Understanding today’s financial system requires at least basic knowledge of accounting. It is a world of interconnected balance sheets. Nature of the government sector’s liability is different than the nature of private sector’s liability.
This kind of approach is called balance sheet approach. From the perspective of balance sheet approach, a financial crisis occurs when there is a plunge in demand for financial assets of one or more sectors.
Creditors may lose confidence
a) in a country’s ability to earn foreign exchange to service the external debt,
b) in the government’s ability to service its debt,
c) in the banking system’s ability to meet deposit outflows, or
d) in corporations’ ability to repay bank loans and other debt.