Abstract

The purpose of this appendix is to provide detailed information on specific instruments and transactions and to set out their classification treatment in the gross external debt position. There are two sections. The first provides a description of specific financial instruments and how they should be classified in the gross external debt position; the second sets out the classification treatment of some specific transactions that, experience suggests, require particular clarification.

Appendix 1. Specific Financial Instruments and Transactions: Classification

The purpose of this appendix is to provide detailed information on specific instruments and transactions and to set out their classification treatment in the gross external debt position. There are two sections. The first provides a description of specific financial instruments and how they should be classified in the gross external debt position; the second sets out the classification treatment of some specific transactions that, experience suggests, require particular clarification.

Part 1. Financial Instruments: Description and Classification in the Gross External Debt Position1

A

American Depository Receipt (ADR)

An ADR is a negotiable certificate that represents ownership of the securities of a non-U.S. resident company. Although the securities underlying ADRs can be debt or money market instruments, the large majority are equities. An ADR allows a non-U.S. resident company to introduce its equity into the market in a form more readily acceptable to investors, such as in U.S. dollars, without needing to disclose all the information normally required by the U.S. Securities and Exchange Commission. A U.S. depository bank will purchase the underlying foreign security and then issue receipts in dollars for those securities to the U.S. investor. The receipts are registered. The investor can exchange the ADRs for the underlying security at any time. See also Bearer Depository Receipts and Depository Receipts.

Classification

These instruments are classified by the nature of the underlying instrument backing the ADR. This is because the “issuing” intermediary does not take the underlying security onto its balance sheet but simply acts as a facilitator. So, the debtor is the issuer of the underlying security, i.e., an ADR is regarded as a non-U.S. resident issue. If owned by nonresidents, these instruments are to be included in the gross external debt position if the underlying security is a debt security. The security is classified as short-term/long-term, debt securities (portfolio investment, debt securities in the IIP) or, depending on the relationship between debtor and creditor, as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). If the underlying item is an equity investment, it should be classified in the memorandum table, equity liability position with nonresidents by sector (Table 4.5) under the appropriate institutional sector. If the nonresident is in a direct investment relationship with the issuer, then the equity is classified as direct investment: equity and investment fund shares (Table 4.5).

Arrears

Amounts that are past due-for-payment and unpaid. These include amounts of scheduled debt-service payments that have fallen due but have not been paid to the creditor(s).

In the context of the Paris Club, arrears are the unpaid amounts that fall due before the consolidation period. See Paris Club, Creditor, and Consolidation Period in Appendix 3.

Arrears also include amounts related to other non-debt-instruments and transactions such as, a financial derivatives contract that comes to maturity and a required payment is not made, or when goods are supplied and not paid for on the contract payment date, or a payment for goods is made but the goods are not delivered on time.

Classification

Arrears of principal and/or interest are reported in the original debt instrument. If owned by nonresidents, the debt instruments are to be included in the gross external debt position.

Arrears related to other nondebt-instruments and late payments of nondebt transactions are debt liabilities that should be recorded under the appropriate instrument, i.e., either trade credit and advances or other debt liabilities in the gross external debt position (other investment, either trade credit and advances or other accounts receivable/payable-other in the IIP).

Asset-Backed Securities

Asset-backed securities are bonds whose income payments and principal repayments are dependent on a pool of assets. Securities may be backed by various assets, e.g., mortgages, credit card loans, and automobile loans, in effect, converting illiquid assets into negotiable securities. The security issuers have a requirement to make payments, while the holders do not have a residual claim on the underlying assets. An asset-backed security enables the original lending institution to devolve credit risks to investors. There are several key features of asset-backed securities: the original lender will usually sell the assets to a trust or other form of intermediary (special purpose vehicle) and so, in the case of a bank, this frees “capital” that regulatory guidelines require a bank to hold against the assets. The intermediary will finance the purchase of the assets by issuing securities. Because income and the repayment of principal are dependent on the underlying assets, if the underlying assets are prepaid so is the security. Issuers often provide different tranches of the security so that if there are prepayments, the first tier will be repaid first, the second tier next, etc. The pricing of the various tranches will reflect the probability of early repayment. Asset-backed securities have also been developed that securitize future income streams—such as the earnings of musicians.

Classification

Asset-backed securities owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). These securities present a special problem regardless of the amount outstanding because there can be partial repayments of principal at any time. Therefore, simply revaluing the original face value to end-period market prices will cause overvaluation of the position data if there has been a partial repayment.

B

Balances on Nostro and Vostro Accounts

A vostro (your) account is another bank’s account with a reporting bank, while a nostro (our) account is a reporting bank’s account with another bank.

Classification

Liability positions in nostro and vostro accounts are to be included in the gross external debt position. They are classified as deposit-taking corporations, except the central bank, short-term, currency and deposits, or loans (other investment in the IIP) depending on the nature of the account.

Bankers’ Acceptances

A negotiable order to pay a specified amount of money on a future date, drawn on and guaranteed by a financial corporation. These drafts are usually drawn for international trade finance purposes as an order to pay an exporter a stated sum on a specific future date for goods received. The act of a financial corporation stamping the word “accepted” on the draft creates a banker’s acceptance. The acceptance represents an unconditional claim on the part of the owner and an unconditional liability on the part of the accepting financial corporation; the financial corporation’s counterpart asset is a claim on its customer. Bankers’ acceptances are treated as financial assets from the time of acceptance, even though funds may not be exchanged until a later stage. By writing the word “accepted” on the face of the draft the bank carries primary obligation, guaranteeing payment to the owner of the acceptance. Bankers’ acceptances can be discounted in the secondary market, the discount reflecting the time to maturity and credit quality of the guaranteeing bank. Since the banker’s acceptance carries a financial corporation’s obligation to pay (in effect “two-name paper”) and is negotiable, it becomes an attractive asset. Bankers’ acceptances are always sold at a discount and usually have maturities of up to 270 days.

Classification

Bankers’ acceptances are short-term debt securities that are claims on the accepting financial corporation, with the financial corporation owning a claim on the issuer of the bill.

If owned by nonresidents, bankers’ acceptances should be included in the gross external debt position. They should be classified as short-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of over one year, in which instance they are to be classified as long-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment; Intercompany lending (see the description of direct investment in Chapter 3).

Bearer Depository Receipt (BDR)

A form of depository receipt issued in bearer rather than registered form. See Depository Receipts.

Classification

A BDR is classified according to the nature of the underlying instrument backing it. This is because the “issuing” intermediary does not take the underlying security onto its balance sheet but simply acts as a facilitator. So, the debtor is the issuer of the underlying security. If owned by nonresidents, these instruments are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as direct investment; intercompany lending (see the description of direct investment in Chapter 3).

Bonds with an Embedded Call Option

A bond that gives the issuer a right to buy back the bonds on or by a particular date. The value of this right is usually reflected in the interest rate on the bond.

Classification

Bonds with embedded call options owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Bonds with an Embedded Put Option

A bond whereby the creditor has the right to sell back the bonds to the issuer on or by a particular date, or under certain circumstance, such as a credit downrating of the issuer. This right is usually reflected in the interest rate on the bond.

Classification

Bonds with embedded put options owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). The option is regarded as an integral part of the bond and is not separately valued and classified.

Brady Bonds

Brady bonds, named after U.S. Treasury Secretary Nicholas Brady, arose from the Brady Plan. This plan was a voluntary market-based approach, developed in the late 1980s, to reduce debt and debt service owed to commercial banks by a number of emerging market countries. Brady bonds were issued by the debtor country in exchange for commercial bank loans (and in some cases unpaid interest). In essence they provided a mechanism by which debtor countries could repackage existing debt. They are dollar denominated, “issued” in the international markets. The principal amount is usually (but not always) collateralized by specially issued U.S. Treasury 30-year zero-coupon bonds purchased by the debtor country using a combination of IMF, World Bank, and the country’s own foreign currency reserves. Interest payments on Brady bonds, in some cases, are guaranteed by securities of at least double-A-rated credit quality held with the New York Federal Reserve Bank. Brady bonds are more negotiable than the original bank loans but come in different forms. The main types are as follows:

  • Par bonds—Bonds issued to the same value as the original loan, but the coupon on the bonds is below market rate. Principal and interest payments are usually guaranteed

  • Discount bonds—Bonds issued at a discount to the original value of the loan, but the coupon is at market rate. Principal and interest payments are usually guaranteed

  • Debt-conversion bonds—Bonds issued to the same value as the original loan but on condition that “new” money is provided in the form of new-money bonds

  • Front-loaded interest reduction bonds—Bonds issued with low-rate fixed coupons that step up after the first few years

There are also other, less common types.

Classification

Brady bonds owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP). When a Brady bond is issued, the original loan is assumed to have been redeemed unless the terms of the issue of the Brady bond state otherwise. Any debt reduction in nominal value terms should be recorded—see Chapter 8. The initial purchase of the principal collateral (U.S. Treasury bonds) is a separate transaction and is classified as debt of the United States.

C

Callable Bonds

A callable bond is a bond in which the bondholder has sold the issuer an option (more specifically, a call option) that allows the issuer to repurchase the bond from the time the bond is first callable until the maturity date.

Classification

Callable bonds owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Catastrophe Bonds

Catastrophe bonds (also known as cat bonds) are bonds whose principal and interest is forgiven in the event of a catastrophe. These bonds are typically issued by insurers as an alternative to selling traditional catastrophe reinsurance. If no catastrophe occurred, the insurance company pays a coupon (usually at a high rate given the risk inherent in the bond) to the investors. If a catastrophe occurs, the forgiveness of the bond supports the insurance company as it makes payments to its claim-holders.

Classification

Cat bonds owned by nonresidents are to be included within the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). If a catastrophe occurs, that is the event specified in the debt contract, forgiveness of principal and interest is recorded as debt forgiveness (see paragraph 8.11, footnote 6).

Certificate of Deposit (CD)

A certificate issued by a deposit-taking corporation acknowledging a deposit in that corporation for a specified period of time at a specified rate of interest; CDs are essentially a form of negotiable time deposit (evidenced by the certificate). Nevertheless, a small minority of CDs are known to be nonnegotiable—not negotiable. CDs are widely issued in the domestic and international markets, and are typically bearer instruments, issued at face value with original maturities of one to six months, although there have been maturities of up to seven years. Typically, interest costs are payable at maturity for issues of one year or less, and semiannually on longer issues. The rate of interest on a given CD depends on several factors: current market conditions, the denomination of the certificate, and the market standing of the bank offering it. Typically, CDs are highly liquid instruments, which allow banks access to a cheaper source of funds than borrowing on the interbank market.

Classification

CDs owned by nonresidents are to be included in the gross external debt position. Those with an original maturity of one year or less should be classified as short-term, debt securities (portfolio investment, debt securities in the IIP), while those with an original maturity of over one year should be classified as long-term, debt securities. However, nonnegotiable CDs that are owned by nonresidents are to be classified as short-term, currency and deposits (other investment, currency and deposits in the IIP). Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Collateralized Debt Obligations (CDOs)

CDOs are bonds whose income payments and principal repayments are dependent on a pool of instruments. Typically, a CDO is backed by a diversified pool of loan and bond instruments either purchased in the secondary market or from the balance sheet of a commercial bank. The diversified nature of the instruments differentiates a CDO from an asset-backed security, which is backed by a homogeneous pool of instruments, such as mortgages and credit card loans. Issuers are often provided with different tranches of the security, so that if there are prepayments the first tier will be repaid first, the second tier next, etc. This allows investors to take different levels of credit risk. The pricing of each tranche reflects the probability of repayment.

Classification

CDOs owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). These securities present a special problem regardless of the amount outstanding because there can be partial repayments of principal at any time. Therefore, simply revaluing the original face value to end-period market prices will cause overvaluation of the position data if there has been a partial repayment.

Commercial Paper (CP)

Commercial paper (CP) is an unsecured promise to pay a certain amount on a stated maturity date, issued in bearer form. CP enables corporations to raise short-term funds directly from end investors through their own in-house CP sales team or via arranged placing through bank dealers. Short-term in nature, with maturities ranging from overnight to one year, CP is usually sold at a discount. A coupon is paid in a few markets. Typically, issue size ranges from $100,000 up to about $1 billion. In bypassing financial intermediaries in the short-term money markets, CP can offer a cheaper form of financing to corporations. But because of its unsecured nature, the credit quality of the issuer is important for the investor. Companies with a poor credit rating can obtain a higher rating for the issue by approaching their bank or insurance company for a third-party guarantee, or perhaps issue CP under a MOF (Multiple Option Facility), which provides a backup line of credit should the issue be unsuccessful.

Classification

Commercial paper owned by nonresidents is to be included in the gross external debt position. Such paper should be classified as short-term, debt securities (portfolio investment, debt securities in the IIP). Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). When CP is issued at a discount, this discount represents interest income.

Commitment-Linked Repayment Loans

These loans have a schedule of principal repayments including a grace period based on the committed amount. The schedule of payment, which is usually shown in the loan agreement, is based on the assumption that the loan will be fully withdrawn. In cases of cancellation or enhancement of the committed amount, the schedule of repayments in the loan agreement is maintained but the repayment amounts are adjusted in line with the ratio between the new committed amount and the original committed amount. The actual principal repayments depend on the amount disbursed. Commitment-linked repayment loans will usually have one of the following principal repayment schedules: (1) annuity-type repayment; (2) bullet repayment; (3) straight-line repayment; and (4) custom-tailored repayment.

Classification

Commitment-linked repayment loans extended by nonresidents to residents are to be included in the gross external debt position as loans (other investment in the IIP). Alternatively, depending on the relationship between debtor and creditor, these loans could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Commodity-Linked Bonds

A bond whose redemption value is linked to the price of a commodity. Typically, issuers whose income stream is closely tied to commodity earnings issue these bonds.

Classification

Bonds with payoffs linked to movements in commodity prices and owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Commodity-Linked Derivatives

Derivatives whose value derives from the price of a commodity. These include:

  • Commodity future—traded on an organized exchange, in which counterparties commit to buy or sell a specified amount of a commodity at an agreed contract price on a specified date

  • Commodity option—gives the purchaser the right but not the obligation to purchase (call) or sell (put) a specified amount of a commodity at an agreed contract price on or before a specified date

  • Commodity swap—a swap of two payment streams, where one represents a currently prevailing spot price and the other an agreed contract price for a specified quantity and quality of a specified commodity

Net cash settlements are usually made.

Classification

Commodity-linked derivatives in which the counterparty is a nonresident are included indistinguishably in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with non-residents by sector).

Convertible Bonds

A convertible bond is a fixed-rate bond that may, at the option of the investor, be converted into the equity of the borrower or its parent. The price at which the bond is convertible into equity is set at the time of issue and typically will be at a premium to the market value of the equity at the time of issue. The conversion option on the bond may be exercised at one specified future date or within a range of dates—“the window period.” The conversion right cannot be separated from the debt. The instrument allows the investor to participate in the appreciation of the underlying asset of the company while limiting risk. A convertible bond will generally pay a coupon rate higher than the dividend rate of the underlying equity at the time of issue but lower than the rate of a comparable bond without a conversion option. For the investor, the value of the convertible bond lies in the excess return of the bond yield over the dividend yield of the underlying shares.

Classification

Convertible bonds owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). As bonds are converted into equity, so the debt is extinguished. The equity issued is recorded in the memorandum table, equity liability position with nonresidents by sector (Table 4.5), under the appropriate institutional sector. If the nonresident is in a direct investment relationship with the issuer, then the equity is classified as direct investment: equity and investment fund shares in the memorandum table (Table 4.5).

Covered Bonds

Covered bonds are dual-recourse bonds with a claim on the issuer and, if the issuer defaults, a cover pool of high-quality collateral (which the issuer is required to maintain). Covered bonds are issued under specific legislation (or contracts which emulate this). The recourse to the pool of collateral and consequent reduction in credit risk transfer distinguishes covered bonds from asset-backed securities.

