In scaling debt by GDP, this approach implicitly focuses on the concept of the debt burden, which captures the ability of borrowers economy-wide to service their debt. In principle, a sharp increase in the debt burden, as measured by the debt-to-GDP ratio, could mechanically reflect: an output collapse; deflation; an exchange rate depreciation that raises the domestic currency value of debt; or a large increase in borrowing. Regardless of the underlying cause, a rise in the debt burden makes it more challenging for the economy to service debt and makes the debt burden more likely to become a source of financial stress.

In practice, output contractions were a source of increased debt-to-GDP ratios in a minority of the rapid debt accumulation episodes identified here (one-third of government debt episodes and two-fifths of private debt episodes). Sharp currency depreciations (in currency crises) have been associated with larger debt buildups during debt accumulation episodes, but such depreciations have typically happened before (usually two years before) debt peaks. The increase in debt during the year of the currency crisis has accounted for only between one-tenth (private debt episodes) and one-quarter (government debt episodes) of the total debt buildup during episodes involving currency crises.

Episodes associated with financial crises . Financial crises (banking, sovereign debt, or currency crises) are defined as in Laeven and Valencia (2018). Data for currency crises are extended to 2018 using the same methodology as Laeven and Valencia (2018).<sup>3</sup> A rapid debt accumulation episode is identified as having been associated with a financial crisis (of any type) if such a crisis occurred at any point between the start of the episode and the year of the episode’s peak debt-to-GDP ratio or within two years of the peak debt-to-GDP ratio. Appendix 3 lists financial crises in EMDEs. Some debt accumulation episodes were associated with multiple financial crises. For example, Mexico’s government debt accumulation episode of 1980-87 spanned a banking crisis in 1981, and currency and debt crises in 1982. Turkey’s government debt accumulation episode of 1998-2001 spanned a banking crisis in 2000 and a currency crisis in 2001.

This identification approach describes an association between rapid debt accumulation and financial crises without necessarily implying any causal link between the two. This approach yields 137 rapid government debt accumulation episodes associated with crises and 105 rapid private debt accumulation episodes associated with crises between 1970 and 2018 in 100 EMDEs.

# 2.2 Main features of episodes

Frequency of episodes. Debt accumulation episodes have been common (Figure 2). In the average year between 1970 and 2018, three quarters of EMDEs were in either a government or a private debt accumulation episode or both. The region with the most episodes was Sub-Saharan Africa (where 34 percent of all government and 33 percent of all private debt accumulation episodes occurred), in part reflecting the large number of countries in the region but also its history of debt dependence. The average EMDE in Sub-Saharan Africa (SSA), South Asia (SAR), and Latin American and the Caribbean (LAC)—the regions with the most episodes per country—went through three government

> 3 Other studies dating crises include, for example, Baldacci et al. (2011); Reinhart and Rogoff (2009); and Romer and Romer (2017).

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