crises, the non-recapitalization debt issues that appear to be related to the crises, the types of crises, the different uses of debt and other instruments during the crises by the various countries, and financing the costs of the crisis-related debt.

Table 2 suggests a strong association between the countries with the largest increases in government domestic debt between 1995 and 2004 and those that had major financial crises—Argentina, Turkey, Indonesia, Thailand, Uruguay, and Mexico.<sup>17</sup> These crisis countries represent six of the ten countries with the largest increases in the ratio of government domestic debt to GDP between 1995 and 2004. Moreover, although Brazil is not judged to have sustained a major banking crisis, its government carried out substantial bank restructuring and took over state debts in banks, particularly in state- and federal-banks. In four of the six crisis countries, the rise in domestic debt accounted for almost all of the total increase in debt. Regarding the other two, Argentina, experienced a much larger rise in the ratio of total debt to GDP that reflected the large devaluation that occurred; in Uruguay the large rise in total debt reflected the large external borrowing from the IMF to meet capital outflows. In addition, Jamaica, which is not shown, suffered a severe financial crisis and Jamaica’s ratio of government domestic debt to GDP increased over 50 percent during the latter part of the 1990s (World Bank 2004).

The rise in government domestic debt during the period 1995-2000 was, however, far from entirely due to crises. In many of the other 18 countries, the rise in domestic debt seems to reflect a conscious substitution of government domestic borrowing for foreign borrowing, which was not related to crises or banking sector developments. Even in the crisis countries, not all the domestic debt increase was crisis-related.

The first problem in separating increases in government domestic debt into crisisand non crisis parts relates to the dating of the crisis and deciding to what extent government domestic debt issues were related to the crisis before the bank recapitalizations occurred. Dating of the start of the crises is inexact; it is usually taken to be the first concrete sign of severe liquidity problems in banks. However, governments often increased their dependence on domestic borrowing before this date, as well as during the period before bank recapitalization actually began, because of the rising cost/declining availability of foreign finance.<sup>18</sup> Counting these issues of debts as part of crisis-related debt is really a counterfactual question: to what extent did this domestic debt issue reflect the crisis because of a crisis-related decline in the supply of foreign loans. In addition, in some countries, government domestic debt also rose before 17 Caprio and Klingebiel, 2002 and Hoelscher and Quintyn, 2003 estimate that the most costly financial crises were in Indonesia in 1997, estimated to have had a gross fiscal cost of about 50 percent of GDP; Thailand, 30-40 percent of GDP; Turkey, about 30 percent of GDP; and Mexico, about 19 percent of GDP. They differ on the estimated cost of Malaysia’s crisis. Outside the sample period, Chile’s crisis in the early 1980s was estimated to have cost about 50 percent of GDP. These costs are based on the estimated fiscal cost of bank recapitalization. Cost estimates are complicated by the difficulties of comparing these issues over time in a turbulent environment and do not reflect other issues of domestic debt around the time of the crisis that may be crisis-related, as discussed below. The costs of the recent crises in Argentina and Uruguay have not yet been widely estimated but appear to be large. Outside the countries studied here, Jamaica’s crisis that began in 1994 is estimated to have cost about 50 percent of GDP (World Bank, 2004). 18 See for example, de Brolle, et, al, 2006. Sometimes this borrowing was from the central bank because of the small size of the domestic market.

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