Classification

Covered bonds owned by nonresidents are to be included in the gross external debt position of the economy of residence of the issuer of the covered bond. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). In case of default, a change of debtor and/or type of instrument may occur when the recourse to the pool of collateral is activated.

Credit Derivatives

Derivatives that provide a market in credit risk. Investors will use credit derivatives to gain or reduce exposure to credit risk. With a credit derivative the investor is taking a view on the creditworthiness of the issuer(s) of the underlying instrument(s) without necessarily risking principal (although credit derivatives may be embedded in a security). Credit derivatives take the form of both forward-type (total return swaps) and option-type contracts (credit default swaps). For instance, a creditor may lend to a debtor but wants to protect against the risk of default by that debtor. The creditor “buys” protection in the form of a credit default swap—the risk premium inherent in the interest rate is swapped by the creditor for a cash payment in event of default, i.e., in the event of default, the seller of a credit default swap is liable for “loss given default” (the magnitude of likely loss on the exposure if the borrower defaults). Also, these instruments are used to circumvent local investment rules, e.g., if a foreign investor cannot invest in equity securities and so enters into a total return swap where the foreign investor pays a reference rate, say LIBOR, against the total return—dividends and capital gain/loss—on an equity security. The other most common structure is a spread option whose payoff structure depends on the interest rate spread between emerging country debt and, say, U.S. Treasury bonds.

Classification

Credit derivatives in which the counterparty is a nonresident are included indistinguishably in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

Credit Default Swap

A credit derivative option-type contract. A credit default swap (CDS) is a financial derivative whose primary purpose is to trade credit default risk. Under a CDS, premiums are paid in return for a cash payment in the event of a default by the debtor of the underlying instrument. See also Credit Derivatives.

Classification

Credit default swaps in which the counterparty is a nonresident are included indistinguishably in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

Credit-Linked Note

A so-called structured security that combines a credit derivative and a regular bond. Credit-linked notes (CLN) are debt securities that are backed by reference assets, such as loans and bonds, with an embedded CDS allowing credit risk to be transferred from the issuer to investors. Investors sell credit protection for the pool of assets to the protection buyer (or issuer) by buying the CLN. Repayment of principal and interest on the notes is conditional on the performance of the pool of assets. If no default occurs during the life of the note, the full redemption value of the note is paid to investors at maturity. If a default occurs, then investors receive the redemption value of the note minus the value of the default losses.

Classification

Credit-linked notes owned by nonresidents are to be included in the gross external debt position of the issuer of the credit-linked note. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP). Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). The credit derivative is regarded as an integral part of the bond and is not separately valued and classified.

Currency

Currency consists of notes and coins that are of fixed nominal values and are issued and authorized by central banks or governments; notes and coins are in circulation and commonly used to make payments.

Classification

Domestic currency owned by nonresidents is included within the gross external debt position as central bank (or perhaps deposit-taking corporations, except the central bank, or other institutional units), short-term, currency and deposits (other investment in the IIP).

Currency-Linked Bonds

A bond in which the coupon and/or redemption value are linked to the movement in an exchange rate. Examples of these types of bonds were the tesobonos issued by Mexican banks in 1994. These bonds, issued and payable in pesos, had a redemption value linked to the movement in the U.S. dollar/Mexican peso exchange rate. When the Mexican peso depreciated, the redemption value increased. More recent examples include currency-linked bonds issued by Brazilian federal government in late 1990s and until mid-2000s—see BIS Quarterly Review, June 2007—Jamaica, Philippines, Thailand, Malaysia, Indonesia, India, and the World Bank—for instance, a samurai bond with a foreign exchange linked variable coupon.

Classification

Bonds with payoffs linked to movements in exchange rates and owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Currency Pool Loans

Currency pool loans, provided by the World Bank and regional development banks, are multicurrency obligations committed in U.S. dollar-equivalent terms whose currency composition is the same (pooled) for all borrowers.

Classification

Currency pool loans of the borrowing economy are to be included in the gross external debt position. They should be classified as loans (other investment in the IIP).

D

Debt Securities

Debt securities are negotiable instruments serving as evidence of a debt. They include bills, bonds, notes, negotiable certificates of deposit, commercial paper, debentures, asset-backed securities, and similar instruments normally traded in the financial markets. Bills are defined as securities that give the holders the unconditional rights to receive stated fixed sums on a specified date. Bills are generally issued at discounts to face value that depend on the rate of interest and the time to maturity and are usually traded in organized markets. Examples of short-term, debt securities are treasury bills, negotiable certificates of deposit, bankers’ acceptances, promissory notes, and commercial paper. Debt securities give the holders the unconditional right to fixed or contractually determined variable payments (i.e., earning of interest is not dependent on earnings of the debtors). Depository receipts, whose underlying securities are debt securities, are debt securities.

Classification

Debt securities owned by nonresidents are to be included in the gross external debt position. Debt securities should be classified as long-term, debt securities, if issued with an original maturity of over one year, or as short-term, debt securities, if issued with an original maturity or one year or less (portfolio investment, debt securities in the IIP). Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Deep-Discount Bond

A bond that has small interest payments and is issued at a considerable discount to its par value. See also Zero-Coupon Bonds.

Classification

Deep-discount bonds owned by nonresidents are to be included within the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Deferred-Coupon Bonds

Deferred-coupon bonds are long-term securities that let the issuer avoid using cash to make interest payments for a specified number of years. There are three types of deferred-coupon structures: (1) deferred-interest bonds, (2) step-up bonds, and (3) pay-in-kind bonds. Deferred-interest bonds are those deferred-coupon structures that sell at a deep-discount and do not pay interest for the initial period. Step-up bonds do pay coupon interest, but the coupon rate is low for the initial period and then increases or “steps-up” to a higher coupon rate. Payment in-kind bonds give the issuer an option to give the bondholder a similar bond, i.e., a bond with the same coupon rate and a par value equal to the amount of the coupon payment that would have been paid.

Classification

Deferred-coupon bonds owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Deferred Drawdown Options (World Bank)

The Development Policy Loan Deferred Drawdown Option (DPL DDO) provides the borrower with the flexibility to rapidly fund its financing requirements following a shortfall in resources due to adverse economic events such as downturns in economic growth or unfavorable changes in commodity prices or terms of trade. The Catastrophe Risk DDO (Cat DDO) enables the borrower to access an immediate source of funding to respond rapidly in the aftermath of a natural disaster.

Classification

When funds are actually borrowed/lent, these loans extended by nonresidents to residents are to be included in the gross external debt position as loans (other investment in the IIP).

Depository Receipts

A depository receipt allows a nonresident entity to introduce its equity or debt into another market in a form more readily acceptable to the investors in that market. A depository bank will purchase the underlying foreign security and then issue receipts in a currency more acceptable to the investor. The investor can exchange the depository receipts for the underlying security at any time. See also American Depository Receipts and Bearer Depository Receipts.

Classification

A depository receipt is classified according to the nature of the underlying instrument backing it. This is because the “issuing” intermediary does not take the underlying security onto its balance sheet but simply acts as a facilitator. So, the debtor is the issuer of the underlying security. If owned by nonresidents, these instruments, if a debt security is the underlying instrument, are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). If the underlying item is an equity investment, it should be classified in the memorandum table, equity liability position with nonresidents by sector (Table 4.5) under the appropriate institutional sector. If the nonresident is in a direct investment relationship with the issuer, then the equity is classified as direct investment: equity and investment fund shares in the memorandum table.

Deposits

Deposits include all claims that are on the central bank, deposit-taking corporations, except the central bank, and, in some cases, other institutional units, and are represented by evidence of deposit. Deposits are claims that are either transferable or are “other deposits.” Transferable deposits consist of all deposits that are exchangeable on demand at par without restriction, or penalty, and directly usable for making payments by check, giro order, direct debit/credit, or other payment facility. “Other deposits” comprise all claims, other than transferable deposits, represented by evidence of deposit, e.g., savings and fixed-term deposits; sight deposits that permit immediate cash withdrawals but not direct third-party transfers; and shares that are legally (or practically) redeemable on demand or on short notice in savings and loan associations, credit unions, building societies, etc. Liabilities under securities repurchase agreements that are included in national measures of broad money are also other deposits (while liabilities under other repurchase agreements are included in loans; see BPM6, paragraph 5.43).

Classification

Deposits are liabilities of central banks, deposit-taking corporations, except the central bank, and, in some cases, other institutional units, and if owned by a nonresident are to be included in the gross external debt position. They should be classified as short-term, currency and deposits (other investment, currency and deposits in the IIP), under the corresponding institutional sector, unless detailed information is available to make the short-term/long-term attribution.

In some cases, the instrument classification of interbank positions may be unclear, e.g., because the parties are uncertain or one party considers it as a loan and the other a deposit. Therefore, as a convention to ensure symmetry, all interbank positions other than debt securities and accounts receivable/payable are classified in the gross external debt position as short-term, deposits (other investment, currency and deposits in the IIP), unless detailed information is available to make the short-term/long-term attribution.

Deposits in Mutual Associations

Deposits in the form of shares or similar evidence of deposit issued by mutual associations such as savings and loans, building societies, credit unions, and the like are classified as deposits. See Deposits.

Classification

Deposits in mutual associations owned by nonresidents are to be included in the gross external debt position. They should be classified as deposit-taking corporations, except the central bank, short-term, currency and deposits (other investment in the IIP).

Disbursement-Linked Repayment Loans

The disbursement linked repayment loans are loans that have a repayment schedule that is linked to each disbursement and will include a grace period for the repayment of principal. The grace period, which is fixed in the loan agreement, will apply from the beginning of each actual disbursement grouping. Usually disbursement-linked repayment loans are multi-tranche loans with each tranche having a different maturity period.

Classification

Loans extended by nonresidents to residents are to be included in the gross external debt position as loans (other investment in the IIP). Alternatively, depending on the relationship between debtor and creditor, these loans could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Dual-Currency Bonds

Dual-currency bonds are a group of debt securities where the interest and/or principal payments differ from the currency in which the bond is issued. The issue of currency-linked bonds followed the development of the currency swap market that broadened the range of currencies in which international bonds were issued.

Classification

Dual-currency bonds owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

E

Embedded Derivatives

An embedded derivative arises when a derivative feature is inserted in a standard financial instrument and is inseparable from the instrument. If a primary instrument, such as a security or loan, contains an embedded derivative, the instrument is valued and classified according to its primary characteristics—even though the value of that security or loan may well differ from the values of comparable securities and loans because of the embedded derivative. Examples are bonds that are convertible into shares, and securities with options for repayment of principal in currencies that differ from those in which the securities were issued.

Classification

Debt instruments with embedded derivatives owned by nonresidents are to be included in the gross external debt position, and they should be classified as debt securities or loans according to their primary characteristics (portfolio investment, debt securities, or other investment, loans in the IIP). Alternatively, depending on the relationship between debtor and creditor, the debt could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Employee Stock Options (ESOs)

Employee stock options (ESOs) are options to buy the equity of a company, offered to employees of the company as a form of remuneration. In a few cases, the company that issues the option is a resident of a different economy from the employee. ESOs have similar pricing behavior to financial derivatives, but they have a different nature and purpose (i.e., to motivate employees to contribute to increasing the value of the company, rather than to trade risk). If a stock option granted to employees can be traded on financial markets without restriction, it is classified as a financial derivative. BPM6 includes financial derivative instruments and ESOs in the same functional category.

Classification

ESOs in which the counter-party is a nonresident are not debt instruments, and are included in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

Equity

Equity consists of all instruments and records acknowledging, after the claims of all creditors have been met, claims to the residual values of a corporation or quasi-corporation. Equity may be split into listed shares, unlisted shares, and other equity. Both listed and unlisted shares are equity securities. Other equity is equity that is not in the form of securities. It includes equity in quasi-corporations for branches and notional units for ownership of land (in most cases), and the ownership of many international organizations. Equity is not a debt instrument, as it gives a residual claim on the assets of the entity.

Classification

Equity securities are included in the memorandum table, equity liability position with nonresidents by sector (Table 4.5) under the appropriate institutional sector, as well as other equity that is not direct investment. If the nonresident is in a direct investment relationship with the issuer, then the equity is classified as direct investment: equity and investment fund shares in the memorandum table.

Equity-Linked Bond

An equity-linked bond comprises features of both debt and equity. Equity-linked bonds are debt instruments that contain an option to purchase (either by conversion of existing debt or by exercising the right to purchase) an equity stake in the issuer, its parent, or another company at a fixed price. These instruments are usually issued when stock market prices are rising because companies can raise funds at lower than market interest rates while investors receive interest payments, and potentially lock into capital gains.

Classification

Equity-linked bonds, if owned by nonresidents, are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). If the bonds are converted into equity, the debt is extinguished. The equity issued is recorded in the memorandum table, equity liability position with nonresidents by sector (Table 4.5) under the appropriate institutional sector. If the nonresident is in a direct investment relationship with the issuer, then the equity is classified as direct investment: equity and investment fund shares in the memorandum table. See also Equity Warrant Bond and Warrants.

Equity-Linked Derivatives

Derivatives whose value derives from equity prices. These include:

Equity future—traded on an organized exchange, in which counterparties commit to buy or sell a specified amount of an individual equity or a basket of equities or an equity index at an agreed contract price on a specified date

Equity option—gives the purchaser the right but not the obligation to purchase (call) or sell (put) a specified amount of an individual equity or a basket of equities or an equity index at an agreed contract price on or before a specified date

Equity swap—in which one party exchanges a rate of return linked to an equity investment for the rate of return on another equity investment

Net cash settlements are usually made.

Classification

Equity-linked derivatives in which the counterparty is a nonresident are included indistinguishably in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

Equity Warrant Bond (Debt-with-Equity Warrants)

Equity warrant bonds are debt securities that incorporate warrants, which give the holder the option to purchase equity in the issuer, its parent company, or another company during a predetermined period or on one particular date at a fixed contract price. The warrants are detachable and may be traded separately from the debt security. The exercise of the equity warrant will normally increase the total capital funds of the issuer because the debt is not replaced by equity but remains outstanding until the date of its redemption. The issue of equity warrant bonds reduces the funding costs for borrowers because the investor will generally accept a lower yield in anticipation of the future profit to be gained from exercising the warrant.

Classification

Because the warrant is detachable and may be traded separately from the debt security, the two instruments should be separately recorded. Bonds owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). Warrants owned by nonresidents are to be included indistinguishably in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

Exchange Traded Funds

An exchange-traded fund (ETF) is a fund—similar to a mutual fund—with a fixed share capital, where investors entering or leaving the fund must buy or sell existing shares. An ETF tracks indices, such as for stocks, commodities, or bonds and is traded over the course of the trading day on an exchange.

Classification

Exchange traded funds shares owned by nonresidents are equity investments to be included in the memorandum table, equity liability position with nonresidents by sector (Table 4.5).

F

Financial Lease

A financial lease is a contract under which a lessor as legal owner of an asset conveys substantially all the risks and rewards of ownership of the asset to the lessee. While there is not a legal change of ownership of the good under the financial lease, the risks and rewards are, de facto, transferred from the legal owner of the good, the lessor, to the user of the good, the lessee. For this reason, under statistical convention, the total value of the good is imputed to have changed economic ownership. Therefore, the debt liability at inception of the lease is defined as the value of the good and is financed by a loan of the same value, a liability of the lessee (see paragraph 3.39).

Classification

Debt liabilities arising from financial leases between residents and nonresidents are to be included in the gross external debt position as loans (other investment in the IIP). Alternatively, depending on the relationship between debtor and creditor, the debt could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Fixed-Rate Bond

A bond whose coupon payments are set for the life of the bond or for a certain number of years. See also Variable-Rate Bond.

Classification

Fixed-rate bonds owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Foreign Bonds

A foreign bond is a security issued by a nonresident borrower in a domestic capital market, other than its own, usually denominated in the currency of that market. Issues are placed publicly or privately. These bonds generally adopt the characteristics of the domestic market of the country in which they are issued, such as in terms of registration—bearer or registered form—settlement, and coupon payment arrangements. Common foreign bonds are Yankee bonds (U.S. market), Samurai bonds (Japan), and Bulldog bonds (U.K.).

