Events

Prof. Jenny Chu
Professor of Financial Accounting
JM Keynes Fellow in Financial Economics
Deputy Director of the Centre for Financial Reporting and Accountability (CFRA)
Judge Business School | University of Cambridge

Despite its importance for economic policy and capital markets, sovereign general government debt is not measured under harmonized or enforceable global accounting standards. As a result, credit rating agencies (CRAs) apply ad hoc adjustments to transform heterogeneous fiscal data into comparable figures for rating purposes, giving rise to disagreement even over historical debt levels. Using historical debt-to-GDP figures reported by S&P, Moody’s, and Fitch for 88 countries from 2007 to 2018, we find that dispersion in CRA sovereign debt assessments is economically meaningful, averaging just over 3% of GDP. We show that this dispersion is related to features of the sovereign fiscal reporting environment. Disagreement is higher in countries with greater exposure to contingent liabilities and weaker fiscal transparency and is lower in countries subject to supranational debt rules, such as those in the European Union. We further document economically significant implications. Higher dispersion is associated with more negative rating actions, and higher sovereign bond yield spreads. Consistent with the effect being driven by fiscal accounting uncertainty rather than macroeconomic fundamentals, these relations are present outside the global financial crisis and across economic development and institutional settings. Overall, our findings suggest that disagreement among professional intermediaries on reported debt levels conveys incremental information about fiscal transparency and uncertainty beyond headline debt measures.