Question

1. Why do banking crises often lead to sovereign debt crises? Why is converse also true?

Answer 1

Banking crisis generally leads to sovereign debt crisis since a banking crisis will seriously impact the countries financial system and then to avoid the system collapse government bailout is provided which convert the private debt that nto the sovereign debt and multiple such bank collapse leads to increase in interest rate for the nation along side decrease in value of the currency leading to higher debt servicing cost eventually leading to default in sovereign debt.

In the similar fashion vice versa is also true since the sovereign debt crisis leads to decrease in value of the national securities which are primarily held by national banks leading the bank to suffer major loss with respect to decrease in fair value of those securities.