Classification

If the owner of the foreign bond is a nonresident, and this is most likely given that the bonds are issued in foreign markets, the bonds are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Foreign-Currency-Linked Derivatives

Derivatives whose value is linked to foreign currency exchange rates. The most common foreign-currency-linked derivatives are:

  • Forward-type foreign exchange rate contracts, under which currencies are sold or purchased for an agreed exchange rate on a specified day

  • Foreign exchange swaps, whereby there is an initial exchange of foreign currencies and a simultaneous forward purchase/sale of the same currencies

  • Cross-currency interest rate swaps, whereby—following an initial exchange of a specified amount of foreign currencies—cash flows related to interest and principal payments are exchanged according to a predetermined schedule

  • Options that give the purchaser the right but not the obligation to purchase or sell a specified amount of a foreign currency at an agreed contract price on or before a specified date

Classification

Foreign-currency-linked derivatives in which the counterparty is a nonresident are included indistinguishably in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

Forward-Type Derivatives

A contract in which two counterparties commit to exchange an underlying item—real or financial—in a specified quantity, on a specified date, at an agreed contract price or, in the specific example of a swaps contract, agree to exchange cash flows, determined by reference to the price(s) of, say, currencies or interest rates according to predetermined rules. In essence, two counterparties are trading risk exposures of equal market value.

Classification

Forward-type derivatives in which the counterparty is a nonresident are included in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

Futures

Futures are forward-type contracts traded on organized exchanges. The exchange facilitates trading by determining the standardized terms and conditions of the contract, acting as the counterparty to all trades, and requiring margin to be deposited and paid to mitigate against risk. See also Forward-Type Derivatives.

Classification

Futures in which the counterparty is a nonresident are included in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

G

Gold Accounts: Allocated and Unallocated

Allocated gold accounts provide ownership of a specific piece of gold. The ownership of the gold remains with the entity placing it for safe custody. Allocated gold accounts have no counterpart liability. When held as reserve assets, allocated gold accounts are classified as monetary gold. When not held as reserve assets, allocated gold accounts are treated as representing ownership of a good. In contrast, unallocated gold accounts represent a claim against the account operator to deliver gold. For these accounts, the account provider holds title to a reserve base of physical (allocated) gold and issues claims to account holders denominated in gold. Unallocated gold account liabilities are debt liabilities of the account operator.

Classification

All unallocated gold accounts liabilities are treated as deposits. If owned by nonresidents, unallocated gold accounts are to be included in the gross external debt position, and they should be classified as short-term, currency and deposits (other investment, currency and deposits in the IIP).

Gold Loans

Gold loans consist of the delivery of gold for a given time period. They may be associated with physical gold or (less frequently) unallocated gold accounts. As with securities lending, legal ownership of the gold is transferred (the temporary borrower may on-sell the gold to a third party), but the risks and benefits of changes in the gold price remain with the lender, that is the gold is assumed not to have changed ownership and remains on the balance sheet of the gold provider. No cash is provided as collateral in gold loan transactions.

Classification

No debt position is created for gold loans, as no cash is provided.

Gold Swaps

A gold swap involves an exchange of gold for foreign exchange deposits with an agreement that the transaction be reversed at an agreed future date at an agreed gold price. The gold taker (cash provider) will not usually record the gold on its balance sheet, while the gold provider (cash taker) will not usually remove the gold from its balance sheet. In this manner, the transaction is analogous to a repurchase agreement and should be recorded as a collateralized loan or deposit. See Appendix 2; see also Repurchase Agreements in Part 2 of this appendix.

Classification

For the cash taker, a gold swap is classified as a loan or a deposit; so borrowing under a gold swap from a nonresident is included within the gross external debt position. A gold swap is generally a loan, but it is classified as a deposit if it involves liabilities of a deposit-taking corporation that are included in national measures of broad money. The debt should be classified as loans or as currency and deposits (other investment in the IIP).

I

Index-Linked Securities

Index-linked securities are debt instruments with coupon and/or principal payments linked to commodity prices, interest rates, stock exchange, or other price indices. The benefits to the issuer of indexing include a reduction in interest costs if the deal is targeted at a particular group of investors’ requirements, and/or an ability to hedge an exposed position in a particular market. The benefit to investors is in the ability to gain exposure to a wide range of markets (e.g., foreign exchange or property markets) without the same degree of risk that may be involved in investing in the markets directly. Issues linked to a consumer price index also provide investors with protection against inflation.

Classification

Index-linked securities owned by nonresidents are to be included within the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). When interest payments are index linked, the payments are treated as interest. If the value of the principal is index linked, the issue price should be recorded as principal, and any subsequent change in value due to indexation changes the value of the principal amount (see also BPM6, paragraphs 11.6–11.65).

Insurance, Pension, and Standardized Guarantee Schemes

Insurance, pension, and standardized guarantee schemes is a type of debt instrument that comprises (1) nonlife insurance technical reserves; (2) life insurance and annuity entitlements; (3) pension entitlements, claims of pension funds on pension managers, and entitlements to nonpension funds; and (4) provisions for calls under standardized guarantees (these items are separately described in this Appendix).

Classification

Insurance, pension, and standardized guarantee schemes that are liabilities to nonresidents policy-holders or beneficiaries are to be included in the gross external debt position as other debt liabilities (other investment, insurance, pension, and standardized guarantee schemes in the IIP). Alternatively, depending on the relationship between debtor and creditor, the debt could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Interest-Rate-Linked Derivatives

Derivatives whose value is linked to interest rates. The most common are:

  • Interest rate swaps, which involve an exchange of cash flows related to interest payments, or receipts, on a notional amount of principal in one currency over a period of time

  • Forward rate agreements, in which a cash settlement is made by one party to another calculated by the difference between a market interest rate of a specified maturity in one currency on a specific date and an agreed interest rate, times a notional amount of principal that is never exchanged (if the market rate is above the agreed rate, one party will agree to make a cash settlement to the other, and vice versa)

  • Interest rate options that give the purchaser the right to buy or sell a specified notional value at a specified interest rate—the price traded is 100 less the agreed interest rate in percentage terms, with settlement based on the difference between the market rate and the specified rate times the notional value.

Classification

Interest-rate-linked derivatives in which the counterparty is a nonresident are included indistinguishably in the memorandum table, financial derivatives and employee stock options positions with nonresidents by sector (Table 4.4).

Investment Fund Shares or Units

Investment funds are collective investment undertakings through which investors pool funds for investment in financial or nonfinancial assets or both. These are sometimes known as mutual funds. These funds issue shares (if a corporate structure is used) or units (if a trust structure is used). The shares in the fund purchased by individual investors represent an ownership interest in the pool of underlying assets—i.e., the investors have an equity stake. Because professional fund managers make the selection of assets, investment funds provide individual investors with an opportunity to invest in a diversified and professionally managed portfolio of securities without the need of detailed knowledge of the individual companies issuing the stocks and bonds. Investment funds include money market funds (MMF) and non-MMF investment funds. MMFs are investment funds that invest only or primarily in short-term debt securities such as treasury bills, certificates of deposit, and commercial paper. Non-MMF investment funds mainly invest in a range of assets, long-term in nature, also including commodity-linked investments, real estate, shares in other investment funds, and structured assets.

Classification

Investment fund shares or units owned by nonresidents are equity investments to be included in the memorandum table, equity liability position with nonresidents by sector (Table 4.5).

L

Land and Other Natural Resources Ownership

By convention, land and other natural resources such as subsoil assets, noncultivated biological resources, and water can only be owned by residents. Therefore, if a nonresident purchases these assets, then a notional resident entity is created on which the nonresident has a financial claim (unless the land or other natural resources are a territorial enclave of the nonresident—see BPM6 paragraph 4.5(e)). Also, if a non-resident leases these assets for long periods, then it is usually the case that a branch should be recognized (see BPM6 paragraph 4.35).

Classification

The financial claim the nonresident has on the notional resident entity is assumed to be a direct investment equity investment, so the equity investment is classified in the memorandum table, equity liability position with nonresidents by sector (Table 4.5) under direct investment: equity and investment fund shares.

Letters of Credit

Letters of credit provide a guarantee that funds will be made available only when certain documents specified by contract are presented, but no financial liability exists until funds are actually advanced.

Classification

Because letters of credit are not debt instruments, they are not included within the gross external debt position.

LIBOR-Based Loans (LBL)

These are loans commonly offered by multilateral institutions to both sovereign and nonsovereign borrowers. The terms of borrowing are based on a LIBOR rate, an effective contractual spread and, where applicable, a maturity premium fixed over the life of the loan. The loans are extended in the various currencies offered by the multilateral institution. These loans normally provide a high degree of flexibility for borrowers like: (1) choice of interest rate basis; (2) embedded options (i.e., currency and interest rate swaps); and (3) choice of currency.

Classification

LIBOR-based loan extended by nonresidents to residents are to be included in the gross external debt position as loans (other investment in the IIP). Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Life Insurance and Annuity Entitlements

This instrument consists of reserves of life insurance companies and annuity providers for prepaid premiums and accrued liabilities to life insurance policy-holders and beneficiaries of annuities. Life insurance and annuity entitlements are used to provide benefits to policyholders upon the expiry of the policy, or to compensate beneficiaries upon the death of policy-holders, and thus are kept separate from shareholders’ funds. These entitlements are regarded as liabilities of the insurance companies and assets of the policyholders and beneficiaries. See also Insurance, Pension, and Standardized Guarantee Schemes.

Classification

Life insurance and annuity entitlements that are liabilities to nonresident policyholders or beneficiaries are to be included in the gross external debt position as other debt liabilities (other investment, insurance, pension, and standardized guarantee schemes in the IIP). Alternatively, depending on the relationship between debtor and creditor, the debt could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Loans

Loans comprise those financial assets created through the direct lending of funds by a creditor to a debtor through an arrangement in which the lender either receives no security evidencing the transaction or receives a nonnegotiable document or instrument. Included are loans to finance trade, other loans and advances (including mortgages), use of IMF credit, and loans from the IMF. In addition, finance leases and repurchase agreements are covered under loans. The supply and receipt of funds under a securities repurchase agreement is generally treated as a loan, unless the securities repurchase agreement involves liabilities of a deposit-taking corporation that are included in national measures of broad money when it is classified as a deposit. An overdraft arising from the overdraft facility of a transferable deposit account is classified as a loan. However, undrawn lines of credit are not recognized as a liability. Loans may be payable in the domestic or foreign currency(s).

Classification

Loans extended by nonresidents to residents are to be included in the gross external debt position as loans (other investment in the IIP). Alternatively, depending on the relationship between debtor and creditor, the debt could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

M

Margins

Margins are payments of cash or deposits of collateral that cover actual or potential obligations incurred in financial derivative and some other contracts. The mandatory provision of margin is standard in financial derivative markets and reflects market concerns over counterparty risks. Repayable margins consist of cash or other collateral deposited to protect the counter party against default risk. Ownership of the margin remains with the unit that deposited it. Repayable margins in cash are a debt liability of the taker of the margin. Non-repayable margin payments reduce the liability created through a financial derivative. The entity that pays nonrepayable margin no longer retains the ownership of the margin nor has the right to the risks and rewards of ownership.

Classification

The classification of margins depends on whether they are repayable or nonrepayable. Repayable margins in cash in which the counterparty is a nonresident are to be included in the gross external debt position. They should be classified as short-term, currency and deposits (particularly, if the debtor’s liabilities are included in broad money) or in short-term, other debt liabilities (other accounts receivable/payable-other in the IIP). Nevertheless, when a repayable margin deposit is made in a noncash asset (such as securities), no position is recorded because no change in economic ownership has occurred.

Medium-Term Notes (MTNs)

These are debt instruments of usually one- to five-year maturity issued in bearer form under a program agreement through one or more dealers. Once a program is set up, issues can be made quickly to take advantage of market conditions, with issues structured more closely to investors’ needs than in the public bond markets. Typically, the MTN market is not as liquid as the international bond market, so issuers may have to pay a higher interest rate.

Classification

Medium-term notes owned by nonresidents are to be included within the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Military Debt

Loans and other credits extended for military purposes.

Classification

Military debt owed to nonresidents is to be included in the gross external debt position, allocated by the nature of the debt instrument.

Mortgage-Backed Securities

A mortgage-backed security is a form of asset-backed security. See Asset-Backed Securities. These securities are also referred to as collateralized mortgage obligations. The various tranches of these instruments—first tranche repaid first, the second tranche next, etc.—attract investors with differing sensitivities to prepayment risk.

Classification

Mortgage-backed securities owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP).

Multi-Currency Loans—Pooled and Nonpooled

A multi-currency loan—pooled—is a loan facility than can be disbursed in more than one currency and repaid in any other applicable currency. A multi-currency loan—nonpooled—is a loan facility than can be disbursed in more than one currency and repaid in the currencies that were disbursed. The currencies in which the loan can be disbursed or repaid should be those currencies that are applicable to the creditor.

Classification

Multi-currency loans—pooled and nonpooled—extended by nonresidents to residents are to be included in the gross external debt position as loans (other investment in the IIP). Alternatively, depending on the relationship between debtor and creditor, the debt could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Mutual Fund Shares

See Investment Fund Shares or Units.

N

Nondeliverable Forward Contracts (NDFs)

A nondeliverable forward contract is a foreign currency financial derivative instrument. An NDF differs from a normal foreign currency forward contract in that there is no physical settlement of two currencies at maturity. Rather, based on the movement of two currencies, a net cash settlement will be made by one party to the other. NDFs are commonly used to hedge local currency risks in emerging markets where local currencies are not freely convertible, where capital markets are small and undeveloped, and where there are restrictions on capital movements. Under these conditions, an NDF market might develop in an offshore financial center, with contracts settled in major foreign currencies, such as the U.S. dollar.

Classification

NDF contracts in which the counterparty is a nonresident are included indistinguishably in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

Nonlife Insurance Technical Reserves

Non-life insurance technical reserves consist of reserves for unearned insurance premiums, which are prepayment of premiums, and reserves against outstanding insurance claims, which are amounts identified by insurance corporations to cover what they expect to pay out arising from events that have occurred but for which the claims are not yet settled. Both nonlife direct insurance and reinsurance are included in this item. These reserves represent liabilities of the insurer and a corresponding asset of the policyholders. See also Insurance, Pension, and Standardized Guarantee Schemes.

Classification

Non-life insurance technical reserves that are liabilities to nonresidents policyholders are to be included in the gross external debt position as other debt liabilities (other investment, insurance, pension, and standardized guarantee schemes in the IIP). Alternatively, depending on the relationship between debtor and creditor, the debt could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Nonnegotiable Debt

Debt instruments that are not usually negotiable in organized and other financial markets.

Classification

Nonnegotiable debt owned by nonresidents is to be included in the gross external debt position. The financial instrument classification will depend on the nature of the instrument.

Nonparticipating Preferred Shares

These are a type of preferred shares in which the payment of a “dividend” (usually at a fixed rate) is calculated according to a predetermined formula and not determined by the earnings of the issuer. In other words, the investor does not participate in the distribution of profits to equity investors (if any), nor share in any surplus on dissolution of the issuer. See also Preferred Shares and Participating Preferred Shares.

Classification

Non-participating preferred shares are debt instruments, and so if owned by a nonresident are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Note Issuance Facilities (NIFs)/Revolving Underwriting Facilities (RUFs)

A note issued under an NIF/RUF is a short-term instrument issued under a legally binding medium-term facility—a form of revolving credit. A bank, or banks, underwrite, for a fee, the issuance of this three- or six-month paper and may be called upon to purchase any unsold paper at each rollover date, or to provide standby credit facilities. The basic difference between an NIF and an RUF is in the underwriting guarantee: under an RUF the underwriting banks agree to provide loans should the issue fail, but under an NIF they could either lend or purchase the outstanding notes. First developed in the early 1980s, the market for NIFs grew substantially for a short period in the mid-1980s. It was a potentially profitable market for international banks at a time when the syndicated credits market was depressed, following the debt crisis of the early 1980s. By the early 1990s, euro commercial paper (ECP), and euro medium-term notes (EMTNs) had become more popular forms of finance.

