Moody’s launches new “Government Liability Map”
Moody’s has launched a “Government Liability map” to better reflect the complexity of assessing sovereign-backed debt during the current economic and financial crisis.
Moody’s says the crisis has led to the proliferation of government financial operations, such as the granting of guarantees and the raising of debt for the purpose of acquiring assets, among other measures. As investors are being invited to purchase billions worth of government debt, the measurement of the true extent of government liabilities has become critical.
“Gaining an accurate picture of government liabilities by examining government financial statements has always been challenging. Indeed, information about government net worth, the concept that ultimately matters, is generally unavailable. As a result, most government credit risk analyses rely on simplistic gross debt information. Even in Europe, where statistics are well-developed and homogeneous, and where debt metrics have been enshrined in the Maastricht Treaty, the analyses are rather unsophisticated – and often circumvented by creative accounting.”
“This issue had previously been of limited interest (except to Moody’s) because Aaa-rated government finances seemed rock-solid. However, in the current circumstances, it is necessary to enhance transparency and illustrate in greater detail analytical efforts with regard to government liabilities.”
In a Special Comment Moody’s seeks:
- to demonstrate that sovereign credit risk must surpass the rudimentary analysis of reported gross public debt and shift to a balance sheet approach;
- to propose an approach (the Government Liability Map) that better reflects the complexity of assessing a “government-at-risk” – in other words, how much of a government’s net worth is affected by liabilities.
The important point here is that, for a government, being equally committed to repay a bond on the one hand and face the cost of bank recapitalization (or future pension shortfalls) on the other, does not mean the same thing: the impact on public finances will be of a certain “value” in one case and a highly uncertain “value” on the other.
In addition to the stylized case, Moody’s provides a sample based on the United States in the Special Comment: Not All Public Debt is the Same: Navigating the Public Accounts Maze.
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