Credit Spreads and the Severity of Financial Crises

We study the behavior of credit spreads and their link to economic growth during nancial crises. We \u85nd that the recessions that accompany \u85nancial crises are severe and protracted. The severity of the crisis can be forecast by the size of credit losses (change in spreads) coupled with the fragility of the \u85nancial sector (as measured by pre-crisis credit growth). We also \u85nd that spreads fall in the runup too a crisis and are abormally low, even as credit grows ahead of a crisis. That is, a crisis involves a dramatic shift in expectations and is a surprise