Economists uncover huge hidden debts: How countries dig their own debt holes

But a new study from the University of Notre Dame says that moment may come even sooner - thanks to countries' "hidden debts."

What are hidden debts?

Hidden debts are debts that are on the public books but have not been disclosed to the general public. The reasons can range from malice and corruption to fear of negative reactions from creditors or simple accounting errors. As the saying goes, "hiding the debt won't hide the consequences."

Consequences for all

When countries fail to report their real debts, it leads to serious problems. Borrowers face higher interest rates and lenders face a reduced likelihood of getting their money back. It turns out that by hiding debts, countries not only harm themselves, but also their citizens and investors. You could say that they are digging their own financial hole.

A trillion-dollar study

Economics professor Cesar Sosa-Padilla and his colleagues analysed more than 50 years of World Bank data on 146 developing countries. They found that public debt is systematically understated - by an average of 1 per cent of each country's GDP. In total, this amounts to about $1 trillion in hidden debt.

Who is to blame and what to do?

Hidden debts are more common in countries with weak institutions and during economic downturns. They usually "surface" during defaults or IMF audits. Researchers recommend increasing the transparency of financial reports, especially during favourable economic periods. After all, honesty is the best policy, especially when it comes to investor confidence and economic stability.

More information: Sebastian Horn et al, Hidden Debt Revelations, (2024). DOI: 10.3386/w32947