Debt Intolerance

Debt intolerance is a term coined by Carmen Reinhart, Kenneth Rogoff and Miguel Savastano referring to the inability of emerging markets to manage levels of external debt that, under the same circumstances, would be manageable for developed countries, making a direct analogy to lactose-intolerant individuals.

The concept of debt intolerance alludes to the extreme duress many emerging market economies experience at their external debt levels, even when they would be controllable for the standard of advanced economies. For debt intolerant countries, sovereign riskiness appears to be out of proportion considering the size of their debt burdens, leading to extreme circumstances that most of the times translate into very high volatility and difficulty to repay their debt commitments.

This hypothesis is built on the empirical fact that debt crises in emerging economies tend to occur at levels of debt that may not be considered excessive. By analyzing debt levels and default decisions of middle income countries during the period 1970-2008 it is observed that, at the time of default, in only 16 percent of the cases the external debt-to-GNP ratio is higher than 100 percent; more than 50 percent of defaults occur at levels of external debt below 60 percent; and, 19 percent of the episodes happen at levels of debt below 40 percent of GNP

The phenomenon of defaults occurring at relatively low levels of debt may be evidence that for some countries, particularly developing countries, the safe threshold of external debt-to-GNP is particularly low. Thus, in order to understand default decisions in these countries, it becomes essential to understand what the determinants of the safe threshold are.

...
Wikipedia