International Debt Sustainability Reconciling Debt Intolerance with Original Sin

In the recent literature on debt sustainability, two competing viewpoints have emerged addressing the underlying causes of many emerging market countries ’ difficulty in sustaining their debt. Carmen Reinhart, Kenneth Rogoff, and Miguel Savastano, authors of the 2003 article “Debt Intolerance, ” argue that institutional weaknesses, evidenced by histories of default and inflation, are the root causes of many countries ’ inability to sustain advanced country levels of debt, or debt intolerance. On the other hand, Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza, authors of the 2003 article “The Pain of Original Sin, ” argue that while institutional history certainly matters, the nature of the international financial system plays a more important role. More specifically, they argue that original sin, or many countries ’ inability to borrow externally in their own currency, takes a primary role in explaining debt intolerance. This paper attempts to reconcile the two views by showing that both institutional history and the incidence of original sin matter empirically when attempting to explain intolerance of external debt. The analysis contains two main analytical chapters: one in which long-term debt intolerance is explained through cross-sectional analysis, and another where year-to-year changes in debt intolerance are explained through panel analysis. In all of the paper, debt intolerance is proxied with measures of country risk such as credit ratings o