Classification

Notes issued under an NIF/RUF that are owned by a nonresident are to be included in the gross external debt position. They should be classified as short-term, debt securities (portfolio investment, debt securities in the IIP). This is because the contractual maturity is less than one year’s maturity. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

O

Operational Leases

Operational leases are arrangements in which machinery or equipment is rented out for specified periods of time that are shorter than the total expected service lives of the machinery or equipment. Typically under an operational lease, the lessor normally maintains the stock of equipment in good working order, and the equipment can be hired on demand or at short notice; the equipment may be rented out for varying periods of time; and the lessor is frequently responsible for the maintenance and repair of the equipment as part of the service which he provides to the lessee. Under an operational lease, ownership of the equipment does not change hands; rather, the lessor is regarded as providing a service to the lessee, on a continuous basis.

Classification

Operational leases are not financial instruments, but rather the provision of a service, the cost of which accrues continuously. Any payments under an operational lease are either classified as prepayments for services—creating a trade credit and advances claim on the lessor—or postpayments for services rendered—extinguishing a trade credit and advances liability to the lessor.

Options

An option is a contract that gives the purchaser the right but not the obligation to buy (call) or sell (put) a specified underlying item—real or financial—at an agreed contract (strike) price on or before a specified date from the writer of the option.

Classification

Options owned by nonresidents are to be included in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

Original Issue Discount Bond

An original issue discount (OID) bond is issued at a price below par. A zero-coupon bond is an example of an OID bond. See also Deep Discount Bond and Zero-Coupon Bonds.

Classification

OID bonds owned by nonresidents are to be included within the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Other Accounts Receivable/Payable-Other

Other accounts receivable/payable-other include arrears arising from nondebt instruments and transactions (see Chapter 3, paragraph 3.43), and liabilities such as in respect of taxes, dividends, purchases and sales of securities, security lending fees, wages and salaries and social contributions that have accrued but are not yet paid.

Classification

Other accounts payable-other owed to nonresidents are to be included in the gross external debt position. They should be classified as other debt liabilities (other investment, other accounts receivable/payable-other in the IIP). Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

P

Participating Preferred Shares

Also known as a participating preference share. These are a type of preferred share where the investor has some entitlement to a share in the profits or a share of any surplus on dissolution of the issuer (in addition to the fixed dividend payment received). See also Preferred Shares and Nonparticipating Preferred Shares.

Classification

Because of the claim on the residual value of the issuer, participating preference shares are classified as equity instruments, and so are included in the memorandum table, equity liability position with nonresidents by sector (Table 4.5) under the appropriate institutional sector. If the nonresident is in a direct investment relationship with the issuer, then the equity is classified as direct investment: equity and investment fund shares in the memorandum table.

Pension Entitlements

Pension entitlements show the extent of financial claims both existing and future pensioners hold against either their employer or a fund designated by the employer to pay pensions earned as part of a compensation agreement between the employer and employee. The economy of residence of pension schemes may differ from that of some of their beneficiaries, in particular, for border workers, guest workers who return home, people who retire to a different economy, staff of international organizations, and employees of transnational enterprise groups that have a single pension fund for the whole group. In addition to liabilities of pension funds, liabilities of unfunded pension schemes are included in this category. These entitlements represent liabilities of the pension fund and a corresponding asset of the beneficiaries. See also Insurance, Pension, and Standardized Guarantee Schemes.

Classification

Pension entitlements that are liabilities to nonresidents policyholders or beneficiaries, are to be included in the gross external debt position as other debt liabilities (other investment, insurance, pension, and standardized guarantee schemes in the IIP).

Permanent Interest-Bearing Shares (PIBS)

These are deferred shares issued by mutual societies, which rank beneath ordinary shares (which are more akin to deposits than equity in mutual societies) and all other liabilities (including subordinated debt) in the event of dissolution of the society. They provide “permanent” capital. In the United Kingdom these instruments are non-profit-participating by regulatory requirement; rather, predetermined (but not necessarily fixed) interest costs are payable, with the amounts to be paid not linked to the issuer’s profits; interest costs are not to be paid if this would result in the society breaching capital adequacy guidelines and are noncumulative; but more PIBS can be issued in lieu of a cash dividend.

Classification

PIBS are debt instruments because they are a form of nonparticipating preferred share (defined as such because the holders of the instruments do not participate in the profits of the society). PIBS owned by nonresidents are to be included within the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP). Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Perpetual Bonds

Perpetual bonds are debt instruments with no maturity date although interest is paid.

Classification

Perpetual bonds should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP). Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Perpetual Floating-Rate Notes

A debt security whose coupon is refixed periodically on a refix date by reference to an independent interest rate index such as three-month LIBOR. Generally, these instruments are issued by financial institutions, particularly banks, and are perpetual so as to replicate equity and qualify as tier-one capital under the Basel capital adequacy requirements (subject to the security meeting a range of additional regulatory requirements, such as giving the issuer flexibility to cancel coupon payments).

Classification

Despite the perpetual nature of these instruments, they are debt securities because the instruments give the holder a contractually determined money income. Perpetual floating-rate notes owned by nonresidents are to be included within the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP). Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Precious Metals (Other than Gold) Accounts: Allocated and Unallocated

Allocated precious metals accounts provide ownership of a specific piece of precious metals. The ownership of the precious metal remains with the entity placing it for safe custody. Allocated precious metals accounts have no counterpart liability. Allocated precious metals (other than gold) accounts are treated as representing ownership of a good, they are not financial assets. In contrast, unallocated precious metals accounts represent a claim against the account operator to deliver precious metals. For these accounts, the account provider holds title to a reserve base of physical (allocated) precious metals and issues claims to account holders denominated in precious metals. Unallocated precious metals account liabilities are debt liabilities of the account operator (see also Gold Accounts: Allocated and Unallocated).

Classification

All unallocated precious metals accounts liabilities are treated as deposits. If owned by nonresidents, unallocated precious metals accounts are to be included in the gross external debt position, and they should be classified as short-term, currency and deposits (other investment, currency and deposits in the IIP).

Preferred Shares

Also known as a preference share. Preferred shares are a class of equity capital that rank ahead of common equity in respect of dividends and distribution of assets upon dissolution of the incorporated enterprise. Investors have little control over the decisions of the company: voting rights are normally restricted to situations where the rights attached to preferred shares are being considered for amendment. Preferred shares are registered securities. Preferred share issues typically pay a fixed-rate dividend payment that is calculated according to a predetermined formula, but some preferred shares participate in the profits of the issuer.

Classification

Preferred shares are classified as equity securities if the shares are participating and debt securities if the shares are nonparticipating. See Nonparticipating and Participating Preferred Shares for specific classification requirements.

Project Preparation Facility

A loan facility that is provided to support project preparation. The outcome of the preparation will determine whether the facility will be treated as standalone loan, or will form part of the facility to be extended to the borrower for the purposes of implementing the project.

Classification

Loans extended by nonresidents to residents to support project preparation are to be included in the gross external debt position as loans (other investment in the IIP). Alternatively, depending on the relationship between debtor and creditor, these loans could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Promissory Note

An unconditional promise to pay a certain sum on demand on a specified due date. Promissory notes are widely used in international trade as a secure means of payment. They are drawn up (issued) by an importer in favor of the exporter. When the latter endorses the note, provided the importer is creditworthy, a promissory note is traded.

Classification

Promissory notes are debt securities that are claims on the issuer. If owned by nonresidents, promissory notes should be included in the gross external debt position. They should be classified as short-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity over one year, in which instance they are to be classified as long-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Provisions for Calls Under Standardized Guarantees

Standardized guarantees are defined as those that are not provided by means of a financial derivative (such as credit default swaps), but for which the probability of default can be well established. These guarantees cover similar types of credit risk for a large number of cases. Examples include guarantees issued by governments on export credit or student loans. Generally it is not possible to estimate precisely the risk of any one loan being in default, but it is possible to make a reliable estimate of how many out of a large number of such outstanding loans will default. These provisions represent liabilities of the issuer of standardized guarantees, and a corresponding asset of the beneficiaries. See also Insurance, Pension, and Standardized Guarantee Schemes.

Classification

Provisions for calls under standardized guarantees that are liabilities to nonresidents policyholders or beneficiaries are to be included in the gross external debt position as other debt liabilities (other investment, insurance, pension, and standardized guarantee schemes in the IIP).

Putable Bonds

A putable bond is a bond in which the bondholder has the right to sell the bond to the issuer at a designated price and time before the expiration date of the security.

Classification

Putable bonds owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

R

Recognition Bonds

Recognition bonds are bonds issued by a government in some economies to recognize accrued social security contributions made by public workers joining a new scheme.

Classification

Recognition bonds owned by nonresidents are to be included in the gross external debt position. Debt securities should be classified as long-term, debt securities, if issued with an original maturity of over one year, or as short-term, debt securities, if issued with an original maturity or one year or less (portfolio investment, debt securities in the IIP).

Reverse Security Transactions

See Appendix 2.

S

Single Currency Loans

Loans which allow the borrower to make drawings and repayments in the same currency only.

Classification

Single currency loans extended by nonresidents to residents are to be included in the gross external debt position as loans (other investment in the IIP). Alternatively, depending on the relationship between debtor and creditor, the debt could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Special Drawing Rights

Special drawing rights (SDRs) are international reserve assets created by the IMF and allocated to members to supplement existing official reserves. SDRs are held only by the depositories of IMF members, a limited number of international financial institutions that are authorized holders, and the IMF itself, through the General Resources Account. SDR holdings (assets) represent unconditional rights to obtain foreign exchange or other reserve assets from other IMF members. SDRs allocated by the Fund to a member that is a participant in the SDR Department are a long-term liability of the member because upon termination of participation in, or liquidation of, the SDR Department, the member will be required to repay these allocations, and also because interest accrues. The holdings and allocations should be shown gross, rather than netted.

Classification

SDR allocations are to be included in the gross external debt position, classified as long-term, special drawing rights (allocations) (other investment, special drawing rights in the IIP).

Stripped Securities

Stripped securities are securities that have been transformed from a principal amount with periodic interest coupons into a series of zero-coupon bonds, with the range of maturities matching the coupon payment dates and the redemption date of the principal amount. Strips can be created in two ways. Either the owner of the original security can ask the settlement or clearing house in which the security is registered to “create” strips from the original security, in which case the strips replace the original security and remain the direct obligation of the issuer of the security; or the owner (a third party) of the original security can issue strips in its own name, “backed” by the original security, in which case the strips represent new liabilities and are not the direct obligation of the issuer of the original security. Usually, short-term strips are bought by money managers as government bill or note substitutes; intermediate maturity strips will be purchased by investors who believe that the yield curve might become more positive. Whereas demand is strongest for the longer maturities because these instruments have longer duration than the original bonds and are leveraged investments, a relatively small up-front payment gives the investor exposure to a larger nominal amount.

Classification

Stripped securities owned by a nonresident are to be included in the gross external debt position. Depending on their maturity, a stripped security is to be classified as either short-term, debt securities (original maturity of one year or less) or long-term, debt securities (original maturity of over one year) (portfolio investment, debt securities in the IIP). Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). The residence of the issuer depends on who has issued the strips. If the owner of the original security issues the stripped bonds, then the residence of the issuer is that of the entity issuing the strips; the underlying securities remain extant. If the strips remain the direct obligation of the original issuer, then the issuer is the original issuer, and the strips “replace” the original securities that have been stripped.

Structured Bonds

Structured bonds have characteristics that are designed to attract a certain type of investor and/or take advantage of particular market circumstances. However, structuring securities to appeal to a particular type of investor risks the possibility of a loss of liquidity if the market moves in such a way as to make the structured features of the issue no longer attractive. Typically, the structured features are achieved through the use of derivatives—for instance, a credit-linked note is a bond with an embedded credit derivative, and therefore inseparable from the debt security.

Classification

Structured bonds are debt instruments, and if owned by a nonresident are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). Any embedded derivative is regarded as an integral part of the bond and not separately valued and identified.

Structured Floating-Rate Notes

The structured floating-rate note is a variation of a standard variable-rate bond (i.e., a long-dated debt security whose coupon payment is reset periodically by reference to an independent interest rate index such as six-month LIBOR). The structured issue includes a derivative that allows the coupon calculation to be tailored to meet investors’ interest rate expectations. For instance, there may be an interest rate collar or band—the interest rate cannot increase above an upper specified rate or fall below a lower specified rate. The issue of structured floating-rate notes has grown as borrowers have used financial derivatives to tailor financing products to investor demands while meeting their own funding needs.

Classification

Structured floating-rate notes are debt instruments, and if owned by a nonresident are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). Any embedded derivative is regarded as an integral part of the note and not separately valued and identified.

Sukuk

Sukuk are Islamic instruments that are issued by Islamic financial institutions. A distinguishing feature of Sukuk is that they are structured to be consistent with Islamic law, which does not allow the charging of interest. The holders are entitled to a share (rent) from the return on the underlying assets. Sukuk can be classified by type of underlying contract, such as Murābahah, Ijārah, Salam, Istisnā, Mushārakah, Mudārabah, and Wakalah.

Classification

For the purpose of compiling external debt statistics, Sukuk should be classified as debt instruments, unless the owner of the security has a claim on the residual value of the issuing entity, and if owned by a nonresident are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. For further details on the classification of Sukuk by type of underlying contract, see Annex 2 in the Handbook on Securities Statistics, Part 1: Debt Securities Issues.

Swaps

A forward-type financial derivative contract in which two counterparties agree to exchange cash flows determined with reference to prices of, say, currencies or interest rates, according to predetermined rules. At inception, this instrument typically has zero market value, but as market prices change the swap acquires value.

Classification

Swaps in which the counterparty is a nonresident are included in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

Syndicated Loans

A syndicated loan is a loan offered by two or more lending institutions on similar terms and conditions using common documentation and administered by a common agent. Also referred as a “Consortium Loan.”

Classification

Syndicated loans extended by nonresidents to residents are to be included in the gross external debt position as loans (other investment in the IIP). Alternatively, depending on the relationship between debtor and creditor, the debt could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

T

Total Return Swap

A credit derivative that swaps the total return on a financial instrument, cash flows and capital gains and losses, for a guaranteed interest rate, such as an interbank rate, plus a margin.

Classification

Total return swaps in which the counterparty is a nonresident are included in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

Trade Credit and Advances

Trade credit and advances consist of (1) credit extended directly by the suppliers of goods and services to their customers and (2) advances for work that is in progress (or is yet to be undertaken) and prepayment by customers for goods and services not yet provided (the debt is extinguished when the supplier provides the goods and/or services).

Classification

Trade credit and advances owed to nonresidents is to be included in the gross external debt position. Such credit should be classified as trade credit and advances (other investment in the IIP). Alternatively, depending on the relationship between debtor and creditor, the credit could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). For the treatment of progress payments for high-value capital goods (see Part 2 of this appendix). The 2008 SNA and BPM6 regard trade credit and advances as a form of other accounts receivable/payable (2008 SNA, paragraph 11.126 and BPM6, paragraph 5.69).

Treasury Bills

A common form of sovereign short-term debt; many governments of the world issue treasury bills. Typically issued through the central bank with maturities ranging from four weeks to two years, they are typically issued at a discount to face value and are redeemed at par.

Classification

Treasury bills are debt instruments, and so if owned by a nonresident are to be included in the gross external debt position. These bills should be classified as short-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of more than one year, in which instance they are to be classified as long term, debt securities.

U

Use of IMF Credit and Loans

These comprise members’ drawings on the IMF other than those drawn against the country’s reserve tranche position. Low-income countries may borrow on concessional terms through the Extended Credit Facility (ECF), the Standby Credit Facility (SCF), and the Rapid Credit Facility (RCF). Non-concessional loans are provided mainly through Stand-By Arrangements (SBA), the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL), and the Extended Fund Facility (EFF). The IMF also provides emergency assistance via the Rapid Financing Instrument (RFI) to all its members facing urgent balance of payments needs. Detailed information on the use of IMF Credit and Loans is available at www.imf.org/external/np/exr/facts/howlend.htm.

