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Back Matter

Author(s):
International Monetary Fund
Published Date:
September 2009
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    Appendix I Reporting the Fiscal Impact of Financial Sector Support

    A thorough and transparent reporting of government interventions in the financial sector is a prerequisite for understanding the fiscal stance in crisis countries and prescribing appropriate fiscal policy. This appendix discusses how to report the fiscal impact of various forms of government intervention.32 The first section deals with the reporting of direct government interventions in bank restructuring operations. To do so, it presents a number of principles for reporting public intervention in resolving financial crises, drawing on accepted statistical methodologies such as the IMF’s Government Finance Statistics Manual (GFSM 1986 and GFSM 2001)—the usual basis for IMF staff monitoring of the fiscal position.33 The second section describes the reporting of indirect interventions, notably those giving rise to contingent liabilities.

    Reporting the Cost of Direct Interventions

    When government intervenes in a financial institution, the key question for reporting purposes is whether the intervention creates an effective government claim on the institution.34 The nature (or quality) of the claim determines the statistical treatment.

    • If the government’s intervention results in an increase in its claims on financial institutions commensurate to its intervention and for which the government expects to get returns (equity purchases) or be repaid (loans to a solvent bank), the intervention would be recorded as a financing operation, since it does not change the government’s net worth. It simply changes the composition of its assets and/or liabilities.

    • An unrequited intervention should, however, be treated as an expense (capital or current transfer) as it results directly in a reduction in the government’s net worth. An important example is the case of the recapitalization of a bank by government that does not create new claims for the government (meaning that the recapitalization is an unrequited transfer) nor a positive expectation of recovering associated claims (e.g., when assets exist but are impaired).

    Under cash accounting (e.g., GFSM 1986 or the cash statement in GFSM 2001), the fiscal impact of some government noncash interventions is not fully reflected in the fiscal balance. Only the carrying cost of these interventions would be reported above the line (as interest payments) and increase the fiscal deficit. To remedy this shortcoming, Daniel, Davis, and Wolfe (1997) proposed an “augmented” fiscal balance as a means of capturing the full costs of recapitalization: as is the case with cash operations, noncash bank assistance operations (e.g., recapitalization through transfer of public debt, and debt swap) would count toward the “augmented” deficit and add to government debt if implemented for purposes of public policy. Table A1.1 and Table A1.2 present the treatment of similar operations under GFSM 1986 and GFSM 2001, respectively, using numerical examples.

    Table A1.1Statistical Treatment of Government Intervention (Under GFSM 1986)
    Capital Injection
    Creating an effective claim
    Buy equity (i)Extend a loan (ii)No effective claim (iii)
    Payment in securities (i)bPayment in securities (ii)bPayment in securities (iii)b
    Baseline: No InterventionPayment in cash (i)aAugmented treatmentPayment in cash (ii)aAugmented treatmentPayment in cash (iii)aAugmented treatment
    (1) Total revenue and grants150153153152152150150
    Of which interest received0002200
    Of which dividends received0330000
    (2) = (3) + (4) Total expenditure and lending minus repayments150250155250155250155
    (3) Expenditure150150155150155250155
    Of which interest0050505
    Of which capital transfers000001000
    (4) Lending minus repayments01000100000
    Loans000100000
    Shares and other equity010000000
    (5) = (1) - (2) Overall balance0–97–2–98–3–100–5
    (6) Noncash bank restructuring measures0010001000100
    Loans000010000
    Shares and other equity001000000
    Capital transfer000000100
    (7) = (5) - (6) Augmented balance0–97–102–98–103–100–105
    (7) Total financing09710298103100105
    Domestic financing09710298103100105
    Net change in banking deposits (- increase)09729831005
    Issuance of treasury bills0010001000100
    Note: Assume amount of the capital injection: 100; interest on government securities issued: 5 percent; interest earned on assets acquired by government: 2 percent; interest on cash deposits of government 0 percent; and dividends on shares and other equity: 3 percent.
    Government acquires an effective claim on recipient of financial assistance
    (i)a Government injects capital in a financial institution by taking up equity to the value of 100, financed from existing cash resources.This exchange of cash assets for an asset acquired for policy purposes directly reduces the overall balance. The secondary impact of acquiring the equity generates some dividend, thus increasing the overall balance to the extent that it is more than interest forgone on the cash deposits. Government’s gross, as well as net, debt remains unchanged.
    (i)b Government injects capital in a financial institution by taking up equity to the value of 100, financed by the issuance of securities.In the standard GFSM 1986 the acquisition of a financial asset for policy purposes, funded by the incurrence of a liability, has no influence on the overall balance in the absence of cash flows. The secondary impact of the actual interest payable on the securities reduces the overall balance, in so far as it does not match the receivable dividend income. Government’s stock of gross debt increases with value of securities issued, but net debt remains unchanged.
    (ii)a Government injects capital in a financial institution by extending a loan to the bank financed from existing cash resources.This exchange of cash assets for a loan acquired for policy purposes directly reduces the overall balance. The secondary impact of the loan extended is interest receivable, thus increasing the overall balance of government to the extent that it is more than interest forgone on the cash deposit. Government’s gross, as well as net, debt remains unchanged.
    (ii)b Government injects capital in a financial institution by extending a loan to the bank financed by the issuance of securities.In the standard GFSM 1986 the acquisition of a financial asset for policy purposes, funded by the incurrence of a liability, has no influence on the overall balance in the absence of cash flows. The secondary impact of the loan extended is interest receivable, thus increasing the overall balance of government to the extent that it is more than interest payable. Government’s gross debt increases with value of securities issued, but net debt remains unchanged.
    Government does not acquire an effective claim on recipient of financial assistance
    (iii)a Government injects capital in a financial institution but does not acquire an effective claim on the recipient. The injection is financed from existing cash resources.This capital injection directly reduces the overall balance of government due to the capital transfer. In addition, the overall balance could also decrease to the extent that revenue reduces due to interest forgone on the cash deposits. Government’s gross debt remains unchanged, but net debt increases.
    (iii)b Government injects capital in a financial institution but does not acquire an effective claim on the recipient. The injection is financed by the issuance of securities.In the standard GFSM 1986 the capital injection has no influence on the overall balance in the absence of cash flows. The secondary impact of the interest cost payable on the securities reduces the overall balance. Government’s gross, as well as net, debt increases with the value of securities issued.
    Table A1.1
    Purchasing Bad Assets from Financial Institutions
    Reducing Liabilities of
    Financial Institutions
    At market prices (vi)At above-market rates (vii)
    Full assumption of debt (iv)Payment in securities (vi)bPayment in securities (vii)b
    Baseline: No InterventionAugmented treatmentAssistance with debt reduction (v)Payment in cash (vi)aAugmented treatmentPayment in cash (vii)aAugmented treatment
    (1) Total revenue and grants150150150152152152152
    Of which interest received0002222
    (2) = (3) + (4) Total expenditure and lending minus repayments150155170250155270155
    (3) Expenditure150155170150155170155
    Of which interest0500505
    Of which capital transfers002000200
    (4) Lending minus repayments00010001000
    Loans00010001000
    (5) = (1) - (2) Overall balance0–5–20–98–3–118–3
    (6) Noncash bank restructuring measures0100001000120
    Loans00001000100
    Capital transfer0100000020
    (7) = (5) - (6) Augmented balance0–105–20–98–103–118–123
    (7) Total financing01052098103118123
    Domestic financing010520983118123
    Net change in banking deposits (-increase)05209831183
    Issuance of treasury bills00001000120
    Increase in other domestic liabilities010000000
    Note: Assume interest on government securities issued: 5 percent; interest earned on assets acquired by government: 2 percent; and interest on cash deposits of government 0 percent.
    Government assists financial institutions in reducing their liabilities
    (iv) Government assumes a bank’s liabilities in respect of a loan outstanding, to the value of 100.In the standard GFSM 1986 the loan assumption has no influence on the overall balance in the absence of cash flows. The secondary impact is a reduction in the overall balance due to the interest payable on the assumed loan. Government’s stock of gross, and net, debt increases with value of assumed loan.
    (v) Government provides assistance to banks in providing them with some cash to be used in reducing outstanding liabilities to the value of 20.This assistance directly reduces the overall balance of government due to the capital transfer. The secondary impact of this assistance is a reduction in the overall balance of government to the extent that revenue reduces due to interest forgone on the cash deposits. Government’s stock of gross debt remains unchanged, but net debt increases.
    Government purchases bad assets from financial institutions
    (vi)a Government purchases bad assets from a bank at market values of 100, financed from existing cash resources.This exchange of cash assets for an asset related to policy purposes directly reduces the overall balance of government. The secondary impact of interest receivable increases the overall balance of government to the extent that it is more than interest forgone on the cash deposit. Government’s stock of gross, and net, debt remains unchanged.
    (vi)b Government purchases bad assets from a bank at market values of 100, financed by the issuance of securities.In the standard GFSM 1986 the acquisition of a financial asset in exchange of a liability has no influence on the overall balance in the absence of cash flows. The secondary impact of the actual interest cost reduces overall balance, in so far as it does not match the interest income. Government’s stock of gross debt increases with value of securities issued, but net debt remains unchanged.
    (vii)a Government purchases bad assets from a bank at a price of 120 while market value of the asset is 100—financed from existing cash resources.This exchange of cash assets for an asset related to policy purposes directly reduces the overall balance of government. The secondary impact of the asset acquired is interest receivable, thus increasing the overall balance of government to the extent that it is more than interest forgone on the cash deposit. Government’s stock of gross debt remains unchanged but net debt increases with 20.
    (vii)b Government purchases bad assets from a bank at a price of 120 while market value of the asset is 100, financed by the issuance of securities.In the standard GFSM 1986 the acquisition of an asset related to policy purposes in exchange for a liability has no influence on the overall balance of government in the absence of cash flows. The secondary impact of the actual interest cost reduces the overall balance, in so far as it does not match the interest income. Government’s stock of gross debt increases with the value of securities issued (120), and the net debt increases with 20.
    Assuming One-Off Debt Service of Guaranteed Debt (ix)
    With creating an effective claim on defaulter (ix)aWithout creating an effective claim on defaulter (ix)bServicing Debt When Guarantee Is Called (x)
    Baseline:
    No Intervention
    Issuing guarantees (viii)Augmented treatmentAugmented treatmentWith creating an effective claim on defaulter (x)aWithout creating an effective claim on defaulter (x)b
    (1) Total revenue and grants150150150150152150
    Of which interest received000020
    (2) = (3) + (4) Total expenditure and lending minus repayments150150150150250255
    (3) Expenditure150150150150150255
    Of which interest000005
    Of which capital transfers00000100
    (4) Lending minus repayments00001000
    Loans00001000
    (5) = (l)- (2) Overall balance0000–98–105
    (6) Noncash bank restructuring measures00111100
    Loans11000
    Capital transfer01100
    (7) = (5) - (6) Augmented balance00–11–11–98–105
    (7) Total financing00111198105
    Domestic financing00111198105
    Net change in banking deposits (-increase)000098105
    Increase in other domestic liabilities00111100
    Memorandum item: Outstanding guarantees01,000990990900900
    Note: Assume interest on government securities issued: 5 percent; interest earned on assets acquired by government: 2 percent; and interest on cash deposits of government 0 percent.
    Government assistance through guarantees
    (viii) Government provides support to the industry by issuing guarantees to the total amount of 1,000.This issuance of guarantees does not affect the overall balance of government because the transaction is not recorded in the operation of government. Government’s stock of gross, and net, debt remains unchanged because such guarantees are not regarded as government liabilities until such time as these are called. However, for transparency purposes, record the total outstanding amount of guarantees as a memorandum item on the government accounts.
    (ix) a Government assumes the obligation to service a one-off principal (10) and interest (1) payment that was guaranteed due to temporary liquidity constraint of a bank (with creating an effective claim on defaulter).In the GFSM 1986 the assumption of debt service has no influence on the overall balance of government in the absence of cash flows. Since the bank remains a going concern, government acquires an effective claim on the bank. The secondary impact of interest receivable increases the overall balance of government to the extent that it is more than interest forgone on the cash deposit. Government’s stock of gross debt increases and net debt remains unchanged.
    (ix) b Government assumes the obligation to service a principal (10) and interest payment (1) that was guaranteed, but due to fundamental insolvency issues, government does not obtain an effective claim on the defaulter bank (without creating an effective claim on defaulter).In the GFSM 1986 the assumption of the servicing of a guaranteed loan has no influence on the overall balance of government in the absence of cash flows. The overall balance could decrease to the extent that revenue reduces due to interest forgone on the cash deposits. Government’s stock of gross debt and net debt increase by 11.
    (x) a A guarantee to the value of 100 is called. The defaulting bank is being restructured and government obtains an effective claim on the bankThis exchange of cash assets for an asset related to policy purposes directly reduces the overall balance of government. Since the bank remains a going concern, government acquires an effective claim on the bank. The secondary impact of interest receivable increases the overall balance to the extent that it is more than interest forgone on the cash deposit. Government’s stock of gross, and net, debt remains unchanged, while the stock of outstanding guarantees reduces with the amount of the called guarantee.
    (x)b A guarantee to the value of 100 is called. The defaulting bank is insolvent and government does not obtain an effective claim on the bank.A called guarantee has the same impact as loan assumption, assuming the loan directly reduces the overall balance of government due to the capital transfer. The secondary impact is a further reduction in the overall balance due to the interest payable on the assumed loan. Government’s stock of gross, and net, debt increases with value of assumed loan, while outstanding guarantees reduce with the same amount.
    Table A1.2.Statistical Treatment of Government Intervention (Under GFSM 2001)
    Capital Injection
    Creating an effective claim
    Buy equity (i)Extend a loan (ii)No effective claim (iii)
    Baseline: No InterventionPayment
    in cash (i)a
    Payment
    in securities (i)b
    Payment
    in cash (ii)a
    Payment
    in securities (ii)b
    Payment
    in cash (iii)a
    Payment
    in securities (iii)b
    (1) Revenue150153153152152150150
    Of which interest received0002200
    Of which dividends received0330000
    (2) Expense100100105100105200205
    Of which interest0050505
    Of which capital transfers00000100100
    (3) = (1) - (2) Net/gross operating balance5053485247–50–55
    (4) Net acquisition of nonfinancial assets50505050505050
    (5) = (3) - (4) Net lending/borrowing03–22–3–100–105
    (6) = (7) - (8) Transactions in financial assets and liabilities (financing)03–22–3–100–105
    (7) Net acquisition of financial assets0398297–100–5
    Of which
    Currency and deposits0–97–2–98–3–100–5
    (7.1) Loans for policy purposes00010010000
    (7.2) Shares and other equity for policy purposes01001000000
    (8) Net incurrence of liabilities0010001000100
    Of which Securities other than shares0010001000100
    Loans0000000
    (9) = (5) - (7.1) - (7.2) Overall balance0–97–102–98–103–100–105
    Note: Assume amount of the capital injection: 100 percent; interest on government securities issued: 5 percent; interest earned on assets acquired by government: 2 percent; interest on cash deposits of government: 0 percent; and dividends on shares and other equity: 3 percent.
    Government acquires an effective claim on recipient of financial assistance
    (i)a Government injects capital in a financial institution by taking up equity to the value of 100, financed from existing cash resources.This exchange of one type of asset for another has no primary impact on net worth of government. The secondary impact of acquiring the equity generates some dividend, thus increasing net worth of government to the extent that it is more than interest forgone on the cash deposits. The implied “cost” of the rescue operation is potential losses in the value of the equity investment. Government’s gross, as well as net, debt remains unchanged.
    (i)b Government injects capital in a financial institution by taking up equity to the value of 100, financed by the issuance of securities.This acquisition of a financial asset funded by the incurrence of a liability has no primary impact on the net worth of government. The secondary impact of the actual interest payable on the securities reduces net worth, in so far as it does not match the receivable dividend income. The implied “cost” of the rescue operation is potential losses in the value of the equity investment. Government’s stock of gross debt increases with value of securities issued, but net debt remains unchanged.
    (ii)a Government injects capital in a financial institution by extending a loan to the bank, financed from existing cash resources.This exchange of one type of asset for another has no primary impact on net worth of government. The secondary impact of the loan extended is interest receivable, thus increasing net worth of government to the extent that it is more than interest forgone on the cash deposit. The implied “cost” of the rescue operation is potential losses on the loans extended. Government’s gross, as well as net, debt remains unchanged.
    (ii)b Government injects capital in a financial institution by extending a loan to the bank, financed by the issuance of securities.This acquisition of a financial asset in exchange for a liability has no primary impact on the net worth of government. The secondary impact of the loan extended is interest receivable, thus increasing net worth of government to the extent that it is more than interest payable. The implied “cost” of the rescue operation is potential losses on the loans extended. Government’s gross debt increases with value of securities issued, but net debt remains unchanged.
    Government does not acquire an effective claim on recipient of financial assistance
    (iii)a Government injects capital in a financial institution but does not acquire an effective claim on the recipient. The injection is financed from existing cash resources.This capital injection directly reduces net worth of government due to the capital transfer. In addition, net worth could also decrease to the extent that revenue reduces due to interest forgone on the cash deposits. The implied “cost” of the rescue operation is the amount provided. Government’s gross debt remains unchanged, but net debt increases.
    (iii)b Government injects capital in a financial institution but does not acquire an effective claim on the recipient. The injection is financed by the issuance of securities.This capital injection directly reduces net worth of government due to the capital transfer. In addition, net worth is further reduced by the interest cost payable on the securities. The implied “cost” of the rescue operation is the value of the securities provided. Government’s gross, and net, debt increases with the value of securities issued.
    Reducing Liabilities of Financial InstitutionsPurchasing Bad Assets from Financial Institutions
    At market prices (vi)At above-market rates (vii)
    Baseline:
    No Intervention
    Full assumption
    of debt (iv)
    Partial assistance
    with reduction (v)
    Payment
    in cash (vi)a
    Payment
    in securities (vi)b
    Payment
    in cash (vii)a
    Payment
    in securities (vii)b
    (1) Revenue150150150152152152152
    Of which interest received0002222
    (2) Expense100205120100105120125
    Of which interest0500505
    Of which capital transfers010020002020
    (3) = (1) - (2) Net/gross operating balance50–553052473227
    (4) Net acquisition of nonfinancial assets50505050505050
    (5) = (3) - (4) also = (6) Net lending/borrowing0–105–202–3–18–23
    (6) = (7) - (8) Transactions in financial assets and liabilities (financing)0–105–202–3–18–23
    (7) Net acquisition of financial assets0–5–20297–1897
    Of which
    Currency and deposits0–5–20–98–3–118–3
    (7.1) Loans for policy purposes000100100100100
    (8) Net incurrence of liabilities0100001000120
    Of which
    Securities other than shares00001000120
    Loans010000000
    (9) = (5)-(7.1) Overall balance0–105–20–98–103–118–123
    Note: Assume interest on government securities issued: 5 percent; interest earned on assets acquired by government: 2 percent; and interest on cash deposits of government: 0 percent.
    Government assists financial institutions in reducing their liabilities
    (iv) Government assumes a banks liabilities in respect of a loan outstanding, to the value of 100.This loan assumption directly reduces net worth of government due to the capital transfer. The secondary impact is a further reduction in net worth due to the interest payable on the assumed loan. Government’s stock of gross, and net, debt increases with value of assumed loan.
    (v) Government provides assistance to the bank in providing it with some cash to be used in reducing outstanding liabilities to the value of 20.This assistance directly reduces net worth of government due to the capital transfer. The secondary impact of this assistance is a reduction in net worth of government to the extent that revenue reduces due to interest forgone on the cash deposits. Government stock of gross debt remains unchanged, but net debt increases.
    Governments purchases bad assets from financial institutions
    (vi)a Government purchases bad assets from a bank at market value of 100, financed from existing cash resources.This exchange of one type of asset for another has no primary impact on net worth of government. The secondary impact of interest receivable increases net worth of government to the extent that it is more than interest forgone on the cash deposit. The implied “cost” of the rescue operation is potential losses on the assets acquired. Government’s stock of gross, and net, debt remains unchanged.
    (vi)b Government purchases bad assets from a bank at market values of 100, financed by the issuance of securities.This acquisition of a financial asset in exchange for a liability has no primary impact on the net worth of government. The secondary impact of the actual interest cost reduces net worth, in so far as it does not match the interest income. The implied “cost” of the rescue operation is potential losses on the assets acquired. Government’s stock of gross debt increases with value of securities issued, but net debt remains unchanged.
    (vii)a Government purchases bad assets from a bank at a price of 120 while market value of the asset is 100, financed from existing cash resources.This exchange of one type of asset for another (acquired at a cost higher than market value) directly reduces net worth of government by the amount of the difference between the market value and purchasing price. The secondary impact of the asset acquired is interest receivable, thus increasing net worth of government to the extent that it is more than interest forgone on the cash deposit. The implied “cost” of the rescue operation is potential losses on the assets acquired. Government’s stock of gross debt remains unchanged but net debt increases by 20.
    (vii)b Government purchases bad assets from a bank at a price of 120 while market value of the asset is 100, financed by the issuance of securities.This acquisition of an asset (at a cost higher than market value) in exchange for a liability directly reduces net worth of government by the amount of the difference between the market value of the asset acquired and the value of the liability issued. The secondary impact of the actual interest cost reduces net worth, in so far as it does not match the interest income. The implied “cost” of the rescue operation is potential losses on the assets acquired. Government’s stock of gross debt increases with the value of securities issued (120), and the net debt increases by 20.
    Table A1.2
    Assuming One-Off Debt Service of Guaranteed Debt (ix)Servicing Debt When Guarantee Is Called (x)
    Baseline: No InterventionIssuing Guarantees (viii)With creating an effective claim on defaulter (ix)aWithout creating an effective claim on defaulter (ix)bWith creating an effective claim on defaulter (x)aWithout creating an effective claim on defaulter (x)b
    (1) Revenue150150150150152150
    Of which interest received000020
    (2) Expense100100100111100205
    Of which interest000005
    Of which capital transfers000110100
    (3) = (1) - (2) Net/gross operating balance5050503952–55
    (4) Net acquisition of nonfinancial assets505050505050
    (5) = (3) - (4) also = (6) Net lending/borrowing000–112–105
    (6) = (7) - (8) Transactions in financial assets and liabilities (financing)000–112–105
    (7) Net acquisition of financial assets001102–105
    Of which
    Currency and deposits0000–98–105
    (7.1) Loans for policy purposes001101000
    (8) Net incurrence of liabilities Of which00111100
    Securities other than shares000000
    Loans00111100
    (9) = (5)-(7.1) Overall balance00–11–11–980
    Memorandum item: Outstanding guarantees01000990990900900
    Assume: Interest on government securities issued: 5 percent; interest earned on assets acquired by government: 2 percent; and interest on cash deposits of government: 0 percent.
    Government assistance through guarantees
    (viii) Government provides support to the industry by issuing guarantees to the total amount of 1,000.This issuance of guarantees does not affect the net worth of government because the transaction is not recorded in the operation of government. Government’s stock of gross, and net, debt remains unchanged because such guarantees are not regarded as government liabilities until such time as these are called. However, for transparency purposes, record the total outstanding amount of guarantees as a memorandum item on the government accounts.
    (ix)a Government assumes the obligation to service a one-off principal (10) and interest (1) payment that was guaranteed due to temporary liquidity constraint of a bank.This exchange of one type of asset for another has no primary impact on net worth of government. Since the bank remains a going concern, government acquires an effective claim on the bank. The secondary impact of interest receivable increases net worth of government to the extent that it is more than interest forgone on the cash deposit. The implied “cost” of the assistance is potential losses on the assets acquired. Government’s stock of gross debt increases and net debt remains unchanged.
    (ix)b Government assumes the obligation to service a principal (10) and interest payment (1) that was guaranteed, but due to fundamental insolvency issues, government does not obtain an effective claim on the defaulter bank.The assumption of this obligation directly reduces net worth of government due to the capital transfer. In addition, net worth could also decrease to the extent that revenue reduces due to interest forgone on the cash deposits. Government’s stocks of gross debt and net debt increase by 11.
    (x)a A guarantee to the value of 100 is called. The defaulting bank is being restructured and government obtains an effective claim on the bank.This exchange of one type of asset for another has no primary impact on net worth of government. Since the bank remains a going concern, government acquires an effective claim on the bank. The secondary impact of interest receivable increases net worth of government to the extent that it is more than interest forgone on the cash deposit. The implied “cost” of the assistance is potential losses on the assets acquired. Government’s stock of gross, and net, debt remains unchanged, while the stock of outstanding guarantees reduces with the amount of the called guarantee.
    (x)b A guarantee to the value of 100 is called. The defaulting bank is insolvent and government does not obtain an effective claim on the bank.A called guarantee has the same impact as loan assumption, assuming the loan directly reduces net worth of government due to the capital transfer. The secondary impact is a further reduction in net worth due to the interest payable on the assumed loan. Government’s stock of gross, and net, debt increases with value of assumed loan, while outstanding guarantees reduce with the same amount.

