Periodically, as an economy borrows its way to the edge of insolvency with debt denominated in foreign currency, government debt-raising capacity appears to vanish virtually overnight. This vanishing capacity characterizes almost all financial crises. Lending institutions will provide funds beyond the immediate visible short-term cash flow of a borrower only if they perceive that maturing debt will be rolled over.
The first whiff of inadequacy in debt-raising capacity induces a run to the exits-not unlike a bank run. Thus, an economy's necessary condition for solvency--indeed, a necessary condition for economic growth--is the maintenance of significant unused financing capacity. Too often governments have endeavored to contain impending debt crises with inflationary policies that inhibit growth. 13  Levine (1998) and Levine and Zervos (1998).