Tag Archives: IPSAS

Measuring (Greek) Indebtedness

In a Vox column, Daniel Dias und Mark Wright propose various measures of the Greek, Portuguese and Irish public debt burden and emphasize the large variability of these measures.

The following figure, taken from Dias and Wright, shows the scheduled principal and interest payments of Greece, Portugal and Ireland as a percentage of 2014 GDP in the respective country. Not all public debt components are accounted for.

wright fig1 13 nov

Dias and Wright write:

[B]oth Portugal and Ireland face far larger cash flow requirements, relative to the size of their economies, than Greece for the next ten years. [A]fter this ten-year period, the required repayments on Greece’s debt will far exceed those of Portugal and Ireland, measured as a fraction of their economies. [W]hether or not we view Greece as more or less indebted than Portugal and Ireland depends on how we weigh cash flows in the near future (next ten years) versus cash flows in the far future (more than ten years).

… we can discount a country’s entire debt repayment cash flows by the interest rates embodied in their currently traded debts to obtain an estimate of the market value of a country’s debt. This assumes that the likelihood of repayment of Greece’s EFSF debt, for example, is the same as that for privately held bonds. Under these assumptions, as shown in Table 5, Greece appears to have less than half as much debt as either Portugal or Ireland. These numbers are closer to the estimates computed under the IPSAS standard, which records a debt at market value at the time of issue, and allows for the accretion of this debt if the contracted interest rate on the debt is less than the yield to maturity of the debt. This approach has the counterintuitive implication that the more likely a country is to default, the less indebted it will look.

Dias and Wright contrast a conventional face-value debt measure (the sum of the blue bars corresponding to principal repayment obligations in the figure) with more informative measures. With the latter, Greek indebtedness typically is not as high compared with the other countries as with the first measure.

See also this earlier post and this earlier post on the topic.

Greece’s Financial Position Is Widely Misreported

In an FT letter to the editor, Ian Ball, the Chair of CIPFA International (Chartered Institute of Public Finance and Accountancy), argues that Greece’s financial position is widely misreported. He writes:

While the debt burden is commonly cited as being between 175 and 180 per cent of gross domestic product, this number is incorrect and indefensible because it is based on the face value of Greece’s debt that doesn’t take into account long maturities and concessional interest rates, as well as grace periods.

Greek debt, calculated on an International Public Sector Accounting Standards (IPSAS) basis, is significantly lower, and at the end of 2013 was 68 per cent of GDP. If this is not an appropriate method for measuring debt, then every company on major stock exchanges around the world has got its debt measurement wrong. In neither accounting standards nor economic principle is debt measured at face value. This pervasive misunderstanding of Greece’s real fiscal position has seen agreements reached between Greece and its creditors that do not address the real problem and instead may actually intensify it.

See also my earlier blog post.

Accounting for Sovereign Debt—Greece’s (Low) Debt Quota

An interesting conference organized by CESifo and Japonica Partners brought together accountants, lawyers and economists with interests in public finance and sovereign debt. Discussions about Greece took center stage.

According to estimates based on the accounting standards IPSAS, ESA 2010 or SNA 2008, Greece’s gross government debt quota at the end of 2013 amounted to roughly 70% and its net debt quota didn’t exceed 20%. The debt numbers give the present values of the contractual payments, discounted at the market yields at the time the debt was issued or restructured. The estimate of the gross debt position closely resembles estimates of the market value of Greek government debt by economists.

The claim that Greece urgently needs debt relief received only limited support, and least from people who worked for and with the Greek government. My reading was that any need for near term debt relief is mostly of a political nature.

Some relevant links:

  • Georgetown’s Anna Gelpern.
  • Duke’s Mitu Gulati.
  • IFAC, CIPFA.
  • “The Reckoning: Financial Accountability and the Rise and Fall of Nations” by Jacob Soll.
  • Japonica Partners.
  • IPSAS: IFAC page, Wikipedia, slides with background info and examples, comparison with GFS (see p. 11).
  • Chicago Fed Mark Wright’s “The Stock of External Sovereign Debt: Can We Take the Data at ‘Face Value’?“
  • European System of National and Regional Accounts in the European Union (ESA 2010), Chapter 20 (Government accounts):

    20.221: Debt operations can be particularly important for the general government sector, as they often serve as a means for government to provide economic aid to other units. The recording of these operations is covered in chapter 5. The general principle for any cancellation or assumption of debt of a unit by another unit, by mutual agreement is to recognise that there is a voluntary transfer of wealth between the two units. This means that the counterpart transaction of the liability assumed or of the claim cancelled is a capital transfer. No flow of money is usually observed, this may be characterised as a capital transfer in kind.

    20.236: Debt restructuring is an agreement to alter the terms and conditions for servicing an existing debt, usually on more favourable terms for the debtor. The debt instrument that is being restructured is considered to be extinguished and replaced by a new debt instrument with the new terms and conditions. If there is a difference in value between the extinguished debt instrument and the new debt instrument, it is a type of debt cancellation and a capital transfer is necessary to account for the difference.

  • UN, EC, OECD, IMF and World Bank System of National Accounts (2008 SNA):

    22.109–110: Debt rescheduling (or refinancing) is an agreement to alter the terms and conditions for servicing an existing debt, usually on more favourable terms for the debtor. Debt rescheduling involves rearrangements on the same type of instrument, with the same principal value and the same creditor as with the old debt. Refinancing entails a different debt instrument, generally at a different value and may be with a creditor different than that from the old debt. Under both arrangements, the debt instrument that is being rescheduled is considered to be extinguished and replaced by a new debt instrument with the new terms and conditions. If there is a difference in value between the extinguished debt instrument and the new debt instrument, part is a type of debt forgiveness by government and a capital transfer is necessary to account for the difference.