    The GFSM 2001 provides a more complete framework for reporting direct government restructuring operations, focusing on the government’s net worth and integrating stocks and flows as well as cash transactions.35

    • Flow operations are reflected in fiscal indicators such as the operating balance, net lending/borrowing balance, and the cash surplus/deficit. In addition, GFSM 2001 allows (¶4.45) a classification of financial assets according to whether they have been acquired/disposed of for public policy or liquidity management purposes, as transactions in policy- related assets often involve a subsidy component. While this classification is usually not included in the reported GFSM 2001 data, policy-related changes in net assets can be treated as flows with characteristics similar to revenue and expense for analytical purposes. Such treatment is notably used in compiling the overall fiscal balance,36 similar to the “augmented” fiscal balance proposed by Daniel, Davis, and Wolfe (1997) under GFSM 1986.

    • Stock information, such as the government’s balance sheet, permits a better understanding of changes in the government’s net worth. The values of assets and liabilities at the beginning of the reporting period plus the transactions recorded in the standard government operations table (“statement of government operations”) and the “statement of other economic flows” determine their values at the end of the period. “Other economic flows” comprise valuation changes and a variety of other economic events, such as debt write-offs, that affect the holdings of assets and liabilities (see below). Their proper reporting is essential for understanding the impact on government of changes in the value of assets and liabilities, and thereby of the government’s net worth.

    The main types of direct intervention should be recorded on the basis of the following principles (references to the columns below correspond to the proposed treatment of the discussed operation in Table A1.1 (GFSM 1986) or Table A1.2 (GFSM 2001)):

    • Loans to financial institutions and investments in equity of financial institutions (requited recapitalization) are recorded as the acquisition of a financial asset (columns i–ii): In the case of loans extended, subsequent interest/dividends and amortization repaid by the financial institution are recorded as government revenue and a reduction in financial assets, respectively. The transactions themselves (extension of a loan, investment in equity, and so on) are therefore not reflected in net lending/borrowing, as they do not affect the government’s net worth as long as the value of the loan or investment remains unimpaired.37 However, as the government’s new asset was acquired for public policy purposes, it would be reflected in the overall fiscal balance. Conversely, if the loan or investment in equity does not raise an effective asset (i.e., the intervened institution is “worthless”) then the treatment becomes similar to the “unrequited recapitalization” below (i.e., it reduces the government’s net worth).

    • Unrequited recapitalization (i.e., not involving an exchange of assets) through a capital injection (column iii) or the assumption of a failed bank’s liabilities (columns iv–v) is recorded, along with the corresponding carrying costs, as an expense in the operating statement. The full costs of bank recapitalization are thus reflected in net lending/borrowing.

    • The purchase of troubled assets will be recorded simply as the acquisition of a financial asset when it is settled at market/fair value (column vi). It will, therefore, affect the overall fiscal balance (as the purchase is made for public policy purposes), but not net lending/borrowing.38 The purchase will, however, require the recording of an expense when it is settled above market/fair value (the expense will then amount to the premium paid by the government relative to market/fair value, column vii).

    A few further issues to keep in mind when recording government interventions:

    • Critical to the proper reporting of a government intervention is its valuation. In some operations, such as the purchase of troubled assets, the current market value of some of the assets may be difficult to determine. The valuation of these assets is, however, crucial in defining the exact nature of the government intervention, i.e., whether it involves a degree of active fiscal policy, or is solely for liquidity management purposes. For example, in the case of the purchase by a government of troubled assets from financial companies, the price that the government will pay will determine whether this operation is purely an asset swap, providing the financial institutions with more liquid assets (cash or government securities vs. troubled assets), or whether it also aims at recapitalizing these institutions (by valuing these assets higher than their estimated market price/fair value). GFSM 2001 stipulates that (¶9.12): “If the market value can be determined, then the transaction should be valued at that amount and a second transaction should be recorded as an expense to account for the transfer. Otherwise, the value of the transaction should be the amount of funds exchanged.” However, when there is a strong presumption that the assets are severely impaired and bought at a significant premium, there may be a strong rationale for reporting the estimated implicit subsidy as an expense.

    • In the absence of an observable market price for these assets/liabilities, other rules need to be set up, for example, historic returns. An assessment of the fair value of the transaction could be made by using the discounted value of expected future flows, using the value of the counterpart of the transaction (such as the mortgaged property values), or using the price at which similar type of assets trade.

    • Other economic flows. When assets have been purchased and liabilities incurred, changes in their value should be recorded as other economic flows. Realized or not, gains and losses resulting from changes in the prices of the government’s assets and liabilities should be recorded as holding gains/losses. These holding gains and losses are not reported in the statement of government operations, and therefore do not impact the government’s net lending/borrowing balance. They are reported in the statement of other economic flows and impact on the government’s net financial worth (GFSM 2001, Figure 4.1). If a government purchases assets at market value (or fair value if there is no market for these assets at the time of the purchase) and the value of these assets subsequently fall, these losses will at no point impact the net lending/borrowing balance of the government, even once they are realized (i.e., the assets are sold and/or the liabilities are reimbursed). Conversely, if a government purchases assets at above market value/fair value, the premium paid by the government will be reported as an expense at the time of the purchase. This reinforces the point that the valuation of government interventions is crucial to their proper reporting. It also encourages reporting not to be limited to reporting economic flows but also aimed at integrating these flows with corresponding stocks to explain and disclose the government’s net worth.

    In practice, governments have tried to design their support so it does not affect their deficits—that is, they have maintained claims on financial institutions in almost all cases. Appendix II shows how these operations have been treated in a number of countries. IMF staff faces unavoidable judgment calls in deciding whether the claims have the full value attributed to them by government.

    Reporting the Cost of Indirect Interventions

    Indirect interventions can potentially have an important fiscal cost and therefore need to be fully reported and, when possible, quantified. These interventions can take the form of operations undertaken by nongovernment entities, notably the central bank, or by the government but without immediate costs, such as blanket guarantees.

    Quasifiscal Operations

    Some public interventions may be implemented by public entities that are not part of the central or general government. The most common example is central-bank-led restructuring operations. If the central bank does not expect to recover the full value of its support, the government indirectly bears the cost through lower profit transfers and possibly compensating the central bank for its losses. These quasifiscal operations would not be directly reflected on the government operations tables. The IMF’s Manual on Fiscal Transparency states that “it is important to identify, quantify (where possible), and report on quasi-fiscal activities,” and recommends that a statement on quasifiscal activities be included in the budget documentation, together with policy purpose statements and information on the duration and intended beneficiaries of the activity. In countries where such operations have been important, the IMF has used a fiscal presentation that consolidates the government operations with central bank quasi-fiscal operations. When this is not practical, the central bank/public bank support to the financial sector should at least be shown separately in a memorandum item.

    In practice, it will be important to

    • Determine whether separate entities are involved in the restructuring, and whether these entities are nonmarket producers and should be regarded part of government and be consolidated with the fiscal tables. Governments often create special restructuring agencies or accounts, and these should be included in the relevant sector (e.g., central government, general government).

    • Determine whether an operation implemented by a nongovernmental organization is a quasifiscal activity, which could, in principle, be duplicated by budgetary measures in the form of an explicit tax, subsidy, or direct expenditure (e.g., a central bank could lend to a bank at below-market conditions).

    • When practical, consolidate quasifiscal operations with the government’s fiscal operations, especially when they have significant financial magnitude or create major distortions in fiscal analysis. Considering that quasifiscal operations are in time likely to affect the government position (through lower revenue/dividends or recapitalization needs), there may be a rationale for reflecting the costs of these operations directly in the government’s accounts.

    • When estimating the exact cost of quasifiscal activities proves impractical and contentious, a pragmatic approach is often devised. For example, one could estimate the cost of any quasifiscal operation that has significant financial magnitude or is deemed to create a major distortion.

    Contingent Liabilities

    Guarantees by the government or the central bank represent a contingent liability and a potentially important fiscal cost. Usually, the cost of guarantees is recorded ex post when government honors the guarantee that is called. However, given the fiscal risks, it is important to disclose the contingent liability and include it in debt sustainability scenarios. Where a government charges for the provision of a guarantee (as is required under state aid rules of the European Union (EU)), the fee improves the government’s operating balance.

    • Under statistical reporting standards (GFSM 2001 or the EU’s European System of Accounts 1995 (ESA-95)), contingent liabilities are not considered liabilities until the contingency materializes, and therefore they need not be recorded in financial statements as a liability/expense until then. Once the contingency has materialized and payments need to be made, the associated liabilities should be reported as in Tables A1.1 and A1.2, columns viii–x.39 It should be noted that GFSM 2001 asks for the disclosure of the value of contingencies in memorandum items. The IMF Code of Good Practices on Fiscal Transparency also calls for statements as part of the budget documentation that describe the nature and significance of all contingent liabilities.