Classification

Use of IMF credit and loans is to be included in the gross external debt position and classified as central bank, long term, loans (other investment, central bank, loans in the IIP), and/or general government, long term, loans, (other investment, loans, general government in the IIP). Because of the particular accounting procedures of the IMF, the use of IMF credit might be considered to have some of the characteristics of a swap of currencies. However, since the IMF has lent in SDR terms, with payments in SDR terms, at an interest rate that is SDR-related, the recommended classification reflects the economic nature of the transaction—a loan.

V

Variable-Rate Bond

A bond whose interest payments are linked to a reference index (e.g., LIBOR), or the price of a specific commodity, or the price of a specific financial instrument that normally changes over time in a continuous manner in response to market pressures.

Classification

Variable-rate bonds owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Variable-Rate Notes (VRNs)

These securities adopted the standard characteristics of a variable-rate bond. However, whereas a standard characteristic of a variable-rate bond is that it carries a fixed spread over a referral index, the spread over LIBOR on a VRN varies over time depending on the change in the perceived credit risk of the issuer. The spread is reset at each rollover date—normally every three months—by means of negotiation between the issuer and arranging house. VRNs are usually issued with no maturity date (perpetual VRNs) but fixed five-year and longer-dated issues are in existence. VRNs generally have a put option for the existing holders of notes to sell the issue back to the lead manager of the issuing syndicate, at par, at any interest payment date.

Classification

VRNs owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3). The put option, embedded in the instrument, is not valued and classified separately.

W

Warrants

Warrants are a form of financial derivative giving the owner the right but not the obligation to purchase or sell from the issuer of the warrant a fixed amount of an underlying asset, such as equities and bonds, at an agreed contract price for a specified period of time or on a specified date. Although similar to traded options, a distinguishing factor is that the exercise of the warrants can create new securities, thus diluting the capital of existing bond or shareholders, whereas traded options typically grant rights over assets that are already available. Warrants can be issued in their own right or with equity or bonds to make the underlying issue more attractive. They can be quoted and traded separately in the secondary market.

Classification

Warrants owned by nonresidents are to be included in Table 4.4 (memorandum table on financial derivatives and employee stock options positions with nonresidents by sector).

Z

Zero-Coupon Bonds

A single-payment security that does not involve interest payments during the life of the bond. The bond is sold at a discount from par value, and the full return is paid at maturity. The difference between the discounted issue price and the face or redemption value reflects the market rate of interest at the time of issue and time to maturity. The longer the maturity of the bond and the higher the interest rate, the greater the discount against the face or redemption value. Zero-coupon and deep-discount bonds have four particular characteristics for investors:

  • There may be some tax advantage in receiving a capital gain rather than an income payment

  • There is no or little (deep-discount bond) reinvestment risk (the possibility that when coupon payments fall due, and need to be reinvested, interest rates will be lower)

  • The bond has a longer “duration” than a bond of comparable maturity that pays fixed- or variable-rate interest, so making the zero-coupon bond’s price more sensitive to interest rate changes

  • A zero-coupon bond is a leveraged investment in that a relatively small initial outlay gives exposure to a larger nominal amount

See also Deep-Discount Bond.

Classification

Zero-coupon bonds owned by nonresidents are to be included in the gross external debt position. They should be classified as long-term, debt securities (portfolio investment, debt securities in the IIP) unless they have an original maturity of one year or less, in which instance they are to be classified as short-term, debt securities. Alternatively, depending on the relationship between debtor and creditor, these securities could be classified as Direct investment: Intercompany lending (see the description of direct investment in Chapter 3).

Part 2. Description and Classification of Specific Transactions

This section discusses the classification treatment within the gross external debt position of specific transactions.

B

Borrowing for Fiscal Purposes

Borrowing for fiscal purposes refers to when a special purpose entity (SPE) or other entity owned or controlled by the general government is resident in another territory and borrows for fiscal purposes. Fiscal purposes can be distinguished because, unlike commercial purposes, they are always oriented to serving the fiscal objectives of the government, e.g., a government may use an SPE or other entity to issue securities to fund its expenditures. Special rules are introduced in BPM6 in relation to this type of borrowing. At the time of borrowing by the SPE, a government’s external debt liability to the SPE is imputed equal to the amount of the SPE borrowing (the corresponding entry is an increase in the government’s equity in the SPE), which is only extinguished when the SPE repays its debt. These entries are made symmetrically for both the government and the borrowing entity. The imputations do not affect the transactions or positions between the borrowing entity and its creditors, which are recorded as they occur with no imputations. The imputed government’s external debt liability is to be included in the gross external debt position, and classified as general government debt under the appropriate debt instrument.

C

Collateralization of External Debt

To provide additional assurance to the creditor, the debtor may set aside either financial assets or future streams of income as collateral for the debt incurred. In other words, payments on the debt might be “backed” by future export earnings, such as receipts from petroleum sales, or the creditor may have a claim on certain financial assets held with third parties if the debtor defaults. Alternatively, the debtor might invest funds in a zero-coupon instrument that at maturity will equal the value of the principal debt incurred, which is then due for repayment. In all cases, external debt should be recorded gross, i.e., separately from the collateral. For instance, where the debtor has invested funds in a zero-coupon bond, both the external debt and the zero-coupon bond are recorded on a gross basis, the zero-coupon bond being an asset of the debtor. Also, when debt is contractually to be serviced by an income source of the debtor (e.g., future export earnings), the debtor continues to record the receipt of income and the payment of principal and/or interest even if the income is passed directly from “source” (e.g., the purchaser of the exports) to the account of the creditor, without directly involving the debtor. There may well be analytical interest in information on the value of external debt that has been collateralized, and in the type of financial asset or income stream used to back the external debt.

Consignment Trade

No debt is created for goods on consignment, i.e., goods intended for sale but not actually sold at the time of crossing a frontier, because ownership of the goods has not changed hands.

D

Defeasance

Defeasance is a technique by which a debtor unit removes liabilities from its balance sheet by pairing them with financial assets, the income and value of which are sufficient to ensure that all debt service payments are met. The Guide does not recognize defeasance as affecting the outstanding debt of the debtor as long as there has been no change in the legal obligations of the debtor. In other words, provided the payment obligations remain de jure with the original debtor, ownership of the liabilities remains unchanged, and should be reported as external debt of the original debtor. Defeasance may be carried out (1) by placing the paired assets and liabilities in a separate account within the institutional unit concerned or (2) by transferring them to another institutional unit. In the second case, debt defeasance leads to a change in the outstanding debt of the original debtor. If the two units are resident in the same economy, the sector classification of the debtor may change; if the second unit is resident of another economy a change in the gross external debt position of the economy of the original debtor will be recorded.

Deposits Jointly Held by Residents and Nonresidents

Some financial instruments have owners who are residents of different economies. The allocation of joint bank accounts, or other cases in which an account holder authorizes relatives to withdraw funds from the account, may be unclear. By convention, deposits of emigrant workers in their home economies that are freely usable by family members resident in the home economies are treated as being held by residents of the home economy; therefore, they are not external debt liabilities of the home economy. Similarly, deposits of emigrant workers in the host economy that are freely usable by family members are treated as being held by a resident of the host economy; therefore, they are not external debt liabilities of the host economy (see BPM6, paragraph 4.145). Compilers may adopt another treatment if better information is available.

Direct Investment: Intercompany Lending

Intercompany lending is used to describe direct investment debt positions between affiliated enterprises. It is not limited to loans. Intercompany lending is identified separately from other debt in the gross external debt position, and is classified under Direct investment: Intercompany lending. Although debt and other claims that do not involve voting power are not relevant to defining a direct investment relationship, they are included in direct investment transactions and positions if a direct investment relationship exists between the parties. Debt instruments—other than SDRs, interbank positions, and pension and related entitlements potentially—can be included in direct investment. Insurance technical reserves are included in direct investment when the parties are in a direct investment relationship. Debt between selected affiliated financial corporations is not classified as direct investment because it is not considered to be so strongly connected to the direct investment relationship. The financial corporations covered by this exception are: (1) deposit-taking corporations (both central banks and deposit-taking corporations, except the central bank); (2) investment funds; and (3) other financial intermediaries, except insurance corporations and pension funds (see BPM6, paragraph 6.28).

F

Fees on Security Lending and Gold Loans

Securities (equity or debt) and monetary gold are financial instruments, and thus, the fees for securities lending without cash collateral and gold loans are payments for putting a financial instrument at the disposal of another institutional unit. Accordingly, fees on securities lending and gold loans accrued to the security/gold owner are treated as interest (see BPM6, paragraph 11.68). The ability of the “borrower” to on-sell the securities (or gold) reflects that legal ownership is transferred to the borrower, while the economic risks and benefits of ownership remain with the lender (original owner). In return, the “lender” receives a fee from the “borrower” for the use of the security. In general, interest accrued and not yet payable, should be recorded with the financial liability on which it has accrued. However, for securities lending and gold loans fees, which are treated as interest by convention, the corresponding entries are classified in the gross external debt position as other debt liabilities (other investment, other accounts receivable/payable-other in the IIP) rather than with the instrument to which they relate.

Financial Intermediation Service Charges Indirectly Measured (FISIM)

In line with 2008 SNA, the concept of FISIM is introduced in BPM6. Actual interest can be seen as including both an income element and a charge for a service. FISIM is the financial service compensated for by the margin between interest rate payable and the reference rate on loans and deposits involving financial corporations, even when lending their own funds (see BPM6, paragraphs 10.126–127). Therefore, actual interest payable by borrowers is partitioned between a pure interest charge at the reference rate and the implicit service charge made by financial corporations. By convention, FISIM applies only to loans and deposits provided by, or deposited with, financial corporations. BPM6 recommends that accrued interest not yet paid should be included in the outstanding amount of the financial asset or liability, rather than being classified separately (such as in other accounts receivable/payable-other), and that accrued interest not yet paid also includes FISIM accrued and not yet paid (see BPM6, paragraph 7.41). Thus, the generation of FISIM does not affect the gross external debt position. Interest due and not paid (arrears) recorded in the appropriate instrument also includes FISIM due and not paid. Interest payments recorded in the debt-service payment schedule include any FISIM element (see Chapter 6, footnote 19).

Financial Leases: Treatment of Residual Values

As explained in Chapter 3, under a financial lease, ownership of the underlying item is considered to have changed hands because the risks and rewards of ownership have, de facto, been transferred from the legal owner to the user; this de facto change of ownership is financed by a financial claim, which is the asset of the lessor and a liability of the lessee. However, even though the rentals may enable the lessor over the period of the contract to recover most of the costs of goods and the carrying charges, there may be a residual amount. The lessee may have an option to pay the residual value to gain legal ownership of the underlying item. How should the residual amount be recorded?

The residual amount is part of the debt obligation that arises when the goods are assumed to have changed ownership. In other words, under statistical convention, the debt at the inception of the lease is defined as the full value of the good, inclusive of the residual amount. This debt obligation is recorded as a loan. The loan liability arising from the residual value is extinguished either when the goods are returned or when a payment is made and legal ownership changes hands. (see BPM6, Appendix 6b, Box A6b. I for a numerical example of financial lease).

This issue also raises the question of whether there is a point at which the residual value is such a large percentage of the total value of the goods that the lease should be regarded as operational and not financial. There is no firm percentage; rather, these arrangements are determined more by their nature. When a lease is a financial arrangement, it is usually evident from the roles and obligations of the transactors, e.g., the lessee is responsible for repairs and maintenance, and the lessor is a financial institution, etc. (see also BPM6, paragraph 5.57).

Fundamental to the assumption of a change of ownership is the idea that, de facto, the lessee assumes the risks and rewards of ownership from the legal owner. But if there is option rather than agreement to purchase the residual value, or if it is agreed that the lessee will pay a market price for the residual amount, the greater the percentage size of the residual amount at inception, the more diminished the extent to which the de facto risks and rewards of ownership can be said to have changed hands.

G

Guaranteed External Debt

The provision by one institutional unit of a guarantee to make future debt-service payments to a nonresident creditor if certain conditions are met, such as a default by the debtor, does not negate the claim the creditor has on the debtor. Thus, the debtor on whom the nonresident creditor has a claim, and not the guarantor, should record an external debt liability, unless and until the guarantor assumes the external debt. Chapter 8 provides guidance on the classification of debt assumption.

I

Islamic Banking2

Activities of Islamic financial institutions differ from those of standard commercial depository corporations in that predetermined interest on financial transactions is prohibited. As is evident from the definition of external debt in Chapter 2, the nonpayment of interest on liabilities does not in itself preclude instruments from being classified as external debt. The classification of Islamic banking instruments as external debt, or not, can be determined by the following general guidance.

Islamic instruments—deposits include conventional and transferable deposits, such as Amanah and Qardhasan deposits—as well as various investment participation certificates that are not investments in the permanent capital of a financial institution and do not have the characteristics of negotiable securities.

Islamic instruments—debt securities consist of various investment participation certificates that have the characteristics of negotiable securities and are not an investment in the permanent capital of the issuer. Included in this category are the most negotiable investment certificates recorded as liabilities of a financial corporation.

Islamic instruments—loans cover arrangements in which a financial institution makes prepayments for clients, finances ventures or trade, or supplies working capital to clients. The arrangements may include short-term or other partnerships in which a financial institution is not making permanent, equity-type investments.

L

Lending to the Fund

The IMF maintains two standing multilateral borrowing arrangements—the expanded New Arrangements to Borrow (NAB) and the General Arrangements to Borrow (GAB). If the IMF considers that its forward commitment capacity might fall short of its member countries’ needs, e.g., in the event of a major financial crisis, it can activate these arrangements.

The GAB is a long-standing credit arrangement under which 11 advanced economies stand ready to loan domestic currency to the IMF for the purpose of forestalling or addressing situations that could impair the international monetary system. The NAB is a set of credit arrangements with selected member countries, who stand ready to lend to the IMF. A contingent claim results from participation in the NAB or GAB, equal to the undrawn amount of credit. As noted, the IMF may require a member who participates in the NAB or in the GAB to lend to the IMF at short notice. When funds are actually lent, the member obtains a claim on the IMF that qualifies as a reserve asset, and should be included in the reserve position in the Fund. For more information on NAB and GAB see www.imf.org/external/np/exr/facts/gabnab.htm and the update of the International Reserves and Foreign Currency Liquidity: Guidelines for a Data Template, Appendix 8 (IMF, 2013).

In response to the financial crisis and following a call by the International Monetary and Financial Committee (IMFC) in April 2009, the IMF took a number of actions aimed at substantially increasing its lending resources. Additional arrangements under the umbrella of the General Resources Account include Bilateral Loan Agreements (BLA)—an agreement under which an IMF member commits to lending funds, usually in its domestic currency, up to an agreed limit, to the IMF, upon demand by the IMF—and Note Purchase Agreements (NPA)—an agreement under which an IMF member commits to purchasing an IMF promissory note from the IMF on demand, up to an agreed limit. Regarding Notes, two classes of notes were designed under the NPAs, Series A and Series B Notes.

M

Merchanting of Goods

Merchanting is defined as the purchase of goods by a resident of the compiling economy from a nonresident combined with the subsequent resale of the goods to another nonresident without the goods being present in the compiling economy (see BPM6, paragraph 10.41). For goods under merchanting, the acquisition of goods and the sales of goods are recorded at the time the change in economic ownership of goods occurs. External debt liabilities with nonresidents may arise from the external financing of goods under merchanting, in which case they should be included in the gross external debt position under the appropriate debt instrument.

