lower incidence of default on external debt among high-income countries). Accordingly, their relevance to advanced economies may be limited, in view of the greater degree of financial development and other structural differences. Moreover, the phenomenon of significant foreign equity liabilities is relatively recent (only growing rapidly since the early 2000s), such that studies concerning external debt do not necessarily carry over to total external liabilities. Finally, these studies consider gross external debt. While foreign debt assets for these types of countries might have been relatively small in earlier periods, the growth in reserve positions over the last decade means that there is a large divergence between gross external debt liabilities and net external debt liabilities for many countries.

As noted above, the debt overhang concept can also apply at the sectoral level and at the level of individual banks, firms and households in addition to the external dimension. There is a growing literature that shows that high public debts are associated with lower output growth (Checherita and Rother 2010, Kumar and Woo 2010, Reinhart and Rogoff 2010).

Kumar and Woo (2010) study a panel of 38 advanced and emerging economies over 1970 to 2007. These authors find that public debt ratios above 90 percent are associated with lower subsequent output growth, with the growth penalty substantially larger for emerging markets than for advanced economies. In particular, these authors estimate that a 10 percentage point increase in the debt ratio is associated with a growth slowdown of 0.15-0.2 percent in advanced economies but 0.3-0.4 percent in emerging economies. Moreover, they find that reduced investment is a key driver of the deterioration in growth performance.

In a study of euro area member countries over 1970-2009, Checherita and Rother (2010) also find a negative growth threshold of around 90-100 percent for the debt ratio. However, these authors caution that the lower-bound confidence interval of 70-80 percent calls for greater prudential policies at lower debt levels. In terms of mechanics, these authors find that high public debt adversely affects growth through several channels, including reductions in private saving and TFP growth. In a study of forty-four countries over two hundred years, the statistical analysis of Reinhart and Rogoff (2010) also suggests a 90 percent threshold ratio of public debt, beyond which growth performance deteriorates.

It is important to emphasize that private-sector debt problems can induce a sovereign debt crisis. Most directly, a government may choose to take over private liabilities, either for efficiency reasons or in response to political pressures. In turn, the existence of an implicit fiscal backstop may lead to lower repayment discipline among private-sector creditors, especially if debt problems are sufficiently widespread in the population to render punishment threats incredible (Arellano and Kocherlakota 2008). A similar logic applies if banks are taken into public ownership and private-sector debtors believe that government-owned banks will take a softer line in enforcing repayment. Accordingly, governments face a difficult problem in designing resolution schemes for private-sector debts, in view of such moral hazard problems.

In relation to sectoral debt overhang, the literature on the output losses associated with banking crises is extensive (see Cerra and Saxena 2008, Furceri and Mourougane 2009 and International Monetary Fund 2009 for recent studies). There is also some evidence that excessive leverage at corporate and household levels may also damage macroeconomic performance (Laeven and Laryea 2009, Laryea 2010).

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