•  A low debt/GDP ratio enables the governments to operate counter-cyclical fiscal policy. •  A low debt/GDP ratio reduces the exposure of the public sector to foreign exchange risk and the exposure of the financial system to domestic market risk. Hence, it enhances financial stability. Finally, the flexibility of the economy is also enhanced by a sound and efficient financial system.
As is well known, domestic financial systems amplify and propagate external shocks to emerging markets economies, rather than helping smooth their effects. The build up of internal and external imbalances and the subsequent recession and financial crisis of the nineties in Colombia attest to the perils of a pro-cyclical behaviour of the financial system.