Box 1.

Hidden debts: Unpleasant surprises that when revealed have undermined the credibility of existing safety nets and may set runs in motion

Central bank debt: To this day, even when the numbers are published, these are not included as part of general government debt (ie, Argentina’s short-term Lebacs). In the event of Euro-area exits, Target2 balances (currently running at around 20–40% of GDP for Greece, Italy, Portugal and Spain) are external central bank debt. Unseen: In June 1997, the new Thai finance minister ‘discovered’ that the Bank of Thailand had already spent US$ 28 billion out of US$ 30 billion of its international reserves in the course of forward market interventions to defend the baht

Non-securitized, floating debt (arrears): Unpaid bills to suppliers and, in more desperate cases (Russia 1998) unpaid pensions and wages to public sector employees

Misreporting and other off-balance sheet: Greece-Goldman Sachs debt swaps: Greek dollar and yen-denominated debt was swapped at historical euro exchange rates to cosmetically reduce the overall level of debt

Debts to China; Even the most comprehensive databases on external debt, such as the World Bank’s Debt Reporting System, did not fully capture liabilities of governments and SOEs in numerous low-income countries, over much of the 2000s

Offshore derivative operations of banks: These can leverage banks’ holdings of government debt (a significant hidden debt problem during the Mexican banking/peso crisis of 1994–1995). With Mexican bond (Tesobonos) as collateral, Mexican banks took on short-term dollar debt, that was for the most part unhedged. As the value of the collateral sank, margin calls increased along with rollover risk

Implicit guarantees and moral hazard: Private sector debt Especially external debt of banks (Diaz-Alejandro 1985) can overwhelm an otherwise healthy fiscal situation (Chile 1981, Iceland, Ireland, Spain, 2007–2008); corporate debt (Korea and Indonesia, 1997). Puerto Rico’s “appropriation debt.”

Puerto Rico (PR) began issuing “Appropriation bonds” in 2000 indirectly through government-owned entities and made repayment contingent upon the Legislature’s appropriating funds for this purpose. These bonds are not counted as debt under the debt limit. Yet PR appropriation debt was, for practical purposes, guaranteed by the government and charged to its taxpayers