It is an economic truism that markets operate more efficiently and fairly when there is more transparency. However, in the case of sovereign debt markets, the virtues of transparency are partially offset by its costs, writes Mark Weidemaier. Without an international regulator or bankruptcy court, opacity sometimes advances the public interest, including by helping financially distressed governments protect assets.
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The early 21st century has brought remarkable gains for emerging markets and developing economies. Growth is up, poverty and inequality are down. But the repeated shocks of the past decade—lower commodity prices, the Covid-19 pandemic, tariffs—have undermined many of these gains. The development outlook has darkened for many countries, and questions of debt sustainability have come to the fore.
Discussions of sovereign debt sustainability increasingly focus on debt transparency. It is not hard to see why. Public debt is systematically underreported. Among the reasons for this (none of them good), keeping debt hidden and off-books can help political actors evade fiscal rules and duck the economic and political costs associated with the perception of excessive borrowing. Estimates have put the amount of “hidden” sovereign debt at $1 trillion. These undisclosed debts can undermine decades of progress and, when disclosed, can trigger financial crises. The Greek debt crisis, for example, was prompted by the revelation, in 2009, that the country had been underestimating its debt for many years. Opaque borrowing practices also short circuit political checks on borrowing and enable corruption, allowing borrowed funds to disappear into accounts held by politically connected individuals offshore. Mozambique’s hidden debt scandal is a case in point. The disclosure of over two billion in off-books borrowing, which had been layered through state-owned enterprises and backed by undisclosed government guarantees, devastated the country’s economy and landed officials in jail.
Even in the best of circumstances, opacity in sovereign borrowing makes resolving debt crises harder than it needs to be. If no one knows how much is owed, to whom, or on what terms, it is difficult to assess sustainability, let alone coordinate a fix. Hidden debts and loans with complicated legal and financial structures don’t just delay negotiations—they erode trust and make it easier for creditors to suspect (sometimes rightly) that someone else is getting a better deal. The result is fragmentation, finger-pointing, and drawn-out restructurings that help no one: not creditors, and certainly not the debtor’s population. So it is no surprise that initiatives launched by multilateral institutions, academics, and others aim to increase the transparency of sovereign debt markets. As a World Bank report on “debt transparency” puts it, “[d]ebt transparency is essential to safeguarding and monitoring debt sustainability.”
But this is where things start to get messy. We usually treat opacity as a flaw in the system, and often it is. But in sovereign debt, it sometimes functions—even if awkwardly—as a kind of feature. These markets operate without the institutional scaffolding that governs most financial distress: no bankruptcy court, no automatic stay, no centralized forum to corral creditors or impose solutions. In that vacuum, opacity can serve useful functions.
Take legal enforcement against a sovereign nation in the case of debt default. In a typical bankruptcy involving a non-sovereign debtor, creditor claims are centralized in a single forum, enforcement actions are automatically stayed, and a structured process determines the priority and distribution of payments. There is no such process for sovereign debtors. Instead, creditors must pursue their claims individually, often in multiple jurisdictions, without the benefit of a coordinated mechanism to stay litigation, marshal assets, or enforce collective decisions. The result is that sovereign debt enforcement is fragmented and prone to delay or deadlock. Litigation against sovereign borrowers isn’t inherently problematic—creditors are entitled to be repaid, after all—but at times it can disrupt broader restructuring efforts or impose unwarranted costs on the borrower’s population. Sovereigns whose wealth depends on exports are particularly exposed to this risk. Commodities like oil, gas, and copper, as well as the revenue generated by exporting these commodities, can be interdicted by creditors. The law of sovereign immunity blocks some paths to creditors seizing these assets, but not all. So sovereigns improvise, relying on what lawyers politely call “liability management”: the use of opaque structures to keep assets out of reach.
Is this ideal? Hardly. Markets tend to work best when obligations are readily enforceable. The law of foreign sovereign immunity, combined with a sovereign’s ability to shelter assets within its own borders, means that this is never really true for a sovereign’s obligations. The willing cadre of lawyers, money managers, and other professionals specialized in hiding offshore assets further undermines the enforceability of sovereign debt. And of course, the tools they use to shield assets from creditors can also obscure corrupt practices, enabling officials to siphon off public wealth. So there are many good reasons to prefer greater transparency. But because of the incomplete institutional architecture of sovereign debt markets, there are also times in which a well-governed society may choose to deploy opacity in the public interest.
There is also irony in the fact that some of the actors best positioned to uncover corruption are entirely lacking in transparency. Private litigation against sovereigns tends to be the domain of hedge funds and similarly opaque entities, which have the resources and legal tools to absorb the costs, navigate the delays, and pursue enforcement strategies that would be out of reach for most other creditors. If you know any of these investors, and if you ask them (sometimes even if you don’t), they’ll tell you they’re doing God’s work. And indeed, creditors have occasionally unearthed damning evidence of official corruption while pursuing claims against sovereigns. Discovery conducted in litigation, particularly in New York or London, can reveal important information. So in going after hidden sovereign assets, creditors sometimes lift the veil on financial wrongdoing.
Sovereign debt markets, in short, function well enough to keep going, but not well enough to work efficiently. Opacity is often part of the problem. It conceals liabilities, erodes public accountability, and can derail restructurings. But it’s also a patch for deeper structural flaws: the lack of a centralized international forum, the absence of an enforcement stay, and the fragility of multilateral coordination. In that kind of system, even well-governed countries may find it rational to obscure asset flows or transaction structures—not to defraud creditors, but to prevent unilateral enforcement that could undermine broader restructuring efforts.
Reform should therefore focus on the kinds of transparency that matter most: disclosure of loan terms, repayment obligations, and collateral arrangements. Governments should be expected to publish the key terms of their financial commitments and identify the parties involved. But calls for absolute visibility have costs as well as benefits. Targeted transparency can still deter corruption and reduce the risk of hidden debt surprises, without asking sovereigns to surrender the few defensive tools they have in an unfinished system. Reforms like those promoted by the World Bank, which emphasize comprehensive debt reporting and disclosure of loan terms are on the right track.
Authors’ Disclosures: The authors report no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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