|This note is in response to the contribution made by Deborah Guz in connection with the IMF Statistics Position Paper on Loan Valuation Issues. First, we would like to thank the author for the interest shown in the loan valuation debate and to assure her that we share her views of the need to standardize statistical terminologies and concepts. However, we would like to clarify a number of issues raised by the author with regard to the definitions/terminologies recommended in the External Debt Statistics: Guide for Compilers and Users (Debt Guide) which we consider inappropriate.
Our specific comments are set out below:
Comment not to use definition of principal in the Debt Guide
We consider the author's recommendation not to use the Debt Guide definition of principal inappropriate given the evolving economic reality in financial markets. The key point to consider is how to view debt. The Debt Guide through its definition views debt as a series of future resource claims on the economy arising from the requirement to make payments to nonresidents. The outstanding value of the debt is determined by the interest rate used to discount these expected future payments. This is the principal amount outstanding-the discounted value of the future resource claims. This approach reflects the policy interest in the future resource burden on the economy. It is true that the 1988 Grey Book looked at debt from an historical, backward looking, perspective and so spoke of principal as an amount that had been disbursed. But the wide ranging international discussion of the Debt Guide and the endorsement of 8 international agencies including the OECD supported the change from this backward-looking to forward-looking view of debt and its burden. This is also the analytical approach in the Heavily Indebted Poor countries (HIPCs) Initiative.
Having said this, it is recognized that there is analytical interest in interest payments as opposed to principal payments, and so these terms are defined comprehensively in the Debt Guide. But it should be clear that not all accrued interest results in an interest payment. For instance, zero coupon bonds accrue interest but one principal payment is made at maturity. So unlike suggested by Deborah, accrued interest and interest payments are not synonymous, and failure to take into account accrued interest of such bonds at any point in time is tantamount to turning a blind eye to an existing debt burden.
Do not attempt to redefine basic language and economic concepts.
We consider that the basic objective in revising any economic manual is to take cognizance of the evolving reality in contemporary world and to strive to identify inconsistencies and inadequacies in existing terminologies and concepts. In this regard, we do not share the author's view that terminologies and concepts should not be redefined if they are deemed to be inadequate in embracing current economic and financial reality. To the extent therefore that existing definitions of interest and principal are not reflective of the true future debt burdens of the debtor, it is unreasonable to continue to use the concepts-as originally defined-in analyzing potential debt payment risks of an economy.
Do define items that can vary, or that do not have an undisputedly clear dictionary meaning.
We agree with the author that "amounts outstanding (stocks)" should be clearly defined.
Define nominal and market value in general and then explain how to measure items at nominal and market value but do not confuse valuation methods with the items being measured.
We agree with the author that there is need to define nominal and market values, and to explain explicitly the method of measurement or valuation. Indeed, we recognize that depending on the context in which different people use/interpret the adjective "nominal" and the nouns "value" and "nominal value" they could potentially confuse valuation methods with the items measured or the measure itself. It is for this reason the authors of the Debt Guide in defining "nominal value" and "market value" of debt were careful to choose the words that avoided the potential confusion of the nouns and the valuation methods (see Debt Guide paragraphs 2.31 and 2.32).
We agree with the author that "principal is not nominal value and nominal value is not principal" although it is not clear to us where in the Loan Valuation Issues it was implied otherwise, unless it is from the quotation "...the current (loan) valuation principle is nominal value.." which means something else.
Andrew Kitili, IMF
November 23, 2004
The author of this contribution to the discussion group on this site bears the sole responsibility for both the substance and the style of the contents. The purpose of the discussion group is to elicit comments and to promote debate on specific topics. As such, the views expressed on any of the issues raised are not to be attributed to the IMF.