Monetary Gold

Monetary gold is gold to which the monetary authorities (or others who are subject to the effective control of the monetary authorities) have title and is held as reserve assets. Monetary gold includes gold bullion and unallocated gold accounts with nonresidents that give title to claim the delivery of gold. Gold bullion takes the form of coins, ingots, or bars with a purity of at least 995 parts per 1,000, including such gold held in allocated gold accounts. See Gold Accounts: Allocated and Unallocated, in this appendix, Part 1.

Gold bullion included in monetary gold is a financial asset for which there is no corresponding liability, so no liability is included in external debt. Unallocated gold accounts do have a counterpart deposit liability (see paragraph 3.30). Unallocated gold account liabilities to nonresident monetary authorities are included in external debt.

Multiterritory Enterprises

A multiterritory enterprise has substantial activity in more than one economy and it is run as an indivisible operation with no separate accounts or decisions, so that no separate branches can be identified. Such enterprises may have operations including shipping lines, airlines, hydroelectric schemes on border rivers, pipelines, bridges, tunnels, and undersea cables. For multi-territory enterprises, it is necessary to prorate the total operations of the enterprise, as well as the enterprise’s gross external debt position, into the individual economies. The factor used for prorating should be based on available information that reflects the contributions to actual operations, e.g., equity shares, equal splits, or splits based on operational factors such as tonnage or wages (see BPM6, paragraph 4.43) could be considered. Compilers in each of the territories involved are encouraged to cooperate in order to develop consistent data, avoid gaps, and minimize respondent and compilation burden, as well as assist counterparties to report bilateral data on a consistent basis.

N

Nonresident Deposits

Because of exchange control or other restrictions, nonresident deposits in domestic banks may not be transferable out of the economy. Such restrictions may be introduced after the deposits have been made or may have been established when the accounts were opened. All such nonresident deposit claims on resident banks should be classified as external debt. Nonetheless, if the amounts are significant and are of analytical interest in their own right, it is recommended that additional information be provided.

O

On-Lending of Borrowed Funds

An institutional unit within an economy might borrow funds from a nonresident(s) and then on-lend the funds to a second institutional unit within the economy. In such instances, the first institutional unit, i.e., the institutional unit that borrowed from the nonresident(s), should record an external debt liability, with any subsequent on-lending classified as a domestic claim/liability. As set out in Chapter 2, the decisive consideration is whether the creditor has a claim on the debtor, and in this example the nonresident creditor has a claim on the first institutional unit.

If an institutional unit within an economy borrowed from a nonresident(s) and on-lent the funds to a nonresident, the unit should record both external debt and an external claim. The nonresident borrower would also record an external debt liability in that economy’s measure of external debt.

Overnight Deposits

Overnight deposits (or sweep accounts) involve funds that are moved back and forth overnight. In some cases, these overnight accounts are a liability to a nonresident. The funds are returned at the beginning of the next working day and may then be moved back at the close of business. Positions should be measured at the end of the day after the funds are moved from the first to the second economy and not after they are returned to the first economy the next working day. The calculation of external liability positions can differ substantially depending on whether they are measured before, or after, funds are moved. By measuring positions after the funds have been moved, consistency is ensured between the measure of interest flows and of positions. In addition, major data users are interested in the size and location of these stocks for risk assessment and other purposes.

P

Part-Payments for Capital Goods

See Progress Payments for High-Value Capital Goods.

Penalties Arising from Commercial Contracts

Under the terms of a commercial contract, one party (resident) may be required to compensate another party (nonresident) (i.e., pay a penalty) in the event of the first party failing to meet its obligations, or some of its obligations, under the contract. Once the penalty is owed and until it is paid to the nonresident, it is external debt, and recorded under other debt liabilities. The debt should be recorded from the time when the resident becomes liable under the contract for the penalty.

Prepayments of Goods and Services

When an importer makes a prepayment to an exporter for goods and services, the exporter has a liability to the importer that remains outstanding until ownership of the goods changes hands or the service is provided. Similarly, when an importer makes a post-payment some time after he acquires goods or services, the importer has a liability to the exporter that remains outstanding until the postpayment is made. These liabilities should be recorded as debt liabilities because future payments are required; in the case of the prepayment, the principal amount outstanding is repaid in goods or in a service provided, whereas in the case of the postpayment, it is likely that a financial payment will be made, although in the instance of barter, goods or services may be provided to extinguish the debt. Unless the prepayment is for more than one year hence, these debt liabilities should be recorded as short term, trade credit and advances.

Processing of Goods

Manufacturing services on physical inputs owned by others—known as goods for processing—covers processing, assembly, labeling, packing, etc., undertaken by enterprises that do not own the goods concerned but are paid a fee by the owner. In these cases, the ownership of the goods does not change, so no general merchandise transaction is recorded between the processor and the owner. Therefore, there are no corresponding imputed liabilities related to these transactions to be recorded because there is no imputation of a change of ownership of the goods. In other words, external debt liabilities recorded under trade credit and advances (or under Direct investment: Intercompany lending, if applicable) are not required for goods for processing.

Progress Payments for High-Value Capital Goods

The production of high-value capital goods such as ships, heavy machinery, and other structures may take several months or years to complete. In BPM6, when a contract of sale is agreed in advance for the construction of such products, a progressive change of ownership may occur for the work-in-progress. When the contract calls for stage payments (progress payments, also known as part-payments), the transaction values may often be approximated by the value of the stage payments made each period, although a difference in timing between the change of ownership and progress payment may give rise to trade credit and advances. Therefore, progress payments are not to be recorded as trade credit and advances debt of the exporter, unless there is a difference in timing between the change of ownership and progress payments.

Project Loans: Disbursements

Disbursements of project loans can take the following form:

  • Advances to the borrowing entity—disbursements are to be recorded when the lender advances funds to the borrower

  • Direct payment by the lender to suppliers of goods and services—disbursements are to be recorded when the lender pays the supplier

  • On a reimbursement basis after the borrower has already paid the suppliers—disbursements are to be recorded when the lender makes reimbursements to the borrower

Public-Private Partnerships (PPPs)

Public-private partnerships (PPPs) typically involve the government and a private corporation agreeing to a long-term contract under which the private corporation constructs and operates fixed-assets of a kind that are usually the responsibility of the general government sector, or public corporations. These commonly include, e.g., roads, bridges, water supply and sewerage treatment works, hospitals, prison facilities, electricity generation and distribution facilities, and pipelines. In many such instances, such transactions are likely to be classified as resident to resident, particularly if the private corporation creates a separate unit to construct and/or operate the asset (although in such instances that unit may incur external debt liabilities to its nonresident parent, which need to be recorded).

If the private sector corporation is a nonresident, the classification of the transactions as external debt depends on who is the economic owner of the fixed asset during the contract period and the nature of the contract. PPPs projects are often complex and the specific contract needs to be taken into account. Detailed advice on different arrangements, with numerical examples, is provided in the PSDS Guide (paragraphs 4.123–4.126). For the purposes of this Guide some general principles for recording external debt are provided:

  • Where an asset is constructed by, and the economic ownership remains with, a nonresident private corporation until transferred to government on completion of the contract, any prepayments for the asset by the government are claims on a nonresident enterprise, i.e., external debt of the private nonresident corporation. If the government only pays the private nonresident corporation and obtains economic ownership on completion, and needs to borrow abroad to finance this purchase, then the government will incur external debt when it borrows.

  • Where there are lease arrangements between the government and a nonresident private corporation, these are classified in the normal way as operating or financial leases, and hence external debt or not, depending on whether the government or private corporation gains most of the risks and benefits of ownership as a result of the contracts entered into. For instance, if the private corporation continues to legally own the asset but the government makes payments both to cover the costs of operating the asset and to meet the financing costs, then a financial lease, and hence external debt, arises for the government and should be recorded as such.

  • If the government is assessed as the economic owner of the asset during the contract period but does not make any explicit payments to the private nonresident corporation, a financial lease is imputed, hence external debt for the government (see also PSDS Guide, paragraph 4.125).

As with all financial leases, at the time of effective change of ownership, the market value of the good is recorded and represents the external debt of the government. The payments to be made need to be separated into operating and financing costs. If a market value is available, the total amount paid in financing costs over the life of the lease in relation to that price will determine the implicit rate of interest on the loan. Otherwise, the financing costs discounted by a representative interest rate of the government—the present value of the finance payments—could represent the market value of the asset in the absence of other information, and generate data on the future interest and principal payments—examples 1 and 2 in the appendix of Chapter 2, provide calculations that illustrate the principles involved.

R

Reinsurance

Positions arising from reinsurance are treated in the same way as those arising from insurance.

For reinsurance relating to life insurance, any technical reserves held by insurance companies that are assets of nonresident policyholders are external debt of the insurance company. As with claims of households in life insurance companies, any such external debt should be included under other debt liabilities in the gross external debt position.

For nonlife insurance, prepayment of premiums by nonresidents, and reserves held against claims of nonresidents that have arisen, are also external debt. In both instances, any such external debt is included under other debt liabilities (see also Insurance, Pension, and Standardized Guarantee Schemes in Part I of this Appendix above).

Repurchase Agreements: Delay in Returning the Security

If the security taker fails to return the security to the security provider, then the recording treatment depends on whether the failure is simply a delay or whether there is a default. If the failure is due to a delay (e.g., the result of another party in the chain of repo securities being unable to access the specific security at that particular date), it has no impact on the gross external debt position, although in line with common market practice the security provider may retain the funds without paying any interest. If there is a default, usually under the terms of the reverse agreement the security provider’s loan liability to the security taker is extinguished—the security taker no longer has a claim on the security provider. If the security provider defaults on returning the cash, then the security provider’s security holdings fall, and those of the security taker increase, and the loan is extinguished. In either event, because the security provided is likely to be of greater value than the cash provided, residual claims may still continue to exist.

Reserve Position in the IMF

Reserve position in the IMF is a component of reserve assets and is the sum of (1) the “reserve tranche,” i.e., the foreign currency (including SDRs) amounts that a member country may draw from the IMF at short notice; and (2) any indebtedness of the IMF (under a loan agreement) in the General Resources Account that is readily available to the member country, including the reporting country’s lending to the IMF under the General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB). (See BPM6, paragraphs 6.85 and 7.77–7.78 for more information).

S

Sovereign Wealth Funds

Some governments create special purpose government funds, usually called sovereign wealth funds (SWFs). Created and owned by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets. The funds are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports (see BPM6, paragraphs 6.93–6.98 for more information on SWFs).

The classification of an SWF controlled by government in the general government or financial corporations sectors is determined according to the criteria set out in BPM6, paragraph 4.92, i.e., government-controlled enterprises that (1) produce market output (i.e., charge prices that are economically significant), and (2) have complete sets of accounts, are excluded from general government and are included as public enterprises in the financial corporations sector—in the case of SWFs. If the fund is an entity incorporated abroad or is a quasi-corporation located abroad, it is classified as a separate institutional unit in the financial corporations sector resident in its economy of incorporation.

T

The Value of Debt After Consolidation Is Greater Than the Value of the Consolidated Debts Combined

If the terms of a loan are changed, a new contract is created. Thus, if two or more old debts are consolidated into one debt, the new debt replaces the two or more old debts and is classified by type of instrument (loan, security, etc.). If the total value of the new debt is greater than the old debts combined, e.g., because of extra charges arising from rescheduling, the gross external debt position increases.

Trading of Non-negotiable Instruments that are Recorded at Nominal Values in Positions

Nominal valuation is used for positions in nonnegotiable instruments—such as loans, deposits, and trade credit and advances (see paragraph 2.38). However, nonnegotiable debt instruments may be sold—without becoming negotiable instruments—by the creditor to a third party, with the sale value often being less than the nominal value, because, for instance, the market price takes account of the possibility of default. Where there is a difference between the sale value and the nominal value of the instrument, the debt instrument continues to be recorded at the nominal value in external debt statistics. For the new creditor, the difference in value is recorded as a revaluation in the flow data (see BPM6, paragraph 9.33).

Appendix 2. Reverse Security Transactions

Introduction

1. A reverse securities transaction is defined in the Guide to include all arrangements whereby one party legally acquires securities and agrees, under a legal agreement at inception, to return the same or equivalent securities on or by an agreed date to the same party from whom the securities were acquired initially.1 These arrangements are known as repurchase agreements (repos), securities lending, and sell-/buybacks.2 Where cash is involved, the economic nature of the agreement is similar to that of a collateralized loan in that the purchaser of the security is providing funds collateralized by the securities to the seller for the period of the agreement and is receiving a return from these funds through the agreed fixed price at which the securities are resold when the agreement is reversed.

2. As outlined in Chapter 3, securities that are provided under a reverse securities transaction are reported as remaining on the balance sheet of the security provider. The supply and receipt of funds under a security repurchase agreement is treated as a loan or deposit. It is a loan, unless classified as a deposit in national measures of broad money. If a securities repurchase agreement does not involve the supply of cash (i.e., there is an exchange of one security for another, or one party supplies a security without collateral), there is no loan or deposit. If the security taker sells outright these securities so acquired, the security taker reports a negative (or “short”) position in the security.

3. This appendix provides background information on reverse security transactions and four examples of how these positions should be recorded in the gross external debt position.

What Are These Instruments?

Repurchase Agreements (Repos)

4. Under a repo, securities are provided for cash with a commitment by the seller (security provider) to repurchase the same or similar securities for cash at a fixed price on a specified future date. The security taker views the transaction as a reverse repo. The security taker earns interest on the cash advanced through the difference between the selling and buying rates for the securities; interest is related to the current interbank rate and not that of the security being “repoed”.3 Full, unfettered ownership passes to the security taker, who can on-sell the security, but the market risk—the benefits (and risks) of ownership (such as the right to holding gains—and losses)—remains with the security provider, who also receives the property/investment income attached to the security, albeit from the security taker rather than the security issuer, i.e., the commitment to reverse the change in legal ownership in the future at a fixed price means that the original owner retains the risks and rewards of changes in the price of the asset. Originally, it was intended that the security taker’s right to on-sell would be invoked only in the event of a default by the security provider, but as the market has developed, the right to on-sell at the security taker’s option has become commonplace.

5. Repos are actively used in international financial markets. They often have a very short overnight maturity, but are also for longer maturities (sometimes up to several weeks), or have an “open” maturity (i.e., the parties agree daily to renew or terminate the agreement). Several different types of institutions are involved. Most commonly, financial institutions transact with other financial institutions, both domestic and nonresident, and central banks with domestic financial institutions and other central banks. However, nonfinancial enterprises and governments may also use repos.

6. Repos are undertaken for a variety of reasons:

  • To finance security purchases, i.e., the security provider acquires a security outright and then sells it under a repo to help finance the position

  • To increase liquidity by raising funds while retaining exposure to market price movements in the security, i.e., the security provider may want a longer-term position in the security but may also require cash in the short term

  • To acquire securities in order to cover a negative (or “short”) position, i.e., the security taker takes a negative position in the security, thus benefiting from market price declines

  • To take leverage positions in securities through a program of buying securities, repoing them out, purchasing more securities with the cash acquired and so on, with only the requirement for margins limiting this activity, i.e., the security provider creates a large positive exposure to movements in the price of the securities without having to fully fund this exposure with own funds

  • Central banks use repos as an operational tool to ease or drain liquidity in the domestic financial markets—in many countries, the repo rate (the rate paid by the borrower in a repo transaction) is the benchmark rate for central bank market lending

7. Chains of repos and reverse repos are common practice in financial markets as highly creditworthy market players raise funds at lower rates than they are able to on-lend. In this manner, the repo market is part of broader financial intermediation activity.4 The development of repo markets can increase the liquidity of a money market while, at the same time, deepening the market for the underlying securities used (frequently government securities, but not necessarily), leading to finer borrowing rates both for money market participants and governments.

8. Usually, the security provider in a repo is the initiator of the transaction, which tends to place the security taker in a slightly stronger negotiating position. These are called “cash-driven” repos. In these circumstances, the security provider is not required to provide a specific security—a list of acceptable securities is generally available. Frequently, substitution of the security is permitted during the life of the repo, i.e., the security provider may wish to access the security repoed and so usually is permitted to do so by substituting it for another of equal quality (generally, one on the list of acceptable securities). The right to substitute securities will usually affect the rate of interest charged on the repo.

