Governments can run out of money even when the numbers say they shouldn't

Governments can hit their debt limits faster than traditional economic models predict. This happens because the financial system itself can amplify small problems into big ones, forcing governments to cut spending or raise taxes sooner.

For decades, governments and central banks have used simple math to figure out how much debt a country can handle. This paper shows that the actual limit is much squishier, and depends on how healthy banks and other financial firms are. It means that even if a country's debt looks fine on paper, a sudden shock to the financial system can make it impossible to borrow more money.