Hidden Debts Push Global Debt Closer to GDP as Transparency Issues Mount According to the University of Notre Dame 

International Monetary Fund (IMF) economists recently warned that global public debt could soon match worldwide GDP, potentially reaching parity by 2030. New research from the University of Notre Dame suggests this threshold could arrive even sooner due to “hidden debts” — obligations on government books that remain undisclosed due to intentional concealment, corruption, scrutiny concerns, or simple accounting mistakes. Such hidden debts prevent essential public investments in areas like infrastructure, healthcare, and education, straining national economies.

For investors and analysts, accurately monitoring a country’s debt is crucial in assessing a borrower’s reliability. However, undisclosed debt carries severe consequences for both lenders and borrowers, often leading to higher interest rates and reduced loan recovery rates, according to a new study by economist Cesar Sosa-Padilla from Notre Dame, alongside co-authors from the World Bank, the University of Hamburg, and the University of Duisburg-Essen. Their working paper, titled “Hidden Debt Revelations,” draws from over five decades of data on 146 developing and emerging economies, compiled from the World Bank’s International Debt Statistics database.

The researchers analyzed updates to the World Bank’s external-debt statistics from 1970 to 2022, which revealed discrepancies from year to year. These inconsistencies highlighted significant underreporting or overreporting in debt amounts, often missed until revised in subsequent records. According to Sosa-Padilla, digitizing earlier records unveiled extensive insights into the prevalence, timing, and nature of hidden debt.

Findings showed that public debt was underreported by an average of 1% of GDP per country, amounting to $1 trillion in concealed debt across all nations and years analyzed — over 12% of total foreign borrowing in the study’s sample. “Hidden debt is large and common,” the researchers stated, with about 70% of debt entries to the World Bank requiring revision, most often adjusted upward. This indicates that underreporting is a frequent issue, and actual debts are likely even higher than officially acknowledged in some nations.

Sosa-Padilla noted that hidden debt typically comes to light only through subsequent revisions, suggesting that certain countries’ debts may be larger than they publicly admit. He pointed out that underreported debt is especially prevalent in nations with weaker institutional structures. The study observed that while debt accumulated during economic boom years, it was often disclosed during economic downturns, usually due to loan defaults or IMF audits.

Hidden debt adversely impacts both creditors and borrowers. For creditors, it leads to larger losses and lower recovery rates when renegotiating loans with countries deeper in debt than expected. This, in turn, prompts lenders to impose tougher borrowing terms on nations with histories of debt concealment. Sosa-Padilla explained that hidden debt increases borrowing costs and restricts countries’ ability to stabilize their economies, resulting in more volatile consumption levels that can affect household welfare.

For U.S. investors, Sosa-Padilla indicated that hidden debt revelations add significant risk to investing in foreign bonds. As one of the IMF’s largest funders, the U.S. may exercise caution when financing countries known for debt misreporting. Notably, bonds and World Bank loans show fewer discrepancies due to consistent disclosures, whereas bank credit and bilateral government loans from private lenders show the largest annual debt adjustments.

The researchers emphasized that only countries with strong economic fundamentals and minimal hidden debt benefit from enhanced transparency, while highly indebted countries may find increased scrutiny costly. They suggested that implementing transparency measures is more effective in favorable economic periods than during crises, as policies encouraging openness can alleviate hidden debt accumulation under stable conditions.

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