9. In certain circumstances, one party may have need for a specific type of security. These transactions are known as “securities-driven” repos. They result when a particular security goes “special”, i.e., is in very high demand and there is insufficient supply to meet commitments. In these circumstances, cash is provided as collateral (noncash collateral is discussed under Securities Lending, below) and the security provider is in a stronger bargaining position. In essence, when a security-driven transaction takes place, the security provider is prepared to accept cash in return for the security “lent,” provided that the provider can be compensated for the risk of lending by obtaining a sufficient spread between the interest to be paid on the cash received and what can be earned in the money market. In extreme cases, when the security may be unavailable from any other source, the interest rate on the cash received may fall to zero.

10. Whether a transaction is cash-driven or securities-driven will affect which party pays margin. Margin payments provide one party with collateral of greater market value than the instrument being provided—the term “haircut” is sometimes used to describe this difference. Margin payments may be made at the outset—known as initial margins—and during the life of a repo—known as variation margin.5 As the market value of the collateral falls, so variation margin is paid, restoring the margin to its original market value. If the transaction is cash-driven, the security provider will provide the margin; if the transaction is securities-driven, the security taker will provide the margin. Margin may be cash or securities.

11. Market and credit risk affect the amount of margin provided. The market risk is that of the underlying security—the more variable the market price of the security, the greater the margin; the credit risk is that of the two counterparties to the repo to each other—the greater the perceived credit risk of the margin provider, the higher the margin. In both instances, the higher margin protects the margin taker against the higher probability of adverse developments. Because each party at the inception of a repo is equally exposed to risk, in many developed financial markets, initial margin may not be required if the credit standing is approximately equal (monetary authorities usually ask for initial margin and rarely, if ever, pay initial margin), but variation margin is usually provided when the market price of the security falls. On the other hand, when the value of the security rises, the security taker may or may not return part of the security’s value as a “reverse variation margin,” depending on the market’s practices in any given country. In less developed capital markets, and depending on the depth and price volatility of the market of the security underlying the repo, initial margins of substantially more (possibly up to 25 percent) than the value of the cash provided may be required.

12. The legal and market arrangements for repos, including the payments of margin (whether initial or variation), the ability to substitute securities, and the retention of market risk by the security provider, support the view that repos are classified as loans, with the security remaining on the balance sheet of the security provider, i.e., there is considered to be no change of economic ownership of the security. This is certainly the way repos are viewed by market participants. On the other hand, given the change of legal ownership of the security, some argue that a security transaction should be recorded—the security provider no longer has a legal claim on the security issuer. In Chapter 4 a memorandum table to the gross external debt position is provided that can be used to present data on resident-issued debt securities that residents (1) provided to and (2) acquired from nonresidents under outstanding reverse transactions, including repo agreements. This table helps in tracking the change of legal ownership of these debt securities between residents and nonresidents and, more generally, the positions acquired under reverse transactions.

Securities Lending

13. Under a securities lending agreement, securities are provided under a legal agreement that requires the security taker to return the same or similar securities on or by an agreed date to the same party from whom the securities were acquired initially. No cash is provided by the security taker to the security provider in return for the acquisition of the securities, although a fee may be paid by the security taker and collateral provided (as in the form of other securities). If cash collateral is provided, the transaction has the same economic impact as a repo.

14. As with repos, full, unfettered legal ownership passes to the security taker, who can on-sell the security, but the market risk—the benefits (and risks) of ownership (such as the right to holding gains—and losses)—remains with the original owner of the security, who also receives the property/investment income attached to the security, albeit from the security taker rather than the security issuer. Therefore, there is no transaction in securities and—if no cash is involved—there is no loan. Because securities lending is a securities-driven activity, so the security taker initiates the transaction, which means that the bargaining advantage lies with the “lender” of the security. The level of the fee charged depends on the availability of the security. The payment may be made at inception or at the close out of the contract. In most cases, the original security owner considers the arrangements to be temporary and does not remove the securities or include the collateral on its balance sheet, since the owner retains the rights to any dividends or interest while the securities are on loan, albeit from the security taker rather than the security issuer.6

15. Security loans are actively used in financial markets. In many cases, the transfer of securities between holders is conducted by security depositories. The security owner will provide the depository with the general right to on-lend the securities subject to certain legal safeguards. As a consequence, frequently the owner of the security will be unaware that the security it owns has been sold under a securities loan agreement.

16. The primary purposes of securities lending are:

  • For the security taker, the security is acquired in order to meet a commitment to sell the security, i.e., to cover a negative (or “short”) position. The security taker can take leverage positions by selling securities it does not own and then covering the position with securities acquired under securities loans.

  • For the security provider, the fee paid by the security taker generates income—the owner has a long-term position in the security, but through a securities loan earns additional income.

  • The depository can earn extra fee income, which might be partially passed on to the security owner through lower custodial fees. The depository is more likely to be able to manage the collateral provided by the security taker than the security owner, who, in return for allowing securities to be lent, may pay lower custodial fees and not have the responsibility of managing the collateral provided.

17. Like repos, chains of securities lending can be established whereby brokers successively on-lend securities to brokers, dealers, or other parties. The lending chains are reversed when the securities are returned. Securities lending involves securities that may be issued by residents or nonresidents, by governments or by corporations, and can be either equities or debt instruments. Securities lending increases liquidity in the securities market as well as the timeliness of some trade settlements—especially for securities that trade infrequently or in small volume.

18. The securities taker will usually provide collateral in the form of other securities of equal or greater value to the securities “lent,” providing initial margin, although in some instances no collateral is provided. If cash collateral is provided, the transaction has the same economic impact as a repo (discussed above). If the market value of securities placed as collateral falls relative to the value of the securities “loaned,” the securities taker is usually required to place variation margin, to restore the relative position. If the value of the securities placed as collateral increases, the securities provider may or may not be required to return part of the collateral, depending on country practice.

19. Because of the requirement for the securities to be returned, the payments of margin, the retention by the original security owner of the market risks of the securities, and the right to receive income payments on the security, securities lent under security loans remain on the balance sheet of the original owner. If a security taker sells the security acquired under a security loan, a negative (or “short”) position is recorded in the security, reflecting the obligation to return the security to the security provider. As noted above, Chapter 4 provides a memorandum table to the gross external debt position that can be used to present data on resident-issued debt securities that residents (1) provided to and (2) acquired from nonresidents under outstanding reverse transactions, including security lending agreements.

Recording Examples

20. To help compilers, some examples are set out in Table A2.1 of how different types of reverse security transactions should be recorded in the gross external debt position and in the memorandum table, when debt securities are involved.7 These examples show the change in the position when resident-issued debt securities are acquired by a nonresident from a resident, or vice versa, under a reverse security transaction. In all these examples, it is assumed that debt securities involved in the transactions are valued at 100, and any cash provided is valued at 95. Each example involves a transaction in a debt security issued by a resident of A. Each example specifies an initial transaction, followed by different subsequent transactions. For each subsequent transaction, the recorded entries include both the initial transaction and the subsequent transaction. So, the entries, e.g., 1(b) include both the sale of the debt security under a repo by a resident of A to a nonresident (1(a)), and the subsequent sale under a repo by the nonresident to another resident of A (1(b)); the entries, e.g., 1(c) include both the sale of the debt security under a repo by a resident of A to a nonresident (1(a)), and the subsequent sale under a repo by the nonresident to another nonresident (1(c)).

Table A2.1.

External Debt: Recording of Reverse Security Transactions

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Appendix 3. Glossary of External Debt Terms

A

Acceleration Clause

Concessional loans from multilateral institutions include an acceleration clause that is triggered when a country becomes creditworthy for International Bank for Reconstruction and Development (IBRD) borrowing and its per capita gross national income (GNI) reaches or exceeds the operational cutoff for the International Development Association (IDA) eligibility for three consecutive years. The acceleration clause will double the size of each repayment, effectively reducing the remaining maturity in half.

Accrual of Interest Costs

Continuous recording of interest costs, so matching the cost of capital with the provision of capital.

Affiliates

Enterprises related through direct investment relationships. Consist of the direct investors (s), both immediate and indirect; the direct investment enterprises, whether subsidiaries (including branches and other quasicorporations), associates, and subsidiaries of associates, both immediate and indirect; and fellow enterprises, i.e., those enterprises that are under the control or influence of the same immediate or indirect investor, but neither fellow enterprises controls or influences the other fellow enterprises. Affiliates are also known as “affiliated enterprises” because they are almost always enterprises.

Agreed Minute

Paris Club document detailing the terms for a debt rescheduling between creditors and the debtor. It specifies the coverage of debt-service payments (types of debt treated), the cutoff date, the consolidation period, the proportion of payments to be rescheduled, the provisions regarding the down payment (if any), and the repayment schedules for rescheduled and deferred debt. Creditor governments commit to incorporate these terms in the bilateral agreements negotiated with the debtor government that implements the Agreed Minute. Paris Club creditors will agree to reschedule only with countries that have an IMF upper credit tranche arrangement (Stand-By Arrangement or Extended Fund Facility (EFF)), a Poverty Reduction and Growth Facility (PRGF) arrangement, or a Rights Accumulation Program.

Amortized Value

Amortized value of a loan reflects the decline in the value of the liability through regular payments over a specified period of time. At the time of each scheduled payment, amortized value is the same as nominal value, but it may differ from the nominal value in other dates because nominal value includes accrued interest costs that have not been paid.

Amortization Schedule

The schedule for the repayment of principal and payment of interest on an ongoing basis. For loans, the amortization schedule is normally included in an annex to the contract or can be estimated from the contract.

Annuity-Type Repayment

A repayment schedule where the sum of interest payment and repayment amounts (annuity) is constant throughout the amortization schedule at fixed intervals. Over time, the interest amount falls, while the repayment amount increases, but the installment remains the same.

Arbitrage

Buying (or borrowing) in one market and selling (or lending) in the same or another market to profit from market inefficiencies or price differences.

Arrangement on Guidelines for Officially Supported Export Credits

The Arrangement is a gentleman’s agreement governing the provision of officially supported export credits with a credit period of two years or more. It is negotiated by an international body called the Participants to the Arrangement on Guidelines for Officially Supported Export Credits, which meets in Paris under the auspices, and with the administrative support, of the Secretariat of the OECD. The Participants are Australia, Canada, the European Union (including all the Member States), Japan, Korea, New Zealand, Norway, Switzerland, and the United States.

Average Maturity

Average maturity is defined as the weighted average time to maturity of all principal payments. The maturity of each principal payment is weighted by the value in the unit of account of that payment relative to all principal payments, and aggregated. This indicator shows how long it takes on average to rollover the debt portfolio. A shortening suggests that the portfolio is being rolled over more frequently and therefore is more exposed to refinancing risks. Like SDR allocations, the exclusion of perpetual bonds from the calculation of average maturity should be considered.

Average Time to Refixing

The average time to refixing is a measure of weighted average time until the interest rate on the whole debt portfolio is refixed. The larger the percentage of variable debt within total debt, the shorter the average time to refixing. For zero-coupon bonds and bonds with fixed coupons, the period until refixing corresponds to the residual life of the bond.

B

Balance of Payments

A statistical statement that systematically summarizes, for a specific period of time, transactions between residents and nonresidents. It consists of the goods and services accounts, the primary and secondary income accounts; the capital account; and the financial account.

Bank for International Settlements (BIS)

Established in 1930 by intergovernmental convention, the BIS promotes discussion and facilitates cooperation among central banks. In this capacity, the BIS carries out four main activities: (1) it organizes meetings for central banks and supervisory agencies; (2) it supports economic, monetary, financial, and legal research and it is a hub for sharing statistical information amongst central banks, and publishing statistics on global banking, securities, foreign exchange and derivatives markets; (3) it organizes seminars and workshops; and (4) it offers a wide range of financial services to assist central banks and other official monetary institutions in the management of their foreign reserves.

Berne Union

The International Union of Credit and Investment Insurers (Berne Union). This Union is an informal association of export credit insurance agencies and/or investment insurance companies and agencies, founded in 1934. The two main objectives of the Berne Union are the promotion of the international acceptance of sound principles in export credit insurance and investment insurance, and the exchange of information relating thereto. The almost 50 members meet several times per year at general or specialist meetings to exchange information and discuss matters of common interest. They also consult with each other on a continuing basis, and cooperate closely. All members participate as insurers and not as representatives of their governments.

Bilateral Deadline

In the context of Paris Club reschedulings, the date by which all bilateral agreements must be concluded. It is set in the Agreed Minute and is typically about six months later, but can be extended upon request.

Bilateral Debt

Loans extended by a bilateral creditor.

Bilateral Rescheduling Agreements

Rescheduling agreements reached bilaterally between the debtor and creditor economies. These are legally the equivalent of new loan agreements. After a Paris Club rescheduling, such agreements are required to put into effect the debt restructuring set forth in the multinational Agreed Minute.

Bullet Repayment

The repayment of principal in a single payment at the maturity of the debt.

Buyer’s Credit

A financial arrangement in which a bank or financial institution, or an export credit agency in the exporting economy, extends a loan directly to a foreign buyer or to a bank in the importing economy to pay for the purchase of goods and services from the exporting economy. Also known as financial credit. This term does not refer to credit extended directly from the buyer to the seller (e.g., through trade credit and advances payment for goods and services).

C

Capital Account

In the balance of payments, the capital account shows (1) capital transfers receivable and payable between residents and nonresidents and (2) the acquisition and disposal of nonproduced, nonfinancial assets between residents and nonresidents.

Capital Transfers

Consists of transfers in which the ownership of an asset (other than cash and inventories) changes from one party to another; or which obliges one or both parties to acquire or dispose of an asset (other than cash or inventories); or where a liability is forgiven, by the creditor.

Capitalized Interest

Capitalized interest is the conversion of accrued interest costs or future interest payments, by a contractual arrangement with the creditor, into a new debt instrument or principal of the current debt instrument. The most common form of capitalization is the reinvestment of interest costs into the principal amount, either because of an explicit agreement regarding the specific debt instrument or as part of a rescheduling agreement, Frequently as part of a rescheduling agreement, some percentage of interest due during the consolidation period (see below) is converted, through an agreement made with the creditor, into principal.

Claim Payments

Payments made to exporters or banks after the claims-waiting period by an export credit agency on insured or guaranteed loans when the original borrower or borrowing-economy guarantor fails to pay. Claim payments are recorded by the agencies as unrecovered claims until they are recovered from the debtor or the debtor’s guarantor.

Claims-Waiting Period

The period that exporters or banks must wait after the due-date of payment before the export credit agency will pay on the corresponding claim.

Cofinancing

The joint or parallel financing of programs or projects through loans or grants to developing economies provided by commercial banks, export credit agencies, other official institutions in association with other agencies or banks, or the World Bank and other multilateral financial institutions (see also Multilateral Creditors).

Commercial Credit

In the context of the Paris Club, loans originally extended on terms that do not qualify as official development assistance (ODA) credits. These are typically export credits on market terms but also include other non-ODA loans by governments.

Commercial Interest Reference Rates (CIRRs)

A set of currency-specific interest rates for OECD countries. CIRRs have been established on the basis of secondary market yields on government bonds. These data are published monthly on the Internet at www.oecd.org/tad/xcred/cirrs.pdf. CIRRs are adjusted monthly and are intended to reflect commercial rates.

Commercial Risk

In the context of export credits, the risk of nonpayment by a nonsovereign or private sector buyer or borrower in his or her domestic currency arising from default, insolvency, and/or a failure to take up goods that have been shipped according to the supply contract (contrasted with transfer risk arising from an inability to convert domestic currency into the currency in which the debt service is payable, or with broader political risk).

Commitment

Generally, a firm obligation to lend, guarantee, or insure resources of a specific amount under specific financial terms and conditions. However, in the OECD’s Arrangement on Guidelines for Officially Supported Export Credits, commitment simply refers to any statement, in whatever form, whereby the willingness or intention to provide official support is communicated to the recipient economy, the buyer, the borrower, the exporter, or the financial institution.