    • For accounting purposes, the International Public Sector Accounting Standards for accrual accounting require disclosure in notes to financial statements of contractual contingent liabilities when the possibility of payment is “not remote.”

    • Good disclosure practice is to publish detailed information on guarantees. This should cover the public policy purpose of each guarantee or guarantee program, the total amount of the guarantee classified by sectors and duration, the intended beneficiaries, and likelihood the guarantee will be called. Information should also be provided on past calls of guarantees. Best practice would be to compute the expected value of the increase in government liabilities due to called guarantees. Implicit liabilities should generally not be disclosed to prevent moral hazard (see Cebotari, 2008).

    • Debt sustainability analysis should cover all of the debt created by the restructuring operations, including quasifiscal interventions and various assumptions for contingent liabilities that may materialize. It should also present scenarios on recovery rates of debt repayments by recapitalized agencies, and resources generated from the sale of acquired assets and equity stakes.

    Appendix II Financial Sector Support Measures

    This appendix provides a detailed summary of the financial sector support measures and their net costs in advanced and emerging market countries. The focus is on new special facilities rather than support through regular liquidity facilities. In addition to the specific measures announced or implemented in each country, it provides information on the potential magnitude of support, estimates of the upfront fiscal cost, and information on how countries currently propose to treat the different measures in their fiscal accounts (which is not in all cases consistent with the recommended treatment in Appendix I). Based on the analysis in Appendixes III and VI, the expected net costs of financial support operations (including recapitalization, purchase of assets, liquidity provision, and guarantees) are calculated in Tables A2.1 and A2.2.

    Table A2.1.Upfront Gross Fiscal Cost and Estimated Recovery Rate(In percent of GDP, unless otherwise indicated)
    Upfront
    Government
    Financing
    Recovery Rate1Medium-Term Net Cost of
    Direct Support
    Point estimate95% intervalPoint estimate95% interval
    Average for2
    G-20 economies3.648.0[28.2,67.7]1.6[0.9,2.2]
    Advanced economies5.650.6[29.5,71.4]2.4[1.4,3.4]
    Emerging economies0.435.3[21.3,49.2]0.2[0.1,0.3]
    Source: IMF staff estimates. See Appendix III for details.

    In percent of upfront outlays.

    Weighted by PPP GDP of 2007.

    Table A2.2.Hypothetical Net Cost from Financial Sector Support Measures: Illustrative Scenarios(In percent of GDP, unless otherwise indicated)
    GuaranteesNew Special
    Facilities by
    Central Banks and Others2
    Expected cost1
    Net Cost
    of Direct
    Support (i)
    GrossPoint
    estimate (ii)
    RangeGrossNet
    (iii)
    Total
    Net Cost
    (i)+(ii)+(iii)
    Average for3
    G-20 economies1.68.81.0[0.6,2.0]10.71.13.7
    Advanced economies2.414.01.7[1.0,3.2]15.41.55.6
    Emerging economies0.20.10.0[0.0,0.0]2.90.30.5
    Source: IMF staff estimates.

    Cumulative cost over five years. Guarantee fees have not been netted from the gross cost of guarantees given the variability in fees across countries and maturity structure of debt, and given the legislative differences in applying those fees. The range reflects assumptions of (1) an optimistic recovery rate of 80 percent; and (2) a conservative recovery rate of 40 percent.

    The gross numbers for central bank support are based on announcements or commitments of new special facilities, and do not necessarily reflect actual outlays. The recovery rate is assumed to be 90 percent.

    Weighted by PPP GDP of 2007.

    The data have been compiled jointly with the IMF’s Monetary and Capital Markets Department, relying primarily on information from official government sources, such as treasuries and central banks. These have been supplemented by information from financial market sources, including investment and commercial banks, ratings agencies, and private consultancy companies. Information by country is presented in Table A2.3. The figures reported reflect official announcements of amounts allocated for financial sector support, not necessarily actual disbursements.40

