External balance sheets

The obvious story about external debt does not survive the data

Start with the argument that motivates this whole page. Liabilities that are equity-like (inward direct investment, portfolio equity) fall in value when the country does badly: the foreign investor takes the loss with you. Liabilities that are debt-like (portfolio debt, cross-border bank loans) do not. They are fixed claims, and a devaluation makes them larger in local terms at precisely the moment they are hardest to service. So a country financed by debt rather than equity ought to be more crisis-prone.

Sort all 195 countries into three groups by the average equity share of their external liabilities and count their crises. The ordering the story predicts does not appear. The middle group has the most crises, of every type. The most equity-financed countries do have fewer crises than the most debt-financed ones, but a relationship that reverses in the middle is not the relationship the argument predicts, and quoting only the two end bars would be picking the evidence that agrees with us.

Source: External Wealth of Nations (Lane & Milesi-Ferretti), 1970-2024 | FinObservatory crisis atlas (GMD, JST, Laeven-Valencia, Reinhart-Rogoff, ESRB) Crisis episodes per 100 country-years, 1970 onward. Episodes are DEDUPLICATED across the five chronologies: the atlas holds one row per source, so a raw count would inflate every country's history by up to five times. Terciles are formed on each country's average equity share of external liabilities over its own history. Methodology

And even the endpoints prove nothing on their own. Countries that finance themselves with equity are, overwhelmingly, richer countries with deeper markets, better institutions and their own credible central banks. Any of those could produce the gap between the outer groups without external composition doing any work at all. This table is a description of the historical record. It is not a finding about cause, and it is not a way to rank a country's risk.

What this page cannot tell you

• Not the currency of the debt. The single most important fact about a country's external liabilities is often whether they are owed in a currency it can print. EWN carries no currency breakdown, so the original-sin story cannot be told from this data, and this page does not attempt it.
• Not causation. The composition table describes a historical record. Richer countries are both more equity-financed and better insulated for a dozen other reasons.
• Not all estimates are equal. EWN is a reconstruction: where a country never reported an international investment position, the authors estimate it, and the file carries no flag distinguishing a reported cell from an estimated one. Coverage is thinner the further back you go and the smaller the economy.

Methodology