Sovereign Risk Repricing after Hidden-Debt Revelations

Overview & Synopsis

Hidden government debt—liabilities that governments incurred but did not fully disclose—can undermine fiscal sustainability. This paper identifies seven hidden-debt revelations during 2005–25 and measures the response of daily sovereign risk spreads following revelations. It finds that sovereign risk spreads rise gradually but persistently in response to a revelation. The pooled sovereign risk spread for the seven countries rises substantially, by 108 basis points on average during the first 30 days after a revelation (with 66 basis points of that in the first 10 days), and an additional 98 basis points during days 31–60. The baseline results are robust to various alternative specifications. Additional exercises show that when debt reconciliation is delayed or contested, sovereign spreads rise roughly 200 basis points more over 60 days than when reconciliation is prompt, although, with only seven episodes, this finding is suggestive.