    Table A2.3.Financial Sector Support Operations in Selected Countries(As of May 2009; in local currencies, unless otherwise stated)
    ProgramAmount
    (billion)
    OperationsGross Treasury
    Financing Need
    Reporting
    Argentina
    Loans9Loans of Arg$ 1.7 billion to the agricultural sector; Arg$ 1.3 billion to the manufacturing sector; Arg$ 3.1 billion to those buying their first car; Arg$ 3.S million to those buying home appliances; Arg$ 3 billion to SMEs; Arg$ 300 million for home refurbishing. All of these measures are likely to be financed by Anses (Administracion Nacional de la Seguridad Social).0This operation will likely involve the transfer of Anses’ deposits to a number of commercial banks. As Anses is not part of the central government, it will not be reflected in the central government accounts.
    Total90
    Australia
    Deposit insuranceGovernment will guarantee all deposits (no explicit deposit insurance before).0The deposit guarantee was reported as a contingent liability in the Statement of Risks in the Mid-Year Economic and Fiscal Outlook (MYEFO). If the guarantee is called upon it will be paid by the government and reported as an expenditure (likely as a capital transfer).
    Guarantee104Government will guarantee, for a fee, eligible wholesale borrowing (new and existing term issuance up to five years) of Australian-owned banks, Australian subsidiaries of foreign banks, and credit unions.0The wholesale funding guarantee was reported as a contingent liability in the Statement of Risks in MYEFO. To the extent that the guarantee is quantifiable in future, those values will be detailed as a “quantifiable contingent liability.” If the guarantee is called upon it will be paid by the Treasury portfolio and will be reported as an expenditure.
    Purchase of assets8Purchase of up to $ A 4 billion of residential mortgage-backed securities (RMBS) from institutions that are not eligible for guarantee. The Australian Office of Financial Management has been directed to purchase another $ A 4 billion of RMBS from nonauthorized deposit-taking institutions, in addition to the $ A 4 billion already announced.8These purchases of AAA-rated RMBS will be reported as financing (purchases of financial assets).
    Total1128
    Austria
    Deposit insurance10Unlimited deposit insurance by the end of 2009. The government committed €10 billion to back this scheme.10Government guarantee. Not expected to be reported.
    Guarantee75€75 billion is pledged to guarantee the interbank market, of which €10 billion for a medium-term interbank clearing facility.0Government guarantee. Not expected to be reported.
    Capital injection15€15 billion is pledged for bank recapitalization. As of mid-April 2009, €4.65 billion has actually been used.15Will be reported in the government accounts as financing (purchase of financial assets).
    Total10025
    Belgium
    Guarantee91Two types of guarantees: (1) a guarantee by the government to the National Bank extending collateralized loans to banks; and (2) new interbank and institutional deposits and financing as well as new bond issuance intended for institutional investments by a number of Dexia entities. €90 billion for Dexia, the rest is unallocated.0Government guarantees. Not expected to be reported.
    Capital injection16Dexia (€2 billion), Fortis (€9.4 billion), KBC Group (€3.5 billion), and Ethias (€1.5 billion).16Will be reported in the government accounts as financing (purchase of financial assets).
    Total10716
    Brazil
    Crisis Liquidity Facilities53Central bank (BCB) initiated repo operations in dollars. Loans outstanding as of December 23,2008 were US$ 13.9 billion (0.9 percent of GDP) having peaked at US$ 14.9 billion. Most expiring contracts are being rolled over. Central bank announced dollar lending program for up to US$ 10 billion (0.6 percent of GDP)—amounts will be lent to banks with commitment to on-lend to firms amortizing foreign debts. This facility has not been used by June 2009.0Primarily implemented by the central bank, these measures will not be reported in the government accounts.
    Central bank99Central bank support measures in Brazil included targeted easing of reserve0Central bank operations.
    liquidity supportrequirements intended to boost liquidity in institutions most affected by the crisis. These measures accounted for an increase of R$ 98.9 billion in systemic liquidity.
    Direct liquidity support23Public banks (Banco do Brasil and Nossa Caixa) announced credit lines totaling up to R$ 8 billion a piece to purchase loan portfolio from small banks. Deposit insurance fund purchases CDs and some other obligations issued by smaller banks for R$ I5 billion. Of this, R$ 2.5 billion had been used as of December 17, 2008.0Implemented by public banks, this measure will not be reported in the government accounts.
    Total1740
    Canada
    Purchase of assets135Canada Mortgage and Housing Corporation will purchase up to Can$ 135 billion of insured mortgage. Purchase of Can$ 56.6 billion has been completed by mid-May, with up to Can$ 70 billion available in the first half of the 2009/10 fiscal year.135The corporation is a public corporation (owned by the government). These purchases are therefore directly reported in the government accounts.
    Liquidity24Crisis Liquidity Facilities. Increased the size of term purchase and resale agreements (PRAs) to around US$ 25 billion (1.9 percent of GDP). A PRA is an arrangement between the Bank of Canada and dealers whereby the Bank buys treasuries from a dealer, and the dealer agrees to repurchase the treasuries the next day.0Central bank operation, not reported in the government accounts.
    Loan by Treasury to auto makers14The Canadian government, together with the Government of Ontario, has provided Chrysler and General Motors with loans.14Reported as financing.
    Credit facility12Canadian Secured Credit Facility has been newly established. The budget sets aside Can$ l2 billion to purchase securities backed by loans and leases on vehicles and equipment.12The purchases will be reported directly, since they will be undertaken by the Business Development Bank of Canada—a crown corporation.
    Guarantee216The government created the Canadian Lender’s Assurance Facility which provides insurance on the wholesale term borrowing of deposit taking institutions (so far, there have been no requests for such guarantees). A new Canadian Life Insurers Assurance Facility has been announced, to guarantee insurers’ wholesale term borrowing. The Canadian government now guarantees the warranties of new vehicles purchased from General Motors of Canada and Chrysler Canada Inc. (Can$ 0.2 billion).0Government guarantees. Not expected to be reported.
    Support to crown corporations13The government increased the authorized capital limits of Export Development Corporation (EDC) and Business Development Bank of Canada (BDC), increased EDC’s contingent liability limit to Can$ 45 billion, and increased Canadian Deposit Insurance Corporation’s borrowing limit by Can$ 9 billion.13The corporations are public corporations (owned by the government). These transactions would be reported in the government accounts.
    Total414174
    China
    Capital injection3Capital injection to Chinese airline companies.3This operation will involve the sale of newly issued stocks to the airlines’ state-owned parent companies. They will therefore not be reported in the government accounts.
    Total33
    France
    Capital injection27€3 billion for Dexia, of which €2 billion from Caisse des Depots et Consignations (CDC) and €21 billion for others. Additional €3 billion is available from the merger between Groupe des Banques Populaires and Groupe des Caisses d’Epargne.25Will be reported in the government accounts below the line as financing (purchase of financial assets).
    Bank lending guarantee320Up to €320 billion will be made available to guarantee bank lending.0Government guarantee. Not expected to be reported.
    Corporate loan26Government has announced a fund of €20 billion to support the country’s strategic companies. The government will raise €6 billion, with the rest coming from a state-owned bank, CDC. Government has extended more credit to PSA Peugeot Citroen and Renault SA and said aid to the carmakers may reach €6 billion in return for their pledges to keep domestic plants open.6The authorities have reported €3 billion in the budget as expenditure and it is unclear how the remainder of the fund contribution will be accounted for. The modalities of the €6 billion credit having yet to be specified, the way this credit will be reported in the government’s account also remains unclear.
    Total37331
    Germany
    Deposit insurancePublic commitment by government to fully cover household deposits.0Is not expected to be reported in the government accounts.
    Capital injection91€ 10 billion for Bayern LB, € 1.358 billion for 1KB, and €80 billion for other bank recapitalization.91Will be reported in the government accounts as financing (purchase of financial assets).
    Asset purchase10Stabilization fund to provide €10 billion for purchase of troubled assets.0The stabilization fund is not part of the government.
    Debt guarantee438Stabilization fund provides interbank loan guarantees (€400 billion). It is expected that 5 percent of guaranteed amount may be called upon. €23 billion for West LB and €15 billion for Hypo real estate.0The stabilization fund is not part of the government.
    Capital injection3Two German states, Hamburg and Schleswig-Holstein, will inject €3 billion capital into HSH Nordbank.0Capital injection projected by local governments.
    Guarantee10Two German states, Hamburg and Schleswig-Holstein, have agreed to guarantee up to €10 billion to cover future losses arising from HSH Nordbank.0Guarantees provided by local governments.
    Total55291
    Greece
    Deposit insuranceDeposit insurance up to € 100,000 for all deposits.0The fund guaranteeing the deposits is not part of the government These guarantees are not expected to be reported as a contingent liability.
    Capital injection5Government announced €28 billion rescue plan. The plan permits the injection of up to €5 billion for bank capital in the form of preferred shares. The shareholders of Alpha Bank approved the government’s capital injection ol €940 million in preference shares. The shareholders of Eurobank approved the government’s capital injection of €345.5 million in preference shares. (These are under a package of €5 billion.)5Will be reported in the government accounts as financing (purchase of financial assets). Preferred shares will pay a fixed annual return of 20 percent, which will be reported as revenue.
    Loan guarantee15Government backs new loans up to €15 billion.0Expected to be reflected as a contingent liability. Related fees will be reported as a revenue.
    Lending8Issuance of up to €8 billion in special bonds to boost bank liquidity. The bonds will be lent directly to the banks at their nominal value against payment of a fee plus collateral.8Could be reported under the line as collateralized loan. Related fees will be reported as a revenue.
    Total2813
    Hungary
    Deposit insuranceIncrease in deposit insurance to Ft 13 million.Expected to be reported as a contingent liability.
    Liquidity provision1,881ECB repo facility €5 billion. In addition, regulations are changed to allow pension funds to invest all of their funds into government bonds.0Central bank operation, not reported in the government accounts.
    Liquidity provision644The government has committed a direct lending of €2.3 billion to three banks.644Will be reported as financing.
    Capital injection300Hungary is trying to set aside Ft 600 billion for banking sector—half to enhance banks’ capital ratios and half to guarantee interbank lending.300A fund will be created for that purpose. The fund will be capitalized though a government transfer, which is expected to be reported in the government accounts as financing. Any capital injection is expected to be reported in the fund accounts as financing (purchase of financial assets).
    Guarantee300Interbank lending.0Another fund will be created for that purpose. The fund will be capitalized though a government transfer, which is expected to be reported as financing. The cost of called guarantees will be reported as transfers in the fund accounts. These funds are not expected to be consolidated in the general government accounts.
    Total3,125944
    India
    Liquidity provision4,228Crisis liquidity facility including measures taken in January 2009.0Central bank operation, not reported in the government accounts.
    Capital injection200Bank recapitalization.200Will be reported in the government accounts as financing—borrowing and drawdown of Treasury deposits.
    Total4,428200
    Indonesia
    Guarantee4,000Export financing agency will be running within nine months and will provide guarantees, insurance, or lending. The agency will be housed under the Ministry of Finance and will have initial capital of Rp 4 trillion.4,000The transfer of capital will be reported in the government budget as financing.
    Total4,0004,000
    Ireland
    Deposit insurance368Deposit insurance increased to unlimited for all deposits (retail, commercial, institutional, and interbank), covered bonds, senior debt, and dated subordinated debt of Irish banks and deposit institutions.0The insurance is provided by the government The corresponding contingent liability is not expected to be reported.
    Capital injection11Recapitalization program for credit institutions. Part of the funds will come from the National Pensions Reserve Fund. The state’s investment will take the form of preference shares and/or ordinary shares and the state may where appropriate participate on an underwriting basis. A recapitalization plan of €7 billion was announced for the Allied Irish Bank and Bank of Ireland, funded by the existing allocation for recapitalization.11The government’s investment will be reported in the government accounts as financing (purchase of financial assets).
    Purchase of assetsThe government outlined plans to set up a national asset management agency to take over an estimated €80-90 billion of bad loans extended by local domestic banks to developers and property companies. The government’s plan is to remove all land and property development loans from the banks’ balance sheets and replace them with government bonds. The amount paid by the agency will be significantly less than the book value to take account of the agency’s estimation of the worth of the loans, to compensate the state for taking on these risks, and the banks that will have to take the associated losses. Should losses be incurred by the agency over a 10 to IS years timeframe, the government intends that a levy should be applied to recoup any shortfall.Will be reported in the government accounts as financing—borrowing and drawdown of Treasury deposit.
    Total37911
    Italy
    GuaranteeMinistry of Finance authorized to guarantee loans granted by the Bank of Italy to banks; issue a state guarantee to back up the Italian interbank deposit insurance, up to € 103,191.38; and issue a state guarantee for new Italian bank liabilities with maturity of less than five years.0These guarantees are expected to be reported as other contingent liabilities in an annex to the budget law.
    Recapitalization11The recapitalization measures were provided to subscribe subordinated debt instruments (to be counted as bank core tier 1 capital). The budget for these measures will be around €10-12 billion.11Reported in the government accounts as financing (purchase of financial assets).
    Liquidity swap40Provide for temporary exchanges of government securities held by the central bank with assets held by Italian banks.0Central bank operation, not reported in the government accounts.
    Total5111
    Japan
    Guarantee37,000Ministry of Finance provides a ¥33 trillion package (with ¥900 billion budget support) through the policy-based financing institutions to the SMEs, including a government guarantee of ¥20 trillion. Additional support of ¥41.8 trillion was announced in April 2009. The government will provide ¥3 trillion for the new measures. Additional guarantees of ¥17 trillion were identified.3,900Credit guarantees are not expected to be reported in the budget. The ¥3.9 trillion that the government will inject into policy-based financing institutions (including Japan Finance Corporation) for them to finance the lending and guarantees will be reported in the government accounts as spending.
    Lending and purchase of commercial papers (CPs)37,800Ministry of Finance provides a ¥33 trillion package through the policy-based financing institutions to the SMEs, including loans of ¥1 1 trillion and purchase of CPs of ¥2 trillion. The additional support of ¥41.8 trillion announced in April 2009 includes a variety of liquidity measures, which is assumed to amount to ¥24.8 trillion.
    Capital injection12,000A special corporation will participate in commercial banks for up to ¥12 trillion.0The corporation will finance its purchases by borrowing, with a government guarantee.
    Purchase of assets1,000The Bank of Japan announced that it will resume a program of stock purchases. The Bank will purchase ¥1 trillion worth of stocks held by financial institutions. The purchase will be financed by the Bank.0Central bank operation, not reported in the government accounts.
    Purchase of corporate bond1,000The Bank of Japan announced a purchase of corporate bonds up to ¥1 trillion.0Central bank operation, not reported in the government accounts.
    Purchase of commercial banks’ stock holdings20,000A special corporation could buy up to ¥20 trillion in stocks from the commercial banks.0The corporation will finance its purchases by borrowing, with a government guarantee.
    Purchase of assets50,000A special corporation could buy up to ¥50 trillion in stocks from the market. The government provides guarantees for the financing.0The corporation will finance its purchases by borrowing, with a government guarantee.
    Purchase of CP5,000The Bank of Japan established “Principal Terms and Conditions for Outright Purchases of CP,” with the aim of ensuring stability in financial markets as well as facilitating corporate financing by conducting appropriate money market operations.0Central bank operation, not reported in the government accounts.
    Total163,8003,900
    Korea
    Guarantee148,000Guarantee to Korean banks’ external debt issued until end-2009 for three years (capped at $ 100 billion). W 18 trillion has also been provided to increase the credit guarantee fund.These guarantees will be provided by the Ministry of Strategy and Finance and reported as government’s contingent liabilities.
    Purchase of assets16,300Creation of a W 10 trillion fund to purchase bonds and commercial papers issued by SMEs and corporations. State-run Korea Asset Management to purchase up to $ 900 million of construction loans from savings banks (W 1.3 trillion). No direct government funding is expected. The government also announced a W 5 trillion purchase of unsold houses, of which W 1.5 trillion has been used by June 2009.This fund will be funded by the central bank, the Korea Development Bank, and institutional banks. The purchases will therefore not be reported directly in the government accounts.
    Liquidity support2,500Central bank expanded the lending facility (with a low interest rate) for SMEs by W 2.5 trillion (total W 9 trillion).Central bank operation, not reported in the government accounts.
    Bank recapitalization20,000Creation of a W 20 trillion fund to purchase commercial banks’ preferred stocks, hybrid bonds, and subordinated debt to augment the banks’ capital.This fund will be funded by the central bank, the Korea Development Bank, and institutional banks. The purchases will therefore not be reported directly in the government accounts.
    Capital injection3,950In-kind investment in public financial institutions (W 1.85 trillion) in 2008. Cash injection into eight state-run financial institutions to support lending to SMEs and exporting firms (W 3.51 trillion) in the 2009 budget.The injection of equity will be provided by the government. Expected to be reported as spending (transfers).
    Purchase of assets40,000The government announced that its state-owned Korea Asset Management Company will issue W 40 trillion of government-guaranteed bonds to purchase nonperforming loans—troubled assets of financial institutions and companies under restructuring. The fund will be in operation until 2014. The bills proposing these initiatives were submitted to the National Assembly in April 2009.The purchase will not be reported directly in the government accounts, while the guarantees will be recorded as government’s contingent liabilities.
    Total230,7508,010
    Netherlands
    Deposit insuranceUp to € 100,000 for one year for all deposits.0The insurance is covered by the banks and the central bank and is therefore not recorded in the government accounts.
    Loan guarantee200Conditional guarantees for loan between banks and institutional investors. €200 billion is allocated for this facility, but the amount actually used by end-2008 is very limited.0These government guarantees will be mentioned in the budget documents but no quantitative estimates are expected to be provided.
    Purchase of assets17The government purchased €16.8 billion equity from Fortis Holding in Belgium to nationalize Fortis Netherlands.17Will be reported in the government accounts as financing (purchase of assets).
    Capital injection20ING (€10 billion) and €10 billion is available for other banks. The actual capital injection by June 2009 was €13.8 billion.20Will be reported in the government accounts as financing (purchase of financial assets).
    Loans44To ensure financial stability and continuity of the activities of Fortis in the Netherlands, the state took over the bank and provided a bridging loan of €44.341 billion. The loan will be repaid in 2009, but is still outstanding as of May 2009.44Will be reported in the government accounts as financing.
    Total28181
    Norway
    Capital injection/liquidity swap350The Storting (Norwegian parliament) has authorized the Ministry of Finance to exchange with banks government securities against collateral in or in return for Norwegian covered bonds in amounts up to a total of NKr 350 billion. It is a swap arrangement with conservative haircuts, and less than half of the announced amount has been used so far.350Will be reported in the government accounts as financing.
    Recapitalization50The Government proposes the establishment of the State Finance Fund. The purpose for this Fund will be to provide tier 1 capital to financially sound Norwegian banks in order to strengthen the banks’ core capital and to improve their lending capacity. The State Finance Fund will be established as a separate legal entity, with NKr 50 billion in capital. In line with the fiscal guidelines, this operation will be covered by borrowing in the market and/or drawing on the Treasury’s cash reserves (50 percent borrowing is assumed).25Will be reported in the government accounts as financing—borrowing and drawdown of Treasury deposits.
    Purchase of assets50The Norwegian government has proposed a new NKr 50 billion fund to boost bank capital and invest in the corporate bond market. In line with the fiscal guidelines, this operation will be covered by borrowing in the market and/or drawing on the Treasury’s cash reserves (50 percent borrowing is assumed).25Will be reported in the government accounts as financing—borrowing and drawdown of Treasury deposits.
    Total450400
    Poland
    Guarantees40The government will provide guarantees for interbank lending up to Zl 40 billion, if needed.0This guarantee is provided directly by the government and will be reported in its accounts as a contingent liability.
    Deposit insuranceThe Bank Guarantee Fund law has been amended to increase the level of deposit guarantee from €22,500 to €50,000 and eliminate coinsurance.Is not expected to be reported in the government accounts.
    Liquidity provisionNational Bank of Poland provides a variety of liquidity support, including (i) weekly three-month (and six-month from May) repo operations; (ii) broadening of the range of collateral and reduced haircuts for Lombard credit; (iii) euro swaps with domestic banks; and (iv) a repo line with the ECB up to €10 billion. However, these measures are difficult to quantify.Central bank operations.
    Total400
    Portugal
    Deposit insuranceFormal deposit insurance increased to € 100,000.0Government guarantee. Not expected to be reported.
    Guarantee20A special scheme provides guarantees to credit institutions, available for the renewal of financing operations. A maximum amount of €20 billion is allocated to both guarantees and capital injection, with the latter not exceeding €4 billion0Government guarantee. Not expected to be reported.
    Capital injection4Government will make €4 billion available to banks seeking to strengthen their capital.4Will be reported in the government accounts as financing (purchase of financial assets).
    Total204
    Russia
    Deposit insurance200Government will widen remit of deposit insurance agency by injecting Rub 200 billion from the budget.200The recapitalization of the agency by the government is reported above the line as a transfer. The insurance is not reported as a contingent liability.
    Purchase of assets200Purchase of mortgages from banks up to Rub 200 billion. Financed from the National Welfare Fund.0This operation will not be reported in the government accounts.
    Capital injection505Government capital injection in the State Mortgage Agency amounts to Rub 60 billion in the 2008 supplementary budget and Rub 20 billion in the 2009 supplementary budget. Public capital has also been injected into VEB: Rub 75 billion in the 2008 supplementary budget and Rub 100 billion in the 2009 supplementary budget.505All transactions reported in the 2008 and 2009 supplementary budgets.
    Central bank lending1,496The central bank’s new uncollateralized lending facility on top of Rub 200 billion rolled over via daily repos has eased local liquidity. As of May 2009, Rub 1,053 billion has been provided. The central bank also provided other loans of Rub 850 billion (against nontraded collateral).0Central bank operation, not reported in the government accounts.
    Bank loan/1,787Subordinated loans to VTB, Sberbank, Rosselkhozbank, and others; some of the.250Central bank operation (in coordination with VEB). Of the total,
    Recapitalizationinjections were through VEB and the central bank. Collateralized lending of $ 6.5 billion to Alfa group and RusAI (financed from foreign reserves).Rub 180 billion to VTB; Rub 45 billion to Rosselkhozbank and Rub 25 billion to Rosagroleasing are reported in the government accounts as part of the 2009 supplementary budget.
    Liquidity support300Government deposit to commercial banks with an interest rate of U.S. dollar LIBOR+ 1 percent.0Central bank operation, not reported in the government accounts.
    Total4,488955
    Saudi Arabia
    Liquidity provision1 1Government has deposited up to US$ 3 billion to local banks to meet a shortfall of dollar funding in the domestic banking sector.1 1This deposit will be reported as financing.
    Loan10"No-fee” loan from the government to Saudi citizens through the Saudi Credit Bank ($ 2.7 billion).10The government contribution will be reported as spending (transfer).
    GuaranteeThe supreme economic council has offered guarantees for all bank deposits.0The corresponding contingent liability is not expected to be reported.
    Other supportIn order to restore liquidity to the banking system which has now normalized, several government agencies placed long-term deposits in the banking system. The Public Investment Fund increased its level of co-participation in financing with local banks, and extended the term (from 15-20 years), loan ceiling, and grace period (to 5 years). These are difficult to quantify.
    Total2121
    Spain
    Deposit insuranceDeposit insurance increased to € 100,000.0Government guarantee. Not expected to be reported.
    Guarantee200Cabinet approved plans to guarantee up to € 100 billion of bank debt for 2009. Another € 100 billion of guarantees can be extended, if needed.0Government guarantee. Not expected to be reported.
    Purchase of assets50Government announced plans to set up a fund up to €50 billion to buy nontoxic assets from banks and other financial institutions. Initial endowment of €30 billion could be expanded to €50 billion.50The fund will be part of the government The purchases will be reported in the government accounts as financing (purchases of financial assets).
    Total25050
    Sweden
    Deposit guarantee0Bank deposit guarantee for all types of accounts of private and legal persons up to SKr 500,000. Deposit insurance fund has SKr 18 billion.0While the government is the ultimate guarantor of the Deposit Guarantee Scheme, which had SKr 17 billion of reserves in early October 2008, the corresponding contingent liabilities are not expected to be reported.
    Guarantee1,500The state will initially guarantee up to SKr 1,500 billion of debt instruments, including bonds, certificates of deposits, and other nonsubordinated debt. However, this scheme has not yet found acceptance within the banking sector and is likely to be revised in order to make it acceptable. By end-May 2009, guarantees of about SKr 300 billion have been provided.0This scheme aims at ensuring the rollover of banks’ existing debt instruments of more than 90 days’ maturity: in exchange for a market-based fee charged by the government to an applicant bank the former agrees to guarantee the latter’s refinanced debt obligations. The fees will be reported above the line as revenue. It is unclear whether the corresponding contingent liabilities will be reported.
    Liquidity support from Swedish National Debt Office (SNDO)150Starting mid-September 2008, the SNDO issued SKr 150 billion worth of short-term treasury bills to use the proceeds to inject funds into the mortgage securities market via reverse repos.150Reported in government accounts as financing operation.
    Liquidity support from Riksbank487Riksbank programs: up to SKr 180 billion lent through three- and six-month kronor lending program; up to $ 35 billion to ease U.S. dollar shortage in the 30-90 day spectrum; SKr 75 billion through the Riksbank Certificated program; SKr 8 billion through the CP program. Special liquidity assistance to Kaupthing’s Swedish subsidiary of SKr 5 billion on October 8,2008.0Central bank operation, not reported in the government accounts.
    Capital injection65A stabilization fund will be set up to manage potential solvency problems, where the government will contribute SKr 15 billion. Sweden announced additional plans to inject up to SKr 50 billion into its financial sector. This new program will be financed from the stability fund presented in October 2008. The Swedish government stated that it may buy as much as 70 percent of new shares and hybrid capital from banks. Banks receiving a capital injection will be required to freeze bonus payments and wage increases for executives for two years.15The modalities of the fund having yet to be specified, the way the government’s contribution will be reported on the government’s account remains unclear.
    Total2,202165
    Switzerland
    Purchase of42Swiss National Bank provided $ 35 billion and UBS contributed $ 4 billion to0Central bank operation, not reported in the government
    illiquid assetsa Special Purpose Vehicle, which acquires illiquid assets from the bank.accounts.
    Deposit insurancePlan to raise deposit insurance for private customers from Sw F 30,000 (amount not decided yet).0Expected to be privately run. Not reported in the government accounts.
    Capital injection6Purchase of convertible notes, to be redeemed or converted within 30 months.6Expected to be reported as spending (capital expenditure).
    Total486
    Turkey
    Liquidity provision0Financed by the governmental Agency for Developing and Supporting SMEs (KOSGEB) and with intermediation of 7 banks, a total of YTL 350 million of financing will be extended to manufacturer tradesmen, artisans, and SMEs at a zero interest rate with size of financing being dependent on the number of existing employees (up to YTL 100,000).0Will not be reported in the government accounts.
    Liquidity provision3A loan of $ 1.65 billion was provided to SME exporters by KOSGEB.0Will not be reported in the government accounts.
    Other supportUnder a protocol signed between Turkish Union of Chambers and Commodity Exchanges (TOBB) and Halkbank (a state-owned bank), union member SMEs can use loans with low interest rates. Under a protocol signed between Turkish Textile Employers’ Association and Ziraat Bank (a state-owned bank), association members can use loans with low interest rates. These are difficult to quantify.
    Total30
    United Kingdom
    Deposit insurance100 percent up to £50,000.May be reported as contingent liabilities
    Credit guarantee scheme250The government guarantees short- to medium-term debt issuance to meet maturing funding needs (estimated at £250 billion), extended until December 2009.0The corresponding contingent liabilities will be reported in the long-term public finance report, to be published with the 2009 budget.
    Bank recapitalization fund56The government injected £20 billion for Royal Bank of Scotland (RBS) and £17 billion for Lloyds/HBOS in 2008. Additional £19 billion has been provided for RBS in March 2009 (£13 billion of capital injection and £6 billion of an option, which is highly expected to be exercised soon). The actual support provided by March 2009 is £6 billion more than the maximum amount committed in 2008 (£50 billion).56Will be done through the purchase of preferred shares and common stock and reported as financing (purchase of financial assets).
    Special liquidity scheme185Bank of England swaps a variety of banks’ less liquid assets for treasury bills. 18 The window was closed down at end-January 2009. The amount drawn down is £185 billion. The outstanding amount is expected to be close to the total amount drawn down, given the three-year swap maturity.5Central bank operation, not reported in government accounts. The treasury bills issued for this swap are not expected to be included in government debt statistics, however, a final ruling of the Office for National Statistics is still pending.
    Asset purchase facility50The Bank of England will set up and operate the U.K. Asset Purchase Facility to buy up to £50 billion of “high quality private sector assets.” The Bank will focus initially on purchases of corporate bonds, commercial papers, and paper issued under the Credit Guarantee Scheme. The facility will be financed by the issue of treasury bills and the Debt Management Office’s cash management operations. It appears that initially all £50 billion will be financed through extending central bank balance sheet. The Bank was given authorization to use the Asset Purchase Facility to buy up to £150 billion of assets financed by central bank money including gilts. Up to £50 billion will be used to purchase private sector assets. The Bank will also buy up to £100 billion of gilts.0Central bank operation, reported in both sides of the government accounts.
    Working capital scheme and enterprise finance guarantee11The Working Capital Scheme is a direct response to the constraint on bank credit available for lending to ordinary-risk businesses with a turnover of up to £500 million a year. The Government will provide banks with guarantees covering 50 percent of the risk on existing and new working capital portfolios worth up to £20 billion. The Enterprise Finance Guarantee aims to help smaller, creditworthy companies that might otherwise fail to access the finance they need for working capital or investment finance due to the current tight lending conditions. The Government will also provide £ 1 billion of guarantees to support up to £ 1.3 billion of bank lending to smaller firms with an annual turnover of up to £25 million, which are looking for loans of up to £ 1 million for a period of up to 10 years.0The corresponding contingent liabilities will be reported in the long-term public finance report, to be published with the 2009 budget.
    Asset protection scheme with RBS254The government launched a scheme to insure more than £500 billion of bank assets. The Asset Protection Scheme (APS) will run for a minimum five years. The first agreement under the APS was announced on February 26, 2009, covering £325 billion in RBS assets. The scheme serves to insure banks against large further losses on troubled assets, by limiting their exposure to the losses. According to the agreement, RBS will bear the initial loss up to 6 percent of the par value (£19.5 billion), on top of existing write-downs (£23 billion), and 10 percent of any additional shortfall. Therefore, the total guarantees provided by Treasury is £254.25 billion. In return, RBS committed to pay a 2 percent guarantee fee (in the form of nonvoting B shares) and forgo tax credit. Further, RBS made 2009 lending commitments totaling £25 billion: £9 billion of mortgage lending and £ 16 billion of business lending. It is likely that Lloyds will follow, and it seems that Treasury may need to expand this scheme.0The corresponding contingent liabilities will be reported in long-term public finance report, to be published with the 2009 budget. Calls on the guarantee would be reported as spending (capital transfer) and reported to parliament. It is unclear whether the guarantee fee will be reported on the government accounts or on the accounts of the state-owned company that manages government’s financial sector participation (U.K. Financial Investments Limited). In either case, one way to do it would be to report the fee as revenue and financing (purchase of financial assets, in this case of nonvoting B shares in the financial institution).
    Asset protection scheme with Lloyds202Lloyds will place £260 billion of assets into the Asset Protection Scheme, focusin; on those assets with the greatest degree of uncertainty about their future performance. Lloyds will pay a participation fee of £15.6 billion to the Treasury in capital. The agreement will mean that in the event of a loss, Lloyds will bear a first loss amount after existing impairments of up to £25 billion. In return, Lloyds will maki additional lending commitments totaling £3 billion of mortgage lending and £1 1 billion of business lending over the next 12 months. A similar lending commitment has been made in respect of the subsequent 12 months but this will be reviewed to ensure it reflects economic circumstances at that time.0The corresponding contingent liabilities will be reported in long-term public finance report, to be published with the 2009 budget. Calls on the guarantee would be reported as spending (capital transfer) and reported to parliament. It is unclear whether the guarantee fee will be reported on the government accounts or on the accounts of the state-owned company that manages government’s financial sector participation (U.K. Financial Investments Limited). In either case, one way to do it would be to report the fee as revenue and financing (purchase of financial assets, in this case of nonvoting B shares in the financial institution).
    Bank loan149Initial liquidity support of £99 billion (Northern Rock) and £50 billion (Bradford & Bingley) from the Bank of England. The 2008 PBR projects the loan for Northern Rock to be reduced to £ 14 billion at end-March 2009, and puts the cost of Bradford & Bingley at £18.2 billion.48Northern Rock and Bradford & Bingley (as well as RBS and HBOS) are now classified as public sector financial corporations, and their liabilities and short-term financial assets count toward public sector net debt. In the budget, authorities also report public sector net debt excluding financial sector interventions.
    Total1,158289
    United States
    Recapitalization I.TARP Capital Purchase Program (CPP)218Treasury purchases of bank preferred shares, in return for dividend payments and warrants. Treasury’s public commitment under the TARP umbrella amounts to $ 218 billion. Through mid-June 2009, the Treasury had purchased about $ 199 billion in preferred shares, of which $ 70 billion had been repaid by issuing institutions.218The Treasury and Office of Management and Budget (OMB) report the estimated subsidy element of the purchases as spending, with the rest being reported as financing (purchases of financial assets). The Congressional Budget Office (CBO) estimated the subsidy component of the $ 129 billion in outstanding purchases at $ 24 billion as of mid-June. Any losses to be incurred by the government would be reported above the line.
    Support to Systemically Important Failing institutions (AIG)70$ 40 billion of equity injection in November 2008, plus announcement in March 2009 of a new equity capital facility that allows AIG to draw down up to $ 30 billion as needed over time in exchange for preferred stock to the U.S. Treasury (outstanding total purchases were approximately $ 41 billion by mid-June 2009).70See the reporting description for the CPP. The subsidy component of the transactions has been projected by CBO as $ 35 billion for the $ 70 billion in purchases outstanding as of mid-June. Any losses to be incurred by the government would be reported above the line.
    Targeted Investment Program40Capital injections to Citigroup and Bank of America, $ 20 billion each.40See the reporting description for the CPP. The subsidy component of the $ 20 billion injected to Citigroup was estimated by CBO at $ 9 billion. Any losses to be incurred by the government would be reported above the line.
    Support to GMAC13Capital support to GMAC under the Automotive Industry Financing Program.13See the reporting description for the CPP. The subsidy component of the assistance to the automotive industry was estimated by CBO at 73 percent. Any losses to be incurred by the government would be reported above the line.
    2. Others Support to Fannie Mae and Freddie Mac400Up to $ 200 billion of equity injection for each government-sponsored enterprise (GSE).400The equity injections are reported as spending by the OMB and Treasury. The CBO reports as spending the subsidy cost (in present value terms adjusted for market risk) of the GSE takeovers.
    Subtotal741
    Grants and purchase of assets and lending by Treasury
    I.TARP Home Affordable Modification Program50As part of the Homeowner Affordability and Stability Plan, the TARP would make direct payments to mortgage servicers to help homeowners refinance their mortgages. As of mid-June 2009, the Treasury had determined the recipients of about $ 15 billion, but no money had been disbursed.50The net cost of the program will be the full amount of payments made by the government.
    Automotive Industry Financial Program67Loans to GM and Chrysler.67The CBO estimated the subsidy component of the assistance to the automotive industry at 73 percent. Any losses to be incurred by the government would be reported above the line.
    Auto Supplier Support Program5Providing suppliers with access to government-backed protection for their receivables.5The CBO estimated the subsidy component of the assistance to the automotive industry at 73 percent. Any losses to be incurred by the government would be reported above the line.
    Unlocking Credit for Small Business15The Treasury announced that it will be purchasing up to $ 15 billion in securities to boost the credit markets for small businesses.15
    2. Others Credit Union Homeowners Affordability Relief Program and Credit Union System Investment Program41Two loan programs operate through the National Credit Union Administration’s Central Liquidity Facility. The Credit Union Homeowners Affordability Relief Program is providing subsidized funding intended to help credit unions modify mortgages. The Credit Union System Investment Program seeks to facilitate lending by shoring up corporate credit unions.0
    Subtotal178
    Central bank liquidity support backed by Treasury I.TARP
    Term Asset-Backed Securities Loan Facility (TALF)20The Treasury made an initial pledge of $ 20 billion in TARP funding to cover the potential losses under the TALF. Proposed modifications to expand the program could involve additional commitments.20
    2. Others Commercial Paper Funding Facility50The Treasury made a special deposit at the Federal Reserve Bank of New York in support of this facility.50The $ 50 billion are reported as a deposit with the Federal Reserve. Any losses resulting from calls on these guarantees will be reported by the government as spending (transfers).
    Subtotal70
    Liquidity provision and other support by central bank
    Maiden Lane II and III facilities and loan (AIG)113The Federal Reserve Board, with full support of the Treasury Department, authorized the New York Federal Reserve to lend to AIG. These comprise $ 53 billion in funding for purchases of distressed assets under Maiden Lane II and Maiden Lane III facilities, and a $ 60 billion loan.0
    Maiden Lane 126The Federal Reserve authorized the New York Federal Reserve to provide nonrecourse lending to JP Morgan against assets of Bear Steams under the Maiden Lane 1 facility.0
    Citigroup and Bank of America Suppon321The Treasury and FDIC will guarantee losses on troubled assets (over $ 300 billion). Total is $ 269 billion. $ 25 billion is from TARP ($ 20 billion for recap and $ 5 billion for guarantee), $ 10 billion is for guarantee by FDIC. The remaining amount ($ 234 billion) is from the Federal Reserve as lending. $ 87 billion support for Bank of America is also announced by the Federal Reserve.0
    Term Securities Lending Facility (TSLF)75Lending Treasuries against Treasuries, agencies, agency MBS, and all investment-grade securities. Volume at end-June 2009 was about $ 7 billion.0
    Term Auction Facility (TAF)500Lending funds at auctioned rate against discount window collateral. Volume at end-June 2009 was about $ 280 billion.0
    Commercial Paper Fund Facility (CPFF)1,750Purchasing highly rated 3-month unsecured and asset-backed commercial paper. The maximum commitment is $ 1.8 trillion. The Treasury has deposited $ 50 billion into an account at the New York Federal Reserve to support this facility. Volume at end-June 2009 was about $ 115 billion.0
    Money Market Investor Funding Facility (MMIFF)540Purchasing certificates of deposit and commercial paper issued by highly rated financial institutions. No purchases as of end-June 2009. Will expire on October 30,2009.0
    Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)15Lending funds (nonrecourse) to a wide range of counterparties against highly rated first tier Asset-Backed Commercial Paper. Volume at end-June 2009 was about $ 15 billion.0
    Primary Dealer Credit Facility0Lending funds against a full range of tri-party repo system collateral. No lending as of end-June 2009.0
    TALF180Lending (nonrecourse) against newly issued ABS. Loans of up to 3 years, underlying securities may be of longer maturity. Volume at end-June 2009 was about $ 25 billion.
    Subtotal3,520
    Guarantees I.TARP Citigroup Asset Guarantee5Second-loss after the bank, with Treasury covering up to $ 5 billion and the Federal Deposit Insurance Corporation (FDIC) up to $ 10 billion.5The fees are reported as revenue in the government accounts. Costs resulting from calls on this guarantee will be reported as spending.
    Bank of America Asset Guarantee8For the second-loss after the bank on $ 10 billion, the Treasury (through TARP) and FDIC split the government’s 90 percent share with the Treasury covering up to $ 7.5 billion and FDIC covering up to $ 2.5 billion. On June 25,2009, Federal Open Market Committee (FOMC) Chairman Bernanke observed that the arrangement has not been consummated, also noting that Bank of America believes that the protection is not needed.8
    2. Others Citigroup Asset Guarantee10Second-loss after the bank, with Treasury covering up to $ 5 billion and the FDIC up to $ 10 billion.0
    Temporary Guarantee Program for Money Market Funds50The Treasury guarantees (through September 18,2009) participating investors that they will receive $ 1 for each money market fund share held as of close of business on September 19,2008. The assets of the Exchange Stabilization Fund will be made available to guarantee payments as needed (up to $ 50 billion).0The fees are reported as revenue in the government accounts. Costs resulting from calls on this guarantee will be reported as spending.
    Temporary Liquidity Guarantee Program1,485This program provides full guarantees for certain checking and other non-interest-bearing deposit accounts (Transaction Account Guarantee) and certain newly issued senior unsecured debt (Debt Guarantee). At end-May 2009, the amount of FDIC-guaranteed debt that can be issued by eligible entities was $ 785 billion (actual amounts outstanding were $ 346 billion). The amount covered by the transaction account guarantee was estimated at $ 700 billion.0The fees will be reported as revenue in the government accounts. Costs resulting from calls on this guarantee will be reported as spending.
    Hope for Homeowners Program1This program permits home mortgages to be refinanced through private lenders with a guarantee from the FHA.0Expected to be reported by the FDIC as contingent liabilities.
    Subtotal1,559
    Total6,067960
    TARP total510
    Appendix III Outlook for Recovery Rates

