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Measuring the Real Debt Burden: Proposing a New Debt Indicator

Measuring the Real Debt Burden: Proposing a New Debt Indicator

In order to assess the problem of a debt overhang more appropriately, a new debt indicator is proposed that solves the ambiguity of traditional debt indicators. Debt service Ratios and Interest Service Ratios, as defined by the Bretton Woods Institutions, are equally low for debt free countries and heavily indebted countries unable or unwilling to pay. Even the International Bank for Reconstruction and Development seems to have been misled by its own indicators. Its World Debt Tables 1992/93 concluded for "a number of" Latin American countries: "With debt indicators now back to pre-1982 levels, most of these countries are emerging from the debt crisis, helped in some cases by the catalytic effects of reductions in their commercial bank debt." Low debt indicators, however, simply mirrored huge arrears. This underlines the need for unambiguous indicators. Interestingly, Sub-Sahara Africa's indicators, dramatically lower at that time, were not interpreted with similar optimism.