Abstract
Many countries face record public debt levels but have until recently benefited from favorable interest-growth differentials. The empirical evidence on the link between high debt and crises is also inconclusive. This paper re-examines the importance of public debt as a leading indicator of fiscal crises using machine learning techniques to account for complex interactions ignored in the literature. We find that public debt is among the most important predictors: beyond certain debt levels, the likelihood of crises increases regardless of the interest-growth differential. Excessive current account deficits and private credit and their interaction with public debt are also important indicators of distress. These results underscore the risks from high debt levels and the role of broader economic imbalances in the emergence of fiscal crises.
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