    This appendix provides estimates of recovery rates for banking crises, and investigates their determinants to assess the outlook for recovery following the current crisis. The recovery rate is here defined as the proceeds recovered from the sale of assets in percent of the gross fiscal cost.

    Magnitude of Recovery Rates

    The key source of the recovery rate data is the Laeven and Valencia (2008) database. The recovery rate in this database is defined as the amount recovered during years t to t + 5, where t denotes the start of the crisis, in percent of the gross budgetary outlays associated with the banking crisis. The following adjustments are made to the Laeven and Valencia (2008) database: (1) the gross fiscal cost of the Japan 1997 crisis is lowered from 14 percent of GDP to 9.1 percent of GDP (see Box A3.1); (2) the recovery amount associated with the Japan 1997 crisis is raised to 4.8 percent of GDP from less than 0.1 percent of GDP (Box A3.1); and (3) the recovery amount associated with the U.S. crisis of 1988 (not included in the Laeven and Valencia database) is recorded as 1.6 percent of GDP based on Hoelscher and Quintyn (2003).

    The recovery rate data have a wide range. For the 39 crises during 1980–2003 for which data are available, the recovery rates have a mean of 20 percent, a median of 8 percent, a maximum of 94 percent (Sweden, 1991), and minimum of zero (Figure A3.1). The net fiscal cost of budgetary outlays associated with the banking crises (gross cost minus recovery amounts) averaged 13 percent of GDP, with a median of 10 percent and a maximum of 55 percent of GDP (Argentina, 1980) (Figure A3.2).

    Figure A3.1.Recovery Rates: Selected Banking Crises1

    (In percent)

    Sources: Laeven and Valencia (2008), Japan Deposit Insurance Corporation, Hoelscher and Quintyn (2003), and IMF staff calculations.

    1 The figure reports episodes with nonzero recovery rates. The episodes with zero recovery rates are Argentina (1980, 1989, 1995, 2001); Brazil (1990); Colombia (1982); Guinea (1985); Croatia (1998); Hungary (1991); Jordan (1989); Sri Lanka (1989); Latvia (1995); Philippines (1983, 1997); Poland (1992); Romania (1990); Senegal (1988); Slovenia (1992);Thailand (1983, 1997); Tunisia (1991); Ukraine (1998); and Zambia (1995).

    Figure A3.2.Gross and Net Fiscal Cost of Banking Crises

    (In percent of GDP)

    Sources: Laeven and Valencia (2008), Japan Deposit Insurance Corporation, Hoelscher and Quintyn (2003), and IMF staff calculations.

    What Determines the Recovery Rate?

    We investigate the association between the recovery rate and the following variables: (1) the level of economic development (captured by per capita real PPP GDP); (2) a transition-country dummy;41 (3) the occurrence of an exchange rate (ER) crisis (an ER crisis dummy that equals 1 when the nominal depreciation is in the top quintile of the full sample); (4) the gross fiscal cost of the crisis; and (5) “fiscal space” at the start of the banking crisis (measured by the fiscal balance/GDP ratio).

    Box A3.1.Japan’s 1997 Banking Crisis: Fiscal Cost and Recovery Rates

    Data from the Japan Deposit Insurance Corporation (JDIC) suggest that the fiscal cost of Japan’s banking crisis was smaller, and the recovery rate higher than reported in existing studies. In particular, the data provide the following insights:

    Total authorized amount. The amount of budget authorizations for measures related to the banking crisis totaled ¥70 trillion during 1997–2001, that is, 13.6 percent of GDP. Of the total amount, the bulk (¥57 trillion) corresponds to government guarantees to the JDIC, and the remainder (¥13 trillion) to government bond issuance to provide resources for grants to the financial institutions.

    Gross fiscal cost. The JDIC data indicate that only 9.1 percent of GDP of the authorized amount was actually spent. This number is substantially lower than the fiscal cost reported in Laeven and Valencia (2008) (14 percent of GDP), and in The Economist (2008) (24 percent of GDP).

    Recovery rate and net fiscal cost. The cumulative amount of recoveries during 1997–2008 reached 4.8 percent of GDP, that is, 53 percent of the gross fiscal cost. If grants—that are unrecoverable by definition—are excluded from the gross cost, the recovery rate rises to 88 percent. These recovery rates are substantially larger than the rate recorded in the Laeven and Valencia (2008) database (less than 1 percent), which was based on recoveries collected during the first five years following the start of the crisis (1997–2002). This result suggests that it may take more than five years for substantial recovery amounts to accrue. In addition, some assets purchased from failed financial institutions—such as securities and real estate property—were eventually sold by the authorities at a gain, resulting in recovery rates in excess of 100 percent.

