In EMDEs, debt-reducing positions in 2007 turned into debt-increasing positions in 2015. In commodity-exporting EMDEs, this deterioration partly reflected the sharp growth slowdown that accompanied the steep post-crisis slide in commodity prices. However, recoveries in commodity prices and activity helped improve debt sustainability in these economies and, by 2018, fiscal positions in commodity exporters became debt-reducing. In commodity-importing EMDEs, fiscal positions have remained weak as a result of fiscal stimulus implemented during the global financial crisis, chronic primary deficits, and, in some EMDEs, anemic post-crisis, leading debt-increasing fiscal positions in 2018.

As aggregate sustainability gaps have improved in advanced economies, fiscal positions in most countries in this group set government debt on clearly declining trajectories by 2018. Sustainability gaps were negative in around 9 percent of advanced economies (Figure 3.D). In EMDEs, share of countries where fiscal positions were on rising trajectories (i.e., negative sustainability gaps) was around 50 percent in 2018. Negative sustainability gaps were observed in roughly 58 percent of commodity-exporting EMDEs and in about 39 percent of commodity-importing EMDEs in 2018. In principle, temporary negative sustainability gaps that are quickly reversed would be of limited concerns. However, in EMDEs, especially in commodity importers, sustainability gaps have worsened steadily since 2011.

# 4.2. Increasing vulnerability to financial crises

A growing debt-to-GDP ratio could erode investor confidence, requiring the government to pay a rising risk premium on its debt. These pressures could culminate in a debt crisis if investors fear that the accumulation of government debt is no longer sustainable (Blanchard 2019; Henderson 2019; Rogoff 2019a,b). Rapid debt accumulation can also lead to a currency crisis if investor concerns about the ability to repay foreign-currencydenominated debt induce a speculative attack on a fixed or pegged currency (Krugman 1979; Obstfeld and Rogoff 1986), or a banking crisis if private sector balance sheet vulnerabilities trigger banking panics (Chang and Velasco 2000; Krugman 1999).

While the increase in private debt in EMDEs partly reflects financial deepening that is associated with growth acceleration, elevated private debt represents a fiscal risk. Past experience illustrates that private sector debt may shift onto government balance sheets during financial crises, such as banking crises, as governments provide support to private institutions and guarantee their liabilities in difficulty (Figure 4.A; Kose, Ohnsorge, and Sugawara 2018; World Bank 2017a). For example, government debt rose by more than 30 percentage points of GDP in Indonesia and Thailand during the Asian crisis in the late 1990s. Some of advanced economies experienced a hike in government debt during banking crises in their economies, including Ireland and Latvia in 2008.

Indeed, many episodes of debt distress were accompanied by currency or banking crises (Claessens and Kose 2014). During 1970s, a relatively small number of crises were materialized, while the most recent four decades have seen more episodes (Figure 4.B). Although currency and banking crises were dominant during 1990s, the frequency of debt crises during other periods is relatively high. Some types of crises are more frequently observed than others. There are 151 banking crises, 245 currency crises, and 76 debt crises 9