Economists at the IMF recently warned that global public debt is on course to match worldwide GDP by 2030. But new research from the University of Notre Dame suggests this might happen sooner, with “hidden debts” accelerating the climb.
These hidden debts are liabilities that have remained off the public books, either through error, evasion, or corruption. For governments, high debt limits investments in critical areas like healthcare, infrastructure, and education. Investors and analysts also worry: hidden debts can mislead lenders about a country’s ability to repay, leading to higher interest rates and lost confidence.
Hidden debts
Using the World Bank’s International Debt Statistics database, researchers reviewed five decades of debt data from 146 developing countries. By tracking year-to-year adjustments, they identified a consistent pattern of underreporting, with hidden debts averaging 1% of GDP per country—a total of $1 trillion worldwide, amounting to 12% of all foreign borrowing.
“Hidden debt is large and common,” say the authors, noting that 70% of countries in the study revised their debt reports upward at least once. Most underreporting, they found, occurred in good economic years, while corrections came during downturns or under scrutiny from international auditors like the IMF. For nations with weaker institutions, these misreports were particularly pronounced, often revealing debt levels far higher than initially declared.
The study also finds consequences for both borrowers and lenders. Countries with hidden debts pay higher interest rates as lenders grow wary of their reliability. For creditors, hidden debt often means lower recovery rates and higher risks, which are ultimately passed back to borrowers as higher costs or tougher terms.
Raising the risk
For U.S. investors, hidden debts raise the risk in foreign bonds. And as the IMF’s largest contributor, the U.S. may become more cautious in funding countries that routinely misreport debt.
Securities like public bonds and World Bank loans are generally less prone to these issues, as they require routine disclosures. By contrast, private bank credit and bilateral loans—often less transparent—show the largest discrepancies. In response, the researchers advise countries to bolster transparency policies during economic boom times rather than in crisis, noting that only those with lower hidden debt levels benefit from such scrutiny.
For investors and policymakers, the takeaway is clear: debt figures tend to rise after initial publication, increasing the chances of default. As global debt edges ever closer to GDP, these hidden liabilities will only heighten the stakes.