    The regression results indicate a number of significant correlates of the recovery rate. The positive and significant correlation with per capita income suggests that advanced countries have higher recovery rates. Similarly, a transition country dummy has a significant and negative sign, suggesting that the nature of the losses arising in financial crises in transition countries implied lower recovery rates. Exchange rate crises are associated with lower recovery rates. This could be because in exchange rate crises, the initial outlays arise from the acquisition of liabilities that are inflated by sizable and permanent depreciations, as well as high interest rates, while the decline in the value of assets plays a less significant role. Recovery rates are higher, the larger the fiscal balance at the start of the crisis: countries entering a banking crisis with a larger “buffer stock” experienced less severe losses. This finding is consistent with the notion that a stronger fiscal position is associated with high-quality public financial management that improves the prospect for a recovery.42 Recovery rates are also lower, the higher the gross fiscal cost of the crisis, although the relationship is not statistically significant. Table A3.1 reports the estimation results.

    Table A3.1.Estimation Results1(Dependent variable: recovery rate)
    (1)(2)(3)(4)(5)(6)(7)
    Log(PPP real GDP per capita)15.18**14.54**13.91**12.96**11.27*
    [2.576][2.505][2.626][2.115][1.936]
    Transition country dummy–18.99***–18.25***–21.95***–17.29***–21.75***
    [-3.152][-2.976][-2.826][-2.770][-2.774]
    ER crisis dummy–25.20***–19.80**–20.11***–14.65*–13.19*
    [-5.245][-2.677][-3.041][-1.971][-1.815]
    Gross fiscal cost/GDP–30.2–34.18
    [-1.233][-1.667]
    Fiscal balance/GDP195.2**215.4**
    [2.519][2.554]
    Observations38383838383737
    Adjusted R-squared0.150.060.120.310.320.370.39
    Source: IMF staff estimates.

    The table reports t-statistics adjusted for clustering in parentheses. ***, **, * denote statistical significance at 1, 5, and 10 percent level, respectively.

    The estimated equation can also be used to project recovery rates. For the purposes of projecting recovery rates, the equation containing the full set of controls considered is used (column 7 in Table A3.1). The in-sample fit of this equation can be assessed based on the adjusted R2 of 39 percent, and a mean absolute residual of 15 percentage points (Table A3.2). Out-of-sample predictions based on this estimated equation imply recovery rates for the current financial crisis averaging 47 percent, with an average 95 percent confidence interval of 28 to 68 percent. Based on these recovery rates, and current estimates of the gross fiscal cost of the crisis that average 3.6 percent of GDP for G-20 countries, the expected average net fiscal cost is 1.6 percent of GDP, with a 95 percent confidence interval of 0.9 to 2.2 percent of GDP (Table A2.1).

    Table A3.2.In-Sample Recovery Rate Predictions1(In percent)
    YearPredictionActualResidual
    Argentina19806.90.0–6.9
    Argentina19891.30.0–1.3
    Argentina199540.20.0–40.2
    Argentina200116.40.0–16.4
    Bolivia199421.756.034.3
    Brazil199030.10.0–30.1
    Brazil199429.822.7–7.1
    Chile198130.660.830.3
    Colombia198211.10.0–11.1
    Colombia199829.159.630.4
    Croatia199811.70.0–11.7
    Czech Republic199622.914.7–8.2
    Dominican Republic200316.25.5–10.7
    Ecuador199816.424.98.5
    Estonia199218.414.2–4.2
    Finland199147.513.4–34.1
    Guinea198521.30.0–21.3
    Hungary199110.20.0–10.2
    Indonesia199713.38.1–5.2
    Jamaica199610.511.30.8
    Japan199743.852.79.0
    Jordan198914.50.0–14.5
    Korea199736.225.6–10.6
    Latvia19959.80.0–9.8
    Lithuania19958.36.5–1.8
    Malaysia199747.868.921.1
    Mexico199428.26.7–21.5
    Nicaragua200016.87.6–9.2
    Norway199153.277.824.6
    Paraguay199535.722.5–13.3
    Philippines198327.60.0–27.6
    Philippines199726.10.0–26.1
    Poland19922.90.0–2.9
    Romania19904.30.0–4.3
    Senegal198815.40.0–15.4
    Slovenia199224.50.0–24.5
    Sri Lanka19899.90.0–9.9
    Sweden199152.194.442.4
    Thailand198321.60.0–21.6
    Thailand199722.420.5–1.9
    Tunisia199123.90.0–23.9
    Turkey200012.84.1–8.8
    Ukraine19988.60.0–8.6
    United States198847.243.2–3.9
    Uruguay200225.245.820.7
    Venezuela199412.516.74.2
    Zambia19958.60.0–8.6
    Memorandum item: Mean absolute residual15.2
    Source: IMF staff estimates.

    The table reports in-sample prediction based on equation 7 (full set of controls), and predictions for gross fiscal cost.

    However, there are several caveats in using the historical estimated coefficients to project recovery rates: (1) this is the first crisis since the Great Depression where both the output decline and financial sector turmoil are global; (2) with many countries attempting the liquidation of assets over the coming years, recovery ratio could be lower; (3) the sample size is small (37 countries); and (4) there are only five advanced economies.

    Appendix IV Measuring Government Contingent Liabilities to the Banking Sector

    This appendix provides illustrative estimates of the fiscal cost of government contingent liabilities related to banking sector implicit and explicit guarantees. The eventual cost of these guarantees is subject to significant uncertainty and will depend on the evolution of the financial sector and of the economy. Thus, we provide here a range of estimates broadly based on the contingent claims approach (CCA), derived from modern finance theory.43

    The main idea behind this approach is to combine balance sheet information of financial institutions with measures of risk that institutions may face. Intuitively, the potential cost for the government arising from guarantees depends on the probability that the value of banks’ assets falls below the value of the banks’ liabilities (including deposits, interbank loans, etc.), and by the extent of the imbalance. In turn, these depend on the structure of bank assets and liabilities, on the market value of the latter, and on the volatility in these values. For example, an increase in volatility will raise the probability that, as a result of market movements, a bank’s net worth becomes negative.

    To implement CCA, standard option-pricing theory is utilized. The option-pricing formulas applied in CCA to estimate the banks’ credit risk and their expected losses rely on a few selected variables including the asset value, volatility of the asset return, risk-free value of debt, the time horizon until the expiration date of the guarantee, and the risk-free interest rate (Black and Scholes, 1973; and Merton, 1973). The guarantee can be modeled as a put option44 on the asset with an exercise price equal to the face value of debt—an option sold by the guarantor (the government). In effect, the guarantee gives the bank the right to “sell” the assets to the guarantor in exchange for a payment equal to the face value of the debt. As with any put option, the bank would exercise the option only if the value of the assets falls below the face value of the debt—that is, in case of default. The CCA computes the value of these put options assuming that all debt and deposits are guaranteed—through explicit or implicit guarantees.

    Operationally, we utilize a methodology developed by Moody’s in conjunction with others (hereafter MKMV). Specifically, the potential expected loss to governments is the implicit put option values as obtained from MKMV’s credit risk spread measure—known as the expected default frequency implied credit default swap (EICDS). EICDS combines a probability of default by a bank on its debt obligations—called the expected default frequency (EDF) with the likely recovery on assets acquired by the government; the latter is measured by the so-called loss given default (LGD). The LGD is calibrated in such a way that the EICDS measure matches closely the observed market CDSs.

    The expected losses for governments from guarantees on banks are estimated for two groups of countries: (1) G-7 and advanced non-G-7 countries (Australia, Austria, Belgium, Denmark, Ireland, Korea, Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland); and (2) emerging markets (Greece, Hungary, Russia, and Saudi Arabia).45

    The present discounted value of expected losses associated with guarantees over a five-year horizon and under three recovery scenarios were computed. The losses were calculated using the MKMV contingent claims model.46 Given the sensitivity of the results to the assumed recovery rates on assets, three scenarios were considered: (1) the base case (using MKMV estimated recovery rates); (2) a conservative recovery rate (of 40 percent for all banks—frequently assumed in many CDS models); and (3) an optimistic scenario (80 percent recovery rate).

    The results suggest substantial potential pressure on the countries’ fiscal positions. Under the first scenario (column A, Table A4.1) governments’ losses over five years are projected to be the largest in relation to GDP in the advanced economies (14½ percent of GDP). These are over three times larger than for the emerging market group. Even under optimistic assumptions (column C), in the advanced economies, losses would amount to over 9 percent of GDP. Assuming lower recovery rates increases the size of the expected losses very significantly (column B).

    Table A4.1.Banking Sector: Expected Cost of Financial Guarantees Based on CCA Calculations1(In percent of GDP)
    Total Implicit Put Value
    MKMV LGD2
    (A)
    Conservative LGD2
    (B)
    Optimistic LGD2
    (C)
    Advanced economies314.428.19.4
    Emerging market economies44.14.51.5
    Total13.626.38.8
    Sources: Moody’s KMV Credit Edge; and IMF staff estimates.

    Assuming full guarantees to all banks (systemic and small). Numbers are weighted by PPP GDP of 2007.

    MKMV LGD, conservative LGD, and optimistic LGD refer, respectively, to (1) Moody’s estimated recovery rates (equivalently 1 – loss given default (LGD)), (2) a conservative recovery rate of 40 percent, and (3) an optimistic recovery rate of 80 percent.

    Advanced economies include our sample of G-7 and non-G-7 advanced economies (Australia, Austria, Belgium, Denmark, Ireland, Korea, Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland).

    Emerging market economies: Greece, Hungary, Russia, and Saudi Arabia.

    The fraction of the expected losses that would likely be covered by government guarantees varies across countries. The fraction would depend on whether small nonsystemically important banks are allowed to fail or some debt holders end up not benefiting from a full guarantee in the event of default. Given that the size of expected losses increases with that of the banks, it is often the case that only large banks benefit from government guarantees or that the government guarantees are a combination of a blanket guarantee of all deposits (deposits are typically 40 to 60 percent of bank liabilities) up to a certain amount and a partial guarantee of banks’ other liabilities. Therefore, in most instances contingent fiscal liabilities would likely represent a fraction of the expected losses presented above. A rough proxy for such fraction could be the proportion of losses that is accounted for by the largest banks. Table A4.2 assumes that the government guarantees 75 percent of the estimated expected losses reported in Table A4.1 above, and reports the annual fiscal cost (i.e., the losses spread equally over the five years).

    Table A4.2.Banking Sector: Expected Cost of Financial Guarantees Based on CCA Calculations Annual Cost Over Five Years1(In percent of GDP)
    Total Implicit Put Value
    MKMV LGD2
    (A)
    Conservative LGD2
    (B)
    Optimistic LGD2
    (C)
    Advanced economies32.24.21.4
    Emerging market economies40.60.70.2
    Total2.03.91.3
    Sources: Moody’s KMV Credit Edge; and IMF staff estimates.

    Assuming that 75 percent of the total expected losses for all the banks represents the contingent liability of the government. This is an annual cost figure over five years. Numbers are weighted by PPP GDP of 2007.

    MKMV LGD, conservative LGD, and optimistic LGD refer, respectively, to (1) Moody’s estimated recovery rates (equivalently 1 – loss given default (LGD)), (2) a conservative recovery rate of 40 percent, and (3) an optimistic recovery rate of 80 percent.

    Advanced economies include our sample of G-7 and non-G-7 advanced economies (Australia, Austria, Belgium, Denmark, Ireland, Korea, Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland).

    Emerging market economies: Greece, Hungary, Russia, and Saudi Arabia.

    The reported results may overstate governments’ costs owing to the increase in market risk premia over the recent period. Estimating the fiscal costs of bank liabilities and the explicit financial support is a dynamic process: these could be large in the early stages or during a crisis, but are likely to fall after a restructuring process has taken place.

    The analysis could be complemented in several ways. The estimates presented above provide a good indication of the range of contingent liabilities for governments associated with banks’ liabilities, but they do not take into account potential future equity injections or other forms of support for the banking system. Large equity injections may reduce the losses on debt and deposits, increase recovery rates, and thus reduce the cost of the guarantees.

    As a complementary measure to the MKMV estimate, we also calculate the potential cost to the government of providing guarantees by an alternative approach. This approach simply entails multiplying the EICDS by the total of banks’ liabilities that are guaranteed. The EICDS spread can in effect be regarded as being indicative of the insurance premium on banks’ liabilities and provides a simple way to estimate the costs to the government of providing this “insurance.” We should note, however, that an EICDS spread (based on market information) in the presence of government guarantees of liabilities may not fully capture government’s risk and thus multiplying it by the liabilities may entail a downward bias in the potential cost to the government. A range of CDS spreads are therefore calculated to assess the possible bias. In particular, the “conservative” CDS spread based on estimates of the present value of expected losses and multiplied by the amount of liabilities should be seen as an upper bound of the potential cost to the government. This approach is applied to compute the cost of the explicit guarantees provided by governments as discussed in the main paper (Section II). Aside from the cost of these explicit guarantees, it could be argued that there are also implicit guarantees stemming from too-big-to-fail or too-systemic-to-fail considerations. Thus, we report below the estimated cost of an implicit guarantee on the total of banking sector liabilities.

    The results using the complementary approach are substantially larger than those obtained above. CDS spreads are calculated based on estimates of the present value of expected losses in the three scenarios noted earlier (Table A4.3): MKMV (column A), conservative (column B), and optimistic (column C). The results show that the annual expected costs under the conservative scenario are significantly larger than the costs under the base case scenario.

    Table A4.3.Banking Sector: Expected Costs of Financial Guarantees Based on Three Alternative Credit Spread Measures and Total Banking Liabilities1(In percent of GDP)
    Expected Costs Based on
    MKMV
    CDS-A2, 3(A)
    Conservative case
    CDS-B2, 3(B)
    Optimistic case
    CDS-C2,3(C)
    Total44.08.42.5
    Advanced economies4.39.02.7
    Emerging market economies1.72.00.6
    Sources: Moody’s KMV Credit Edge; and IMF staff estimates.

    Assuming full guarantees to all banks.

    Spreads are calculated based on estimates of implicit put option values for individual banks and using Moody’s KMV Credit Edge database as of November 14, 2008. They are based on a five-year average duration.

    MKMV LGD, conservative LGD, and optimistic LGD refer, respectively, to (1) Moody’s estimated recovery rates (equivalently 1 – loss given default (LGD)), (2) a conservative recovery rate of 40 percent, and (3) an optimistic recovery rate of 80 percent.

    Numbers are weighted by PPP GDP of 2007.

    Appendix V Estimation of Nondiscretionary Impacts

    Methodology for Calculating the Estimated Impact of Automatic Stabilizers

    The impact on fiscal balances from automatic stabilizers was computed as the change in the cyclical balance between two consecutive years. The cyclical balance in year t was estimated as the difference between the overall balance in percent of GDP (OBt) and the cyclically adjusted balance in percent of potential GDP (CAOBt), which was computed as

    where GAPt is the output gap, calculated as the ratio of output to potential GDP minus one.47 Output gap estimates were taken from the IMF’s April 2009 World Economic Outlook Update for all G-20 countries, except Indonesia and Saudi Arabia. For these two countries, potential GDP was computed as trend-GDP using a Hodrick-Prescott filter with the smoothing parameter 6.25.48 ηRt and ηGt are revenue and expenditure budgetary-sensitivity parameters defined as

    where εR and εG are revenue and expenditure elasticities with respect to the output gap assumed to be constant over time and Rt/Yt and Gt/Yt are ratios of primary revenue and expenditure to GDP.

    Hence, the contribution from automatic stabilizers is, effectively, the first difference (change between the two consecutive years) of the output gap multiplied by the difference of revenue and expenditure budgetary-sensitivity parameters, namely:

    The estimates of revenue and expenditure elasticities were obtained as follows. Girouard and André (2005) provide estimates for εR and εG for a number of advanced countries. For other G-20 countries, revenue elasticity εR was assumed to be equal to 1, and expenditure elasticity εG was set equal to zero. In this simple case, the contribution from automatic stabilizers becomes

    With no significant change in government size between two consecutive years, the contribution from automatic stabilizers can be further approximated by

    Estimates of the impact of the automatic stabilizers on G-20 fiscal balances in 2008 and 2009 using this approach are shown in Table A5.1.49

    Table A5.1.Estimated Impact of Automatic Stabilizers on G-20 Fiscal Balances(In percent of GDP, relative to the previous year)
    20082009
    United States–0.4–1.7
    China–0.1–0.6
    Japan–0.6–2.6
    India0.0–0.6
    Germany0.0–3.5
    Russia0.7–2.8
    United Kingdom–0.4–2.4
    France–0.5–2.4
    Brazil0.6–1.8
    Italy–0.8–2.7
    Mexico–0.4–1.5
    Spain–0.7–1.8
    Canada–0.7–1.8
    Korea–0.1–1.7
    Turkey–0.7–2.4
    Indonesia0.2–0.4
    Australia–0.4–1.2
    Saudi Arabia0.4–1.3
    Argentina0.1–1.5
    South Africa–0.2–1.1
    PPP-weighted average–0.2–1.8
    Sources: IMF, World Economic Outlook, April 2009; and IMF staff estimates.

