Hidden Truths of the Debt Crisis

By Freer, Steve | Public Finance, November 2011 | Go to article overview

Hidden Truths of the Debt Crisis


Freer, Steve, Public Finance


Any sense that the global financial crisis concluded in or around 2009 is now well and truly dispelled. Over the past few months it has become clear that such theories should be filed under 'foolish optimism'. The crisis grinds on and, despite the efforts of politicians and their advisers, seems no nearer to a lasting resolution.

With the benefit of hindsight, the 'solutions' implemented by the UK and other governments in 2009 merely shifted rather than solved the problem. Put simply, we traded over-leveraged banks for over-leveraged governments. Now, as the full extent of the sovereign debt crisis becomes apparent, we can see the problem, slowly but surely, migrating back to its origin.

Most worrying of all is the fact that ahead of key Group of 20 and eurozone meetings, there really doesn't seem to be any fresh ideas on the table. Instead, the focus seems to be on ever larger bail-out kitties. What, we wonder, will that mean when it trickles down to future sovereign debt ratings?

In some respects it is easy to sympathise with the leaders who are wrestling with these issues. The levers available to them are limited and the effects of pulling them fraught with uncertainty.

However, it is surprising that we have not seen more coverage of one important variable which is entirely within the gift of governments: highquality public financial management.

Is the crisis really helped by the fact that many of the world's governments continue to account on a cash basis providing little or no information about their assets and liabilities? Isn't that just a tiny bit risky in a period in which those same governments are entering into a range of extraordinary transactions to shore up beleaguered financial institutions and fragile market confidence?

The time has come for us to have hard, accrual-based information about all governments' financial health, debts and deficits, produced on a basis consistent with international financial reporting standards and, of course, professionally audited. This information is fundamental for transparent accountability and the ability of governments to discharge their critical responsibilities for fiscal and economic management. …

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