Sovereign Debt Problem: When Governments Mislead About Numbers

Iceland and Dubai have already reneged on foreign debt obligations. There is a growing concern about similar trouble with the debt of Greece, Spain, and several Eastern European nations. Credit agencies downgraded the debt of a number of these countries. The price to insure  the sovereign debt of some nations is higher than the insurance of the debt of some large multi-national corporations.

Analysts and creditors assume that they receive reliable data when they evaluation the risk of sovereign obligations, but that assumption may be incorrect. According to the FT, “Greece was condemned by the European Commission on Tuesday for falsifying data about its public finances and allowing political pressures to obstruct the collection of accurate statistics.” That makes any meaningful analysis of the state of Greece’s financial situation impossible.

The EC charge against Greece raises the ugly and troubling issue of whether other nations have tilted economic data in their favor to improve debt ratings. That would add a layer of uncertainty to figures provided by the governments of nations that are in trouble. In theory, credit agencies should account for that risk by warning investors that some sovereign debt is riskier than others. The ability to confirm basic national economic statistics could become part of the debate about bailing out countries that may default on obligations.

It has occurred to very few analysts, at least based on public statements, that lying is now a part of the transactions between nations and creditors. If the problem with Greece is identified as part of the data from other countries, the calculus of figure debt risk among sovereign nations will take and unexpected and unpleasant turn.

Douglas A. McIntyre