Critical Levels of Debt?

Lenno Uusküla (), Peeter Luikmel () and Jana Kask ()

No 2005-3, Bank of Estonia Working Papers from Bank of Estonia

Abstract: High credit growth in Central and Eastern European countries (CEEC) over recent years has sparked interest among many market analysts. Although banking supervision has improved, the continuation of such growth may cause concern about the threat of financial crisis. This paper is written with the aim of analysing the importance of debt factors as a potential cause of financial crises. First, a comparison is conducted of various debt indicators from episodes of crisis in banking across European countries since the 1970s. Second, a probit analysis is used to measure the probability of a crisis. Based on this analysis, it can be claimed that any direct link between debt indicators and financial crises is weak. However, there is some evidence that once the crisis occurs, greater indebtedness lengthens the crisis and raises costs in terms of GDP.

Keywords: financial crisis; indebtedness indicators (search for similar items in EconPapers)
JEL-codes: C23 E44 F34 G20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-fin, nep-fmk and nep-mac
Date: 2005-10-10, Revised 2005-10-10
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