    Estimates of the Impact of Other Nondiscretionary Factors

    As noted in the main paper, looking just at the influence of output gap changes is not sufficient to evaluate the effect of nondiscretionary factors on budgetary positions. This is because some variables affecting fiscal balances are not perfectly correlated with output fluctuations. For example, exceptional declines in asset prices—that is, significantly above or below what might be considered “normal” levels—may reduce revenues by more than could be explained just by looking at output gap changes.

    Estimation

    To assess the cost for fiscal revenues of equity and housing market price declines, staff regressions from a sample of advanced and emerging market countries were used to derive parameters that could be applied across the sample. Country-specific parameters would have been preferable, given country-by-country differences in, for example, financial markets and taxation (see Morris and Schuknecht, 2007). However, a simpler approach was followed, in light of time and data constraints, as well as the aim of deriving estimates of broadly comparable and illustrative costs. This involved estimating regressions of the form:

    where ΔCARt is the first difference in cyclically adjusted revenue as a share of potential GDP; F are country-specific fixed effects; Et and Ht are, respectively, real equity and real housing prices.50

    Results

    The results are presented in Table A5.2. The estimated coefficients represent the percentage point change in cyclically adjusted revenue for a given real change in asset prices. The estimates from column 1 were used in the main paper. They suggest that a 10 percent decline in equity prices leads to a cyclically adjusted decline in revenues by 0.07 and 0.08 percent of GDP in the current and subsequent years. The 0.15 percent of GDP cumulative effect is close to estimates for selected countries in Europe in Morris and Schuknecht (2007). For housing, a 10 percent decline in prices leads to a 0.27 percent of GDP decline in cyclically adjusted revenues in the following year (the contemporaneous term was excluded).

    Table A5.2.Responsiveness of Cyclically Adjusted Revenue to Asset Price Changes1
    10 Countries, 1991–200720 Countries, 1991–2007
    (1)(2)(3)(4)(5)(6)(7)(8)(9)(10)
    Real house prices–1.67–0.62–1.43–0.14
    (Std. error)(1.47)(1.24)(1.58)(1.33)
    P-value (in percent)25.861.536.791.7
    Real house prices (lag)2.691.790.953.362.07
    (Std. error)(1.38)(1.37)(1.15)(1.57)(1.36)
    P-value (in percent)5.319.341.23.413.1
    Real equity prices0.670.660.630.520.04
    (Std. error)(0.32)(0.32)(0.32)(0.26)(0.22)
    P-value (in percent)3.84.24.94.886.2
    Real equity prices (lag)0.790.790.820.940.83
    (Std. error)(0.32)(0.32)(0.32)(0.23)(0.22)
    P-value (in percent)1.41.31.20.00.0
    R-squared0.170.070.060.070.170.090.140.150.090.14
    Sources: IMF, World Economic Outlook; Bloomberg; international real estate and investment banking sources; and IMF staff estimates.

    Explanatory variables are percent change in corresponding asset price for end-of-period values. Dependent variable is the first difference of cyclically adjusted revenue as a share of potential GDP. Country fixed effects are included.

    As the dependent variable is cyclically adjusted revenue, staff estimates measure the impact of housing and equity price changes beyond the normal cycle. If these asset prices moved in the same fashion as the business cycle, then the coefficients should be zero, as the standard cyclical adjustment should capture this effect.

    Appendix VI Fiscal Stimulus Packages in the G-20 Countries

    This appendix provides a summary of the fiscal stimulus packages announced in late 2008 and in the first several months of 2009 in the G-20 countries. For each country, information is provided on the type of measure (expenditure or revenue), its nature (permanent, temporary, or self-reversing), and its estimated budgetary cost and time profile, where available (Table A6.1).51 Data are expressed in U.S. dollars (unless otherwise indicated) and reflect staff’s assessment of the authorities’ estimates. For example, support to financial institutions are typically included in national authorities’ announced packages, but they have been excluded here if these operations are already covered in Appendix II of this paper. Similarly, announced measures that staff have been able to determine were not genuinely new and crisis related have also been excluded.

    Table A6.1.Summary of the Fiscal Stimulus Packages in the G-20 Countries(In billions of U.S. dollars, unless otherwise stated)
    Cost
    MeasureNature20092010
    Argentina
    Expenditure3.4
    Infrastructure investmentTemporary3.0
    Support to small and medium-sized enterprises (SMEs) and/or farmers
    Safety netsTemporary0.3
    Housing/construction support
    Strategic industries support
    Increase in public wage bill
    Other
    Revenue1.3
    Personal income tax (PIT)/exemptions/deductionsPermanent0.7
    Indirect tax reductionsPermanent0.6
    Corporate income tax (CIT)/depreciation/incentives
    Other
    Memorandum items:
    Total cost4.7
    In percent of GDP1.5
    Australia
    Expenditure18.114.7
    Infrastructure investmentTemporary4.05.0
    Support to SMEs and/or farmers
    Safety netsTemporary8.33.3
    Housing/construction supportTemporary0.70.3
    Strategic industries support
    Increase in public wage bill
    OtherTemporary5.16.2
    Revenue1.01.2
    PIT/exemptions/deductions
    Indirect tax reductions
    CIT/depreciation/incentivesTemporary0.40.8
    OtherTemporary0.60.4
    Memorandum items:
    Total cost19.115.9
    In percent of GDP2.52.1
    Brazil1
    Expenditure2.96.3
    Infrastructure investment
    Support to SMEs and/or farmers
    Safety netsTemporary0.2
    Housing/construction supportTemporary2.76.3
    Strategic industries support
    Increase in public wage bill
    OtherTemporary
    Revenue4.90.9
    PIT/exemptions/deductionsTemporary2.40.6
    Indirect tax reductionsTemporary1.3
    CIT/depreciation/incentivesPermanent
    Other1.20.3
    Memorandum items: Total cost in 20097.87.1
    In percent of GDP0.60.5
    Canada1
    Expenditure19.615.0
    Infrastructure investmentTemporary11.28.4
    Support to SMEs and/or farmersTemporary
    Safety netsTemporary2.93.5
    Housing/construction supportTemporary3.71.7
    Strategic industries supportTemporary
    Increase in public wage bill
    OtherTemporary1.91.4
    Revenue3.55.1
    PIT/exemptions/deductionsPermanent2.84.3
    Indirect tax reductions
    CIT/depreciation/incentivesPermanent0.60.8
    Other
    Memorandum items: Total cost23.120.9
    In percent of GDP1.91.7
    China1, 2
    Expenditure149.8
    Infrastructure investmentTemporary115.4
    Support to SMEs and/or farmers
    Safety netsTemporary
    Housing/construction supportTemporary15.0
    Strategic industries supportTemporary13.9
    Increase in public wage bill
    OtherTemporary5.6
    Revenue
    PIT/exemptions/deductions
    Indirect tax reductionsPermanent
    CIT/depreciation/incentives
    Other
    Memorandum items: Total cost149.8143.2
    In percent of GDP3.12.7
    France
    Expenditure15.12.6
    Infrastructure investmentTemporary6.81.8
    Support to SMEs and/or farmers
    Safety netsTemporary3.0
    Housing/construction supportTemporary0.90.8
    Strategic industries support
    Increase in public wage bill
    OtherTemporary4.3
    Revenue1.418.8
    PIT/exemptions/deductionsTemporary1.40.1
    Indirect tax reductionsPermanent3.4
    CIT/depreciation/incentives15.3
    Other
    Memorandum items: Total cost16.521.4
    In percent of GDP0.70.8
    Germany1
    Expenditure31.825.4
    Infrastructure investmentTemporary13.012.8
    Support to SMEs and/or farmersTemporary0.61.8
    Safety netsPermanent9.07.7
    Housing/construction supportPermanent
    Strategic industries supportTemporary0.10.2
    Increase in public wage bill
    OtherTemporary9.12.9
    Revenue16.034.6
    PIT/exemptions/deductionsPermanent12.827.9
    Indirect tax reductionsPermanent0.10.2
    CIT/depreciation/incentivesPermanent3.16.5
    Other
    Memorandum items: Total cost47.760.0
    In percent of GDP1.62.0
    India3
    Expenditure
    Infrastructure investmentTemporary
    Support to SMEs and/or farmers
    Safety netsTemporary
    Housing/construction supportTemporary
    Strategic industries support
    Increase in public wage bill
    OtherTemporary
    Revenue6.37.6
    PIT/exemptions/deductions
    Indirect tax reductionsTemporary6.37.6
    CIT/depreciation/incentives
    Other
    Memorandum items: Total cost6.37.6
    In percent of GDP0.60.6
    Indonesia
    Expenditure1.5
    Infrastructure investmentTemporary1.0
    Support to SMEs and/or farmers
    Safety netsTemporary0.5
    Housing/construction support
    Strategic industries support
    Increase in public wage bill
    OtherTemporary0.0
    Revenue4.93.3
    PIT/exemptions/deductionsPermanent2.70.6
    Indirect tax reductionsPermanent0.50.5
    CIT/depreciation/incentivesPermanent1.72.2
    Other
    Memorandum items: Total cost6.43.3
    In percent of GDP1.40.6
    Italy4
    Expenditure3.40.7
    Infrastructure investmentTemporary0.40.5
    Support to SMEs and/or farmers
    Safety netsTemporary3.1
    Housing/construction supportTemporary0.5
    Strategic industries supportTemporary
    Increase in public wage bill
    OtherTemporary–0.60.3
    Revenue–0.31.2
    PIT/exemptions/deductionsTemporary1.71.1
    Indirect tax reductionsTemporary–0.60.1
    CIT/depreciation/incentivesPermanent0.30.8
    OtherPermanent–1.8–0.8
    Memorandum items: Total cost (net)4.51.9
    In percent of GDP0.20.1
    Japan
    Expenditure113.680.1
    Infrastructure investmentTemporary15.927.5
    Support to SMEs and/or farmersTemporary
    Safety netsTemporary47.39.8
    Housing/construction supportTemporary2.10.4
    Strategic industries support
    Increase in public wage bill
    OtherTemporary48.342.5
    Revenue7.25.0
    PIT/exemptions/deductionsPermanent2.11.4
    Indirect tax reductions
    CIT/depreciation/incentivesPermanent2.61.8
    OtherPermanent2.51.8
    Memorandum items: Total cost120.885.1
    In percent of GDP2.41.8
    Korea1
    Expenditure19.4
    Infrastructure investmentTemporary7.2
    Support to SMEs and/or farmersTemporary5.6
    Safety netsTemporary6.6
    Housing/construction supportTemporary
    Strategic industries support
    Increase in public wage bill
    OtherTemporary
    Revenue7.39.2
    PIT/exemptions/deductionsPermanent1.92.5
    Indirect tax reductionsTemporary0.9
    CIT/depreciation/incentivesPermanent4.36.4
    OtherTemporary0.10.3
    Memorandum items: Total cost26.79.2
    In percent of GDP3.71.2
    Mexico1
    Expenditure9.9
    Infrastructure investmentTemporary4.7
    Support to SMEs and/or farmers
    Safety netsTemporary5.2
    Housing/construction support
    Strategic industries support
    Increase in public wage bill
    OtherTemporary
    Revenue
    PIT/exemptions/deductions
    Indirect tax reductions
    CIT/depreciation/incentives
    Other
    Memorandum items: Total cost12.4
    In percent of GDP1.5
    Russia
    Expenditure32.91.1
    Infrastructure investment
    Support to SMEs and/or farmersTemporary1.0
    Safety netsTemporary14.71.1
    Housing/construction supportTemporary2.4
    Strategic industries supportTemporary6.2
    Increase in public wage bill
    OtherTemporary8.6
    Revenue14.616.7
    PIT/exemptions/deductionsPermanent1.21.4
    Indirect tax reductions
    CIT/depreciation/incentivesPermanent11.913.6
    Other1.51.7
    Memorandum items: Total cost47.517.8
    In percent of GDP4.11.3
    Saudi Arabia1
    Expenditure
    Infrastructure investmentTemporary
    Support to SMEs and/or farmers
    Safety nets
    Housing/construction support
    Strategic industries support
    Increase in public wage bill
    Other
    Revenue
    PIT/exemptions/deductions
    Indirect tax reductions
    CIT/depreciation/incentives
    Other
    Memorandum items: Total cost12.314.8
    In percent of GDP3.33.5
    South Africa5
    Expenditure7.35.2
    Infrastructure investmentTemporary4.32.8
    Support to SMEs and/or farmers
    Safety netsTemporary2.21.8
    Housing/construction supportTemporary0.70.6
    Strategic industries support
    Increase in public wage bill
    Other
    Revenue
    PIT/exemptions/deductions
    Indirect tax reductions
    CIT/depreciation/incentives
    Other
    Memorandum items: Total cost7.35.2
    In percent of GDP3.02.1
    Spain
    Expenditure14.6
    Infrastructure investmentTemporary10.7
    Support to SMEs and/or farmers
    Safety netsTemporary0.8
    Housing/construction supportTemporary0.1
    Strategic industries supportTemporary2.3
    Increase in public wage bill
    OtherTemporary0.8
    Revenue15.21.7
    PIT/exemptions/deductionsPermanent7.39.5
    Indirect tax reductionsSelf-reversing7.9–7.8
    CIT/depreciation/incentives
    Other
    Memorandum items: Total cost32.1
    In percent of GDP2.3
    Turkey
    Expenditure2.10.3
    Infrastructure investment
    Support to SMEs and/or farmersTemporary0.1
    Safety netsTemporary0.80.1
    Housing/construction support
    Strategic industries supportTemporary0.2
    Increase in public wage bill
    OtherTemporary1.00.2
    Revenue2.21.2
    PIT/exemptions/deductionsPermanent0.00.0
    Indirect tax reductionsTemporary1.60.1
    CIT/depreciation/incentivesPermanent0.30.5
    OtherPermanent0.20.6
    Memorandum items: Total cost4.31.5
    In percent of GDP0.80.3
    United Kingdom7
    Expenditure6.4–6.7
    Infrastructure investmentSelf-reversing2.8–2.2
    Support to SMEs and/or farmers
    Safety netsTemporary1.71.2
    Housing/construction supportTemporary1.5–0.4
    Strategic industries support
    Increase in public wage bill
    OtherTemporary0.4–5.3
    Revenue22.53.3
    PIT/exemptions/deductionsPermanent4.95.4
    Indirect tax reductionsSelf-reversing15.1
    CIT/depreciation/incentives
    OtherPermanent2.5–2.1
    Memorandum items: Total cost30.9–0.3
    In percent of GDP1.50.0
    United States8
    Expenditure183.8142.3
    Infrastructure investmentTemporary31.847.0
    Support to SMEs and/or farmers
    Safety netsTemporary77.013.8
    Housing/construction support
    Strategic industries support
    Increase in public wage bill
    OtherTemporary75.081.5
    Revenue94.3111.3
    PIT/exemptions/deductionsPermanent37.279.6
    Indirect tax reductions
    CIT/depreciation/incentivesPermanent57.231.7
    Other
    Memorandum items: Total cost283.2257.3
    In percent of GDP2.01.8
    1

    For some measure(s), the only information available is about their nature, but no estimate of their budgetary cost is available.

    Updated cost estimates are based on the breakdown of spending measures reported in February 2009.

    Cost is shown on a fiscal year basis. Includes only on-budget measures. Additional off-budget measures amount to 1.6 percent of GDP in 2009/10 (including 0.4 percent of GDP for bank recapitalization).

    The stimulus measures announced by the government will be partially offset by other “deficit-reducing” measures; IMF staff estimates assume that only part of revenue increasing measures from the November 2008 decree would be effective in 2009–11.

    Based on staff estimates of the cyclically adjusted general government balance. Additional stimulus in the form of infrastructure investment is being provided by the broader public sector, so that the total fiscal stimulus (as measured by the public sector borrowing requirement) is 4.2 percent of GDP in 2008, 6.2 percent in 2009, and 4.9 percent in 2010.

    6

    Budget liquidity impact basis.

    Negative numbers refer to impact of offsetting measures.

    Excludes financial system rescue costs.

    The data are derived from several sources, including government announcements, websites, and reports. As national authorities continue to take measures to stem the crisis, this appendix reflects the status and information available through mid-May 2009.

    Appendix VII Effect of Larger Debts on Interest Rates

    Although empirical evidence on the impact of fiscal variables on interest rates is mixed, several studies find positive and significant effects (Table A7.1):

    • The few studies focusing on “world” long-term real interest rates (average interest rates in the advanced economies) find that their main correlates are investment prospects (reflected in stock returns) and the monetary stance, with average fiscal deficits or debts playing an insignificant role in most estimates (Barro and Sala-i-Martin, 1990).

