Measuring GDP is an extremely complex and error-prone process. Investment pay-outs on bonds should be based on criteria that are definitive and easy to measure. For that reason, linking payments to the growth in a country’s GDP could never be anything other than challenging even though the sense of the idea (you pay more when you earn more) is indisputable.
Even the great advocates of GDP-indexed bonds, such as Eduardo Borensztein and Paolo Mauro, who wrote an IMF discussion paper making their case, have reservations about “the verifiability of GDP data”.
In Bulgaria’s case, however, it seems that even the currency of measurement is unclear: should it be dollars or the leva, the national currency? Fitch Ratings has always assumed the calculation was to be made in leva at constant prices. Now it seems that there is doubt and that Bulgaria could owe $228m in interest arrears in the worst case scenario, using leva at current prices.
Potential issuers should not despair, however. New markets always experience this kind of teething trouble. It wasn’t that long ago that credit derivatives players were arguing about the meaning of default.
Bulgaria may be doing good work in paving the way for other emerging market issuers to use a mechanism that matches their repayments to their performance.
