent of GDP in 1997, which then accelerated to 16 percent in 1998 and then to over 27 percent of GDP (67 percent of deposits) in 2000. In India, net credit to government rose over the decade from 8.9 percent of GDP in 1990 (26.5 percent of deposits) to 16 percent of GDP in 2000 (34.5 percent of deposits), as government deficits rose toward the end of the decade (World Bank, 2000b).<sup>25</sup> In Argentina, the ratio of net government debt to GDP in the banks initially fell from 8.2 percent of GDP to about 3 percent, in 1992-1994, but then began to rise again, reaching 8.4 percent of GDP in 2000 and over 13 percent of GDP in 2001 (See Mussa, 2002).

To some extent, the rise in government debt and the deficits of the 1990s reflected the rise in real interest rates on government debt that was associated with the switch from implicit taxes on the financial sector under financial repression to more market-based rates on government debt after financial liberalization. At the same time, government debt was attractive to banks because of its zero risk weighting for purposes of capital requirements. Another attraction was the increased liquidity of government debt as a result of the development of government debt markets.<sup>26</sup> The attraction of government 24 Thailand also suffered a financial crisis but the bank restructuring that occurred in Thailand appears to have involved only limited injections of government debt into the banks, unlike Brazil, Indonesia, and Mexico. Argentina suffered bank problems in 1995 but the increase in government debt in the banks was relatively small; in the slowdown and crisis beginning in 1999 the increase in holdings of government debt was much larger. Russia suffered a crisis in 1998, but it was largely related to external holdings of debt. Colombia suffered a banking crisis toward the end of the 1990s, and its banks’ holdings of government debt increased at the end of the 1990s, but by much less than in Brazil, Indonesia, and Mexico. In Turkey, much of the growth of government debt reflected deficits. However, there was a banking crisis in 1994 that led to the failure of 4 small banks and a blanket guarantee of liabilities; in 1999, a major bank failed and a larger financial crisis began (Denizer, Gultekin and Gultekin, 2002).

25 India recapitalized public sector banks in 1994 and 1995, but the cost was less than two percent of GDP.

26 Governments used both marketable and non-marketable debt in the recapitalizations.