    • Studies focusing on country-specific interest rates based on panels of countries or individual country time series find either insignificant or positive and significant effects. For member countries of the Organization for Economic Cooperation and Development (OECD), Ardagna, Caselli, and Lane (2007) find that a 1 percentage point increase in the ratio of the primary deficit to GDP is associated with a 10 basis point increase in nominal long-term (10-year) interest rates. The effect of an increase in public debt is estimated to be positive only for countries with large debts: a 10 percentage point increase in the debt/GDP ratio for a country with an initial ratio of 100 percent is associated with an increase of 20 basis points, whereas for a country with an initial ratio of 50 percent the effect is negligible. For the United States, studies that find a significantly positive effect put it in most cases in the range between 20–60 basis points for an increase in the budget deficit by 1 percentage point of GDP (Gale and Orszag, 2004).

    • For emerging markets, variation in a country’s sovereign bond spread is mainly correlated with changes in the average spread for all emerging markets; changes in country-specific fundamentals, including public debts or deficits, play a more limited role (see Mauro, Sussman, and Yafeh, 2006 for a review of this literature).

    Table A7.1Studies on the Effects of Debt and Deficits on Interest Rates
    Predominantly Positive Significant EffectMixed EffectPredominantly Insignificant Effect
    Numerical effect1Numerical effect1Numerical effect1
    DebtDeficitDebtDeficitDebtDeficit
    United States
    Gale and Orszag (2004)20.04/0.060.25/0.35Engen and Hubbard (2004)0.030.03/0.19Gale and Orszag (2004)–0.03/0.040.02/0.17
    Dai and Phillipon (2004)0.43/0.89 (VAR)Engen and Hubbard (2004)0.02 (VAR)0.12 (VAR)Plosser (1987)5–0.07
    Canzoneri, Cumby, and Diba (2002)0.20/0.68Perotti (2002)8–I.4I/-0.52 (VAR)Evans (1987)–0.08/0.13
    Miller and Russek (1996)0.01/0.03Perotti (2002)90.02/0.34 (VAR)Evans (1985)6–3.63/0.19
    Thomas and Abderrezak (1988)0.64/1.55Quigley and Porter-Hudak (1994)110.01Mascaro and Meltzer (1983)–0.07/0.02
    Kim and Lombra (1989)7–0.01/0.02Hoelscher (1983)0.09
    Zahid (1988)7–0.05/0.08Plosser (1982)10–0.01/-0.15
    Tanzi (1985)0.11/0.180.27 / 0.84
    AustraliaPerotti (2002)80.09/0.45 (VAR)
    Perotti (2002)9–0.14/0.46 (VAR)
    CanadaPerotti (2002)8–0.14/1.62 (VAR)Evans (1987)–0.04/0.02 (VAR)
    Perotti (2002)9–0.41/0.25 (VAR)
    FranceEvans (1987)–0.03/0.07 (VAR)
    GermanyPerotti (2002)80.46/1.86 (VAR)Evans (1987)–0.43/-O.I7(VAR)
    Perotti (2002)9–0.21/0.75 (VAR)
    ItalyCottarelli and Mecagni (1990)0.13/2.010.2
    JapanEvans (1987)–0.27/-0.23 (VAR)
    United KingdomPerotti (2002)8–0.57/0.95 (VAR)Evans (1987)–0.37/-0.36 (VAR)
    Perotti (2002)9–0.07/0.34 (VAR)
    Panel (advanced and emerging countries)
    Aisen and Hauner (2008)0.26/0.56Cantor and Packer (1996)340.00/0.010.01/0.15
    Panel (advanced countries)
    Ardagna, Caselli, and Lane (2007)0.0020.1Aisen and Hauner (2008)–0.08
    Panel (emerging countries)
    Aisen and Hauner (2008)0.24Dell’ Ariccia, Schnabel, and Zettelmeyer (2006)12–0.02/-0.08–0.92/1.27
    Baldacci, Gupta, and Mati (2008)30.24/0.44Mauro. Sussman, and Yafeh (2006)30.00/0.20
    Eichengreen and Mody (1998)31.66
    Min (1998)33.56
    Note: VAR is vector autoregression.

    Impact on interest rate (in percentage points) of a 1 percentage point of GDP increase unless otherwise indicated.

    Impact of projected fiscal variables on five-year-ahead interest rates.

    Dependent variable is spreads (percentage points) on U.S. dollar-denominated sovereign bonds over long-term interest rates on U.S. government bonds.

    Uses external debt (relative to exports).

    Uses shocks to the growth rate of real per capita public debt (I percent).

    Uses the ratio of real deficit to real trend national income.

    Measure the impact of a $1 billion increase in the deficit.

    Effects of a 1 percent of GDP increase in public spending.

    Effects of a 1 percent of GDP increase in net taxes.

    Uses shocks to the growth rate of public debt (I percent).

    Uses shocks to the announced increase in deficit (I percent).

    Uses external debt (relative to GDP).

    Methodological considerations suggest that the findings of these empirical studies should be viewed as a lower bound on the true effects. Observed fiscal deficits are an imperfect proxy for the concept of fiscal deficit that is expected to increase interest rates based on theory. Indeed, observed fiscal deficits are affected by a host of factors (to differing degrees in different countries) that cannot easily be controlled for in empirical studies (particularly for panels of countries), such as inflation, the position in the economic cycle, and varying quality of expenditures. With measurement error in the explanatory variable, the estimated coefficients are likely to reflect downward (i.e., “attenuation”) bias. Moreover, the analysis is further complicated by the need to control for monetary policy, which may also respond to recessions at the same time as fiscal policy does.

    Appendix VIII Japan: High Public Debt and Low Interest Rates

    Japan’s gross public debt has increased steadily since the early 1990s and now exceeds that of all other major advanced countries. Gross debt was close to 200 percent of GDP and net debt exceeded 90 percent of GDP at end-2007 (Figure A8.1). This reflects low economic growth and repeated efforts by the authorities to jumpstart the economy through fiscal stimuli.

    Figure A8.1.Japan: Debt and Interest Rates

    Source: IMF, World Economic Outlook, April 2009.

    At the same time, the government has continued to benefit from low financing costs. Long-term government bond yields gradually declined from 7 percent in 1990 to 1 percent in 2003 and have remained below 2 percent since. These yields have been consistently lower than for other G-7 countries.

    Several factors, some of which may be seen as specific to Japan, could help reconcile low interest rates with large public debts.

    • High private saving rate. The savings-to-GDP ratio of the private sector (including households, private corporations and private financial institutions), at 24 percent in 2007, is significantly above the average for member countries of the Organization for Economic Cooperation and Development (OECD) (17 percent).

    • Institutional restrictions. Until the late 1990s, private pension funds were required to invest a significant share of their assets in domestic bonds; moreover, the special treatment of the postal system allows it to provide favorable yields that attract a significant share of retail deposits, which are partly channeled to the Japanese government bond market.

    • Home bias. Despite the reduction/elimination of administrative and regulatory impediments to the acquisition or holding of foreign assets, home bias remains above the OECD average.

    • Net external position. Japan is a large net creditor and does not depend on foreign creditors to finance its public debt.

    Reflecting these factors, public debt is held almost exclusively by domestic investors (93 percent), notably domestic banks, life insurance companies, and several government-related entities (public financial institutions, pension funds, and the central bank).

    Another hypothesis is that Japanese households may behave in a Ricardian manner: interest rates did not rise because households cut consumption to match the increasing dissaving of the government. This would also help explain why fiscal stimulus had limited impact in Japan.

    Bibliography

    The G-20 group is defined in this paper as inclusive of Spain.

    Some countries have also provided direct support to the nonfinancial sector but in fairly small amounts.

    In some instances, the amounts announced have not yet been formally committed through legislation or regulation (see Appendix II, Table A2.3 for details).

    For the euro area countries, the European Central Bank (ECB) has provided significant support since the summer of 2007, initially mainly through lengthening of the maturity of its refinancing operations, and since October 2008, through an increase in the aggregate amount of liquidity provision. This also applies to other major central banks, with some variation in the modalities in the provision of the support.

    Many countries noted below have announced measures that are difficult to quantify and so are not included in Table 2.1.

    The point estimate reflects the EICDS spreads observed in the market. These spreads, once the guarantees are in place, capture the residual risk for banks, but may not capture the full risk for the government that is providing the guarantee. The approach, therefore, may bias downward the calculation of the potential costs for the government. To correct for this, a “conservative” CDS was calculated (assuming a conservative recovery rate—broadly in line with market practices) and used to derive the figure reported in the text as upper bound (see Appendix II, Table A2.2).

    These costs are calculated in Appendix IV, Table A4.1 (column A) and in Table A4.3 (column A), converted to a five-year measure.

    See Appendix V for details on the computation of the automatic stabilizers. The estimates are based on noncommodity revenues.

    Severe disruptions in payment and credit markets could also abnormally reduce revenue collection, including through failure to file returns, underdeclaration, or payment deferrals. These effects, which may only affect the fiscal balance on a cash (and not accrual) basis, are difficult to estimate, and are not included here.

    CIT revenues averaged 3 percent of GDP across the G-20 during 2004–06 (weighted average). The calculation assumes that the financial sector pays 25 percent of CIT and has a decline in profits of 50 percent on top of the average decline in profits (already captured by the cyclical adjustment calculation). Because of the possible double-counting between this effect and the equity price effect, the former is reduced by a quarter.

    Another major G-20 oil producer, Mexico, hedged its 2009 oil export price at US$70 per barrel. Staff estimate that each 10 percent fall in commodity prices will reduce G-20 fiscal revenue by 0.15 percent of GDP.

    These figures reflect the budgetary cost of the stimulus measures in each year. They are based on packages announced through mid-May 2009. The figures have been corrected for (1) “below-the-line” operations that do not have an impact on the fiscal balance; and (2) the fact that in some countries part of the announced stimulus included measures that were already planned before the crisis.

    Mutual funds in these countries are also heavily weighted toward equities. Investment by funded pension funds in real estate is small (below 3 percent of total assets, on average, for member countries of the Organization for Economic Cooperation and Development (OECD)).

    Partly because of low pricing of premiums, weak funding rules, and limited adjustment for plan-sponsor risk, guarantee schemes in the United States, the United Kingdom, and Ontario, Canada were in deficit in 2008.

    In the United States, pension plans of S&P 1500 companies lost nearly half a trillion dollars in 2008, nearly 80 percent of which occurred in the last quarter (Mercer, 2009).

    To avert windup of plans, there are increasing demands for temporarily amending funding rules. Several countries are considering regulatory adjustments, for example, to adjust the time within which pension plans have to restore adequate funding levels. For example, in December 2008, the U.S. Congress rolled back part of the Pension Protection Act of 2006, which had increased the funding requirements of underfunded plans. Concerns remain, however, that such a relaxation would weaken the long-term health of the plans, affecting members and the government in the future.

    Baseline data are from the IMF’s April 2009 World Economic Outlook.

    These projections assume different recovery rates for the financial support operations as discussed in Section II, depending on the nature of the support.

    This trend is also confirmed for other advanced countries using consensus inflation forecasts to estimate real bond yields.

    Spreads also rose to above 200 basis points for Ireland (Figure 6.1), where government guarantees provided to financial sector obligations amount to about 200 percent of GDP.

    CDS spreads for the United States rose from 8 basis points in June 2008 to almost 100 basis points in late February 2009 before moderating to around 50 basis points by mid-April 2009. Similarly, CDS spreads for Austria, Greece, Iceland, Ireland, Italy, Portugal, and Spain had all risen more than 150 basis points (by end-February 2009, compared with their June 2008 levels), though in some cases they declined somewhat by mid-April 2009.

    Strictly speaking, the no-Ponzi-game condition is equivalent to the stabilization of the debt-to-GDP ratio only if the interest rate on government debt exceeds the growth rate of the economy (otherwise, it is more stringent). It is, however, common to assume that this is the case in the long run.

    Hyperinflations occurred in the aftermath of major wars and in a context of domestic political instability, although moderate inflation has also occasionally played a significant role in reducing the real value of debt—especially until the 1950s. Partial defaults occurred during the interwar period, for example, in Italy in the late 1920s (Alesina, 1988), and in the United States in 1933, when the abrogation of “gold clauses” in debt contracts prevented a 25 percentage point increase in the government debt/GDP ratio (Kroszner, 2003).

    Some advanced countries have exhibited strong resilience to high government debt. Japan is the most noteworthy example. See Appendix VIII for a discussion of the idiosyncratic reasons that may explain such resilience.

    The EC projections of pension and health care costs are currently being updated. The baseline scenario assumes that the increase in life expectancy will lead to some postponement of the need for additional care. The health care projections assume an elasticity of demand higher than unity (1.1) in the short term, gradually declining to unity over the projection period.

    The relatively small increase in U.S. health care spending in Table 6.3 reflects the fact that only the demographic effect is considered and not the impact of high income elasticity of demand and/or faster growth of health care costs relative to GDP.

    The above outlook does not take into account, on the one hand, additional costs that may arise for public finances from climate change (IMF, 2008b), and, on the other hand, some savings associated with demographic change, for example, lower costs for education.

    The projection assumes an interest rate growth differential as projected in the April 2009 World Economic Outlook until 2014 and converging thereafter to 1 percentage point; and pension and health contributions remaining constant as a ratio to GDP after 2014.

    To the extent that fiscal action is effective in supporting growth, its net fiscal cost is reduced by the automatic stabilizers. For example, the net cost of a 1 percentage point of GDP of fiscal stimulus, assuming a unit multiplier, is about¾percentage point of GDP for the G-20. More generally, if fiscal action succeeds in rescuing the economy from a downward expectations spiral, its long-run costs could be lower than in the absence of intervention.

    Indeed, as noted in Spilimbergo and others (2008), even in 2008, not all countries were in a position to implement fiscal stimulus.

    This appendix does not address issues related to accounting principles.

    Both government finance statistics manuals are available via the Internet at http://www.imf.org/external/pubs/ft/gfs/manual/gfs.htm.

    This criterion was not developed at the time of GFSM 1986. All transactions in claims on others acquired for purposes of public policy would be captured by “lending minus repayments” above-the-line. If the government intervention does not result in an effective claim, it would be recorded as expenditure.

    The treatment of direct interventions is essentially the same under the EU European System of Accounts 1995 (ESA-95).

    The overall fiscal balance is defined (GFSM 2001, Box 4.1) as “net lending/borrowing adjusted through the rearrangement of lending and repayment transactions in assets and liabilities that are deemed to be for public policy purposes.”

    The net impact of this intervention would be interest receivable forgone because governments usually extend these loans at rates lower than market rates.

    In the case of revenue-generating assets (e.g., loans or mortgage-backed securities), the corresponding revenue will, however, be reported and affect net lending/borrowing.

    The 2008 System of National Accounts distinguishes between one-off guarantees and standardized guarantees. The former are recorded only when the guarantee is called, while for the latter the present value of expected calls (net of expected recoveries) is recorded.

    In some instances, the amounts announced have not yet been formally committed through legislation or regulation.

    Transition countries are as defined in IMF (2000).

    Countries with stronger public financial management systems could be countries that adopted better processes for managing and selling the assets acquired through financial support operations. Further work would be needed to measure, and use as regressor, a variable capturing directly differences in those processes across countries.

    See Gray, Merton, and Bodie (2007 and 2008) and Gray and Malone (2008) for further details about the CCA methodology.

    A put option is the right to sell the underlying asset at a specified exercise price by a certain expiration date.

    The country classification of emerging markets is different than the one that is traditionally used in the IMF. In particular, Greece is classified as an advanced economy by the IMF. The countries that are included in the emerging market economies in this work are not very representative of this group.

    MKMV calculates the CCA models and expected losses for banks with traded equity and those without traded equity are not in the database.

    The use of total GDP has limitations for commodity-producing countries, given different cycles. However, due to limited data on non-oil GDP, the paper uses overall GDP for the estimates.

    The estimates extend the growth projections of the World Economic Outlook, April 2009 through the year 2020 for the calculation of trend output.

    Estimates of the impact of automatic stabilizers based on other approaches such as use of more detailed information about the behavior of revenue and spending in specific countries and calculation of stabilizers as the difference between the overall and structural balances may yield somewhat different results.

    Cyclically adjusted revenue data are based on the April 2009 World Economic Outlook, using the methodology described in the section “Methodology for Calculating the Estimated Impact of Automatic Stabilizers.” Housing price data and projections through 2009 covering 10 countries are from the IMF’s Research Department; data for some other G-20 countries (Brazil, India, Indonesia, Russia, and South Africa) were obtained from international real estate and investment banking sources. Equity price data are from Bloomberg, with GDP deflators from the IMF’s World Economic Outlook used to convert nominal prices to real terms; data were obtained starting from 1990, with annual growth indicators from 1991.

    Temporary measures have a temporary effect on the deficit but a permanent impact on the debt level (e.g., expenditure measures that are one-off or designed to expire after a certain period). Permanent measures have a permanent effect on the deficit, and a cumulative one on debt (e.g., most revenue measures seem permanent). Self-reversing measures have a temporary effect on both deficits and debts.

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