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17 July 2012

Public Finance International: Sovereign balance sheets, stranger than fiction


According to Ian Ball, CEO of IFAC, sovereign balance sheets are real, but very rare. Writing for the PFI Blog, he analyses the range of reasons why they are very valuable.

There is no escaping the fact that the sovereign debt crisis has exposed the weak fiscal positions of many governments. From Greece to Portugal, to Italy, to Ireland, to Spain, with more to come, markets have reacted negatively to the fiscal positions of many sovereigns.

Much of what has been written about the relative fiscal strength of these countries has referred to ‘sovereign balance sheets’— for example, the International Monetary Fund’s ‘Guiding Principles for Managing Sovereign Risk and High Levels of Public Debt’ (updated June 18, 2012) and various Financial Stability Board documents.

But the reality is that most sovereigns do not have balance sheets. So for those countries, sovereign balance sheets have some of the characteristics of mermaids and unicorns, existing only in fiction. However, it is a safe bet that the balance sheets of sovereigns that choose not to produce them would be by no means as attractive as these mythical creatures are reputed to be. After all, why would a government not disclose its true fiscal position, if such disclosure would be reassuring to markets?

Unlike mermaids and unicorns, sovereign balance sheets are real, if rare. And they are also very valuable, for at least two reasons.

First, a balance sheet ensures that a country’s fiscal position is much more accurately and reliably presented than is the case with conventional debt to GDP measures. It‘s an account of all the government’s assets and liabilities, and therefore provides a clearer snapshot of its financial strength and sustainability. It recognises that sovereigns have significant liabilities other than debt (for example employee pension obligations) and different asset structures from which to meet those obligations.

Second, a balance sheet gives a sovereign a starting point for better managing its assets and liabilities. Better accounting helps a government use its assets more productively and efficiently, make more informed decisions and choices about the acquisition, management and disposal of capital assets, and redirect capital where it is most needed and produces most value.

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