Commitment Charge (or Fee)

This is the charge made for holding available the undisbursed balance of a loan commitment. Typically, it is a fixed-rate charge (e.g., 1.5 percent a year) calculated on the basis of the undisbursed balance.

Commitment, Date of

The date on which the commitment is made.

Comparable Treatment

An understanding in a debt-restructuring agreement with the Paris Club creditors that the debtor will secure at least equivalent debt relief from other creditors.

Complete Market

A financial market place is said to be complete when a market exists with an equilibrium price for every asset in every possible state of the world.

Completion Point

In the context of the HIPC Initiative (see below), when the IMF and World Bank Executive Boards decide that an economy has met the conditions for assistance under the Initiative. The timing of the completion point depends on the satisfactory implementation of key structural policy reforms agreed at the decision point, the maintenance of macroeconomic stability, and the adoption and implementation of a poverty reduction strategy developed through a broad-based participatory process (see also Decision Point).

Concessional Loans

These are loans that are extended on terms substantially more generous than market loans. The concessionality is achieved either through interest rates below those available on the market or by grace periods, or a combination of these. Concessional loans typically have long grace periods.

Concessional Restructuring

Debt restructuring with a reduction in present value of the debt service. In the context of the Paris Club, concessional restructuring terms have been granted to low-income countries since October 1988 with a reduction in the present value of eligible debt of up to one-third (Toronto terms); since December 1991, with a present value reduction of up to one-half (London terms or “enhanced concessions” or “enhanced Toronto” terms); and, since January 1995, with a present value reduction of up to two-thirds (Naples terms). In the context of the HIPC Initiative, creditors agreed in November 1996 to increase the present value reduction to up to 80 percent (Lyon terms) and then in June 1999 to 90 percent (Cologne terms). Such restructuring can be in the form of flow restructuring or stock-of-debt operations. While the terms (grace period and maturity) are standard, creditors can choose from a menu of options to implement the debt relief.

Concessionality Level

A net present value calculation, measured at the time the loan is extended, that compares the outstanding nominal value of a debt and the future debt-service payments discounted at an interest rate applicable to the currency of the transaction, expressed as a percentage of the nominal value of the debt. The concessionality level of bilateral debt (or tied aid) is calculated in a similar manner, but instead of using the nominal value of the debt, the face value of the loan is used, i.e., including both the disbursed and undisbursed amounts, and the difference is called the grant element (see also Grant Element and Net Present Value).

Consolidated Amount or Consolidated Debt

The debt-service payments and arrears, or debt stock, restructured under a Paris Club rescheduling agreement.

Consolidated Banking Statistics (BIS)

The BIS consolidated banking statistics report banks’ on-balance sheet financial claims on the rest of the world on an immediate borrower basis, and, after risk transfers, on an ultimate risk basis. They thereby provide a measure of the risk exposures of lenders’ national banking systems. The quarterly data cover contractual lending by the head office and all its branches and subsidiaries on a worldwide consolidated basis, i.e., net of inter-office accounts. In addition to on-balance sheet financial claims, derivative contracts, guarantees and credit commitments are also reported.

Consolidated Reporting

Reporting covering the claims and liabilities of all offices worldwide of the same entity, but excluding positions between offices of the same entity. Offices include head offices, branch offices, and subsidiaries. A consolidated balance sheet refers to a balance sheet grouping of assets and liabilities of a parent company and all its offices, after elimination of all unrealized profits on intragroup trading and of all intragroup balances.

Consolidation Period

In Paris Club restructuring agreements, the period in which debt service to be restructured (the “current maturities consolidated”) have fallen or will fall due. The beginning of the consolidation period may precede, coincide with, or come after the date of the Agreed Minute. The standard consolidation period is one year, but sometimes debt payments over a two-or three-year period have been consolidated, corresponding with a multiyear arrangement with the IMF.

Contingent Asset/Liability (Contingencies)

Contingent assets and liabilities are contractual financial arrangements between institutional units that do not give rise to unconditional requirements either to make payments or to provide other objects of value. They are not recognized as financial assets or liabilities prior to the condition(s) being fulfilled. Lines of credit, letters of credit, and loan commitments assure that funds will be made available, but no financial asset (i.e., loan) is created until funds are actually advanced.

Corporations

Corporations in the legal sense are separate legal entities, so qualify as institutional units, except resident artificial subsidiaries (see BPM6, paragraph 4.18). In addition to corporations in the legal sense, some arrangements that are not legal entities in their own right may be recognized as being institutional units, including cooperatives, limited liabilities partnerships that are not incorporated, notional residents units, and other quasi-corporations. For example, branches in separate economies from their head offices and partnerships are not separate legal entities, but may be treated as corporations because they behave in similar ways (see BPM6, paragraph 4.15).

Coupon

A coupon payment of a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures.

Cover

Provision of export credit guarantee or insurance against risks of payment delays or nonpayments relating to export transactions. Cover is usually, though not always, provided for both commercial risk and political risk. In most cases, cover is not provided for the full value of future debt-service payments; the percentage of cover is typically between 90 percent and 95 percent (see also Quantitative Limits).

Coverage of Rescheduling Agreements

The debt service or arrears rescheduled. Comprehensive coverage implies the inclusion of most or all eligible debt service and arrears.

Credit

An amount for which there is a specific obligation of repayment. Credits include loans, trade credits, bonds, bills, etc., and other agreements that give rise to specific obligations to repay over a period of time usually, but not always, with interest. Credit is extended to finance consumption and investment expenditures, and financial transactions.

Credit Guarantee

Commitment by an export credit agency to reimburse a lender if the borrower fails to repay a loan. The lender pays a guarantee fee.

Credit Insurance

The main business of most export credit agencies is insurance of finance provided by exporters or banks (although some major agencies lend on their own account). Insurance policies provide for the export credit agency to reimburse the lender for losses up to a certain percentage of the credit covered and under certain conditions. Lenders or exporters pay a premium to the export credit agency. Insurance policies typically protect the lender against political or transfer risks in the borrowing economy that prevent the remittance of debt-service payments.

Creditor

An entity with a financial claim on another entity.

Creditor Economy

The economy in which the creditor resides. In Paris Club terminology, it is an official bilateral creditor.

Creditor Reporting System

A statistical reporting system maintained by the OECD on aid activities. It contains detailed quantitative and descriptive data on individual aid projects and programs. CRS data are used to analyze the sectoral and geographical breakdown of aid for selected years and donors, to examine aid that promotes specific policy objectives (gender quality, environmental sustainability, and aid for trade), and to monitor donors’ compliance with various international recommendations in the field of development cooperation and the debt of developing economies. Major creditor economies, primarily the 23 member economies—at the time of writing the Guide—of the DAC, together with the European Commission, other donors, and international organizations supply information (see www.oecd.org/dac/stats/data).

Cross-Border Positions

Asset and liability positions of residents of an economy vis-à-vis residents of all other economies.

Currency of Denomination

The currency of denomination is determined by the currency in which the value of flows and positions is fixed as specified in the contract between parties. Accordingly, all cash flows are determined using the currency of denomination and, if necessary, converted into the domestic currency or another unit of account for the purpose of settlement or compilation accounts. The currency of denomination is important for distinguishing transaction values and holding gains and losses.

Currency of Reporting

The unit of account in which amounts are reported either to the compiling agency and/or to an international agency compiling debt statistics. See Chapter 2 for details on unit of account.

Currency of Settlement

The currency of settlement is determined by the currency in which the values of the flows and positions are settled. It is important for international liquidity and measurement of potential foreign exchange drains. The currency of settlement may be different from the currency of denomination. Using a currency of settlement that is different from the currency of denomination simply means that a currency conversion is involved each time a settlement occurs.

Currency of Transaction

The medium of exchange in which an individual transaction occurs. It may be currency, goods, or services. The medium of exchange of one transaction (e.g., disbursement) does not necessarily determine the medium of exchange of another (e.g., repayment).

Current Account

The current account of the balance of payments covers all transactions of goods, services, primary income, and secondary income between residents and nonresidents. The current account balance shows the difference between the sum of exports and income receivable and the sum of imports and income payable (exports and imports refer to both goods and services, while income refers to both primary and secondary income). The value of the current account balance equals the saving-investment gap for the economy.

Current Maturities

In the context of restructuring agreements, principal and interest payments falling due in the consolidation period.

Current Transfers

Current transfers are all transfers, i.e., the transfer of a real resource or a financial item without a quid pro quo—that are not transfers of capital. Current transfers directly affect the level of disposable income and should influence the consumption of goods and services. Current transfers are classified in the secondary income account of the balance of payments.

Custom-Tailored Repayment

A repayment schedule with uneven intervals and uneven repayment installments. The repayment schedule is usually defined for purposes of satisfying cash flow requirements.

Cutoff Date

The date (established at the time of a country’s first Paris Club debt reorganization/restructuring) before which loans must have been contracted in order for their debt service to be eligible for restructuring (pre-cutoff-date debt). New loans extended after the cutoff date are protected from future restructuring (subordination strategy). In exceptional cases, arrears on post-cutoff-date debt can be deferred over short periods of time in restructuring agreements.

D

De Minimis Creditors (or Clause)

Minor creditors that are exempted from debt restructuring to simplify implementation of the Paris Club restructuring agreements. Their claims are payable in full as they fall due. An exposure limit defining a minor creditor is specified in each Agreed Minute.

Debt- and Debt-Service-Reduction (DDSR) Operations

Debt-restructuring agreements are typically undertaken for bank loan debt obligations and involve the buyback and exchange of eligible debt either for financial instruments that are valued at a substantial discount (simple cash buyback) or for new bonds featuring a present value reduction. In some instances, the principal portion of new financial instruments is fully collateralized with zero-coupon bonds issued by the treasury of an advanced economy, while interest obligations are also partially secured. DDSR operations are characterized by a “menu approach,” allowing individual creditors to select from among several DDSR options. Under the Brady Plan of March 1989, some of these arrangements have been supported by loans from official creditors.

Debt Assumption

Debt assumption is a trilateral agreement between a creditor, a former debtor, and a new debtor under which the new debtor assumes the former debtor’s outstanding liability to the creditor and is liable for repayment of the debt. The activation of a guarantee is an example of debt assumption.

Debt Buyback

The repurchase by a debtor of its own debt, usually at a substantial discount. The debtor’s obligations are reduced while the creditor receives a once-and-for-all payment. Although in apparent contravention of standard commercial bank loan agreements, some debtors have bought back their own debt on the secondary market.

Debt Conversion

The exchange of debt for a nondebt liability, such as equity, or for counterpart funds can be used to finance a particular project or policy.

Debt Default

Failure to meet a debt obligation payment, either principal or interest. A payment that is overdue or in arrears is technically “in default,” since by virtue of nonpayment the borrower has failed to abide by the terms and conditions of the debt obligation. In practice, the point at which a debt obligation is considered “in default” will vary.

Debt-for-Charity Swap

The purchase by a nonprofit organization such as a nongovernmental organization (NGO) of the external debt of an economy at a discount in the secondary market, which the NGO then exchanges for local currency to be used for philanthropic purposes.

Debt-for-Commodity Swap

The repayment in kind by a debtor economy of all or part of its external debt. Typically, the lender takes a specific, earmarked percentage of the receipts from the exports of a particular commodity or group of commodities to service the debt.

Debt-for-Development Swap

Financing part of a development project through the exchange of a foreign-currency-denominated debt for local currency, typically at a substantial discount. The process normally involves a foreign nongovernmental organization (NGO) that purchases the debt from the original creditor at a substantial discount using its own foreign currency resources, and then resells it to the debtor economy government for the local currency equivalent (resulting in a further discount). The NGO in turn spends the money on a development project, previously agreed upon with the debtor economy government.

Debt-for-Equity Swap

A transaction in which debt of an economy is exchanged, usually at a discount, for equity in an enterprise in the same economy. Although variable in form, such arrangements usually result in the extinction of a fixed-rate liability (e.g., a debt security or loan) denominated in foreign currency and the creation of an equity liability (denominated in domestic currency) to a nonresident. There may be clauses in the agreement to prevent the repatriation of capital before some specified future date.

Debt-for-Nature Swap

Similar to a debt-for-development swap, except that the funds are used for projects that improve the environment.

Debt Forgiveness

The voluntary cancellation of all or part of a debt within a contractual arrangement between a creditor in one economy and a debtor in another economy.

Debt Instrument(s)

Existing debt instruments typically arise out of contractual relationships under which an institutional unit (the debtor) has an unconditional liability to another institutional unit (the creditor) to repay principal with or without interest, or to pay interest without principal. These instruments include SDRs, currency and deposits, debt securities, loans, trade credit and advances, insurance, pension, and standardized guarantee schemes and other accounts payable/receivable-other. Debt instruments may also be created by the force of law—in particular, obligations to pay taxes or to make other compulsory payments—or through rights and obligations that results in a debtor accepting an obligation to make future payment(s) to a creditor.

Debt Prepayment

Debt prepayments consist of a repurchase, or early payment, of debt at conditions that are agreed between the debtor and the creditor, i.e., debt is extinguished in return for a cash payment agreed between the debtor and the creditor. When a discount is involved relative to the nominal value of the debt, debt prepayments are referred to as buybacks.

Debt-Reduction Option

Option under concessional Paris Club debt restructurings where creditors effect the required debt reduction in present value terms through a reduction of the principal of the consolidated amount. A commercial interest rate and standard repayment terms apply to the remaining amounts. (See Concessional Restructuring.)

Debt Refinancing

Debt refinancing refers to the conversion of the original debt including arrears, into a new debt instrument. In other words, overdue payments or future debt-service obligations are “paid off” using a new debt obligation. In the Guide, as in BPM6, a change in the terms of a debt instrument is to be reported as the creation of a new debt instrument, with the original debt extinguished.

Debt Relief

Any form of debt reorganization that relieves the overall burden of debt. Debt relief results where there is a reduction in the present value of these debt-service obligations and/or a deferral of the payments due, thus providing smaller near-term debt-service obligations. This can be measured, in most cases, by an increase in the duration of these obligations, i.e., payments become weighted more toward the latter part of the debt instrument’s life. However, if debt reorganization results in changes in present value and duration that are countervailing in their impact on the debt burden, then there is no debt relief, unless the net impact is significant—such as could occur if there was a deep reduction in present value (together with small decrease in duration) or a sharp increase in duration (together with a small increase in present value).

Debt Reorganization/Restructuring

Debt reorganization (also referred to as debt restructuring) is defined as arrangements involving both the creditor and the debtor (and sometimes third parties) that alter the terms established for servicing an existing debt. Types of debt reorganization include debt rescheduling, refinancing, forgiveness, conversion, prepayments, and assumption.

Debt Rescheduling

Debt rescheduling refers to the formal deferment of debt-service payments and the application of new and extended maturities to the deferred amount. Rescheduling debt is one means of providing a debtor with debt relief through a delay and, in the case of concessional rescheduling, a reduction in debt-service obligations.

Debt Service

Refers to payments in respect of both principal and interest. Actual debt service is the set of payments actually made to satisfy a debt obligation, including principal, interest, and any late payment fees. Scheduled debt service is the set of payments, including principal and interest, which is required to be made through the life of the debt.

Debt-Service (-to-Exports) Ratio

The ratio of debt service (interest and principal payments due) during a year, expressed as a percentage of exports (typically of goods and services) for that year. Forward-looking debt-service ratios require some forecast of export earnings. This ratio is considered to be a key indicator of an economy’s debt burden.

Debt-Service-Reduction Option

Option under concessional Paris Club debt reschedulings where creditors effect the required debt reduction in present value terms through a reduction in the applicable interest rate. (See Concessional Restructuring.)

Debt-Sustainability Analysis (DSA)

A study of an economy’s medium- to long-term debt situation. The IMF’s advice on macroeconomic policies—both in the context of IMF-supported programs and surveillance—is anchored in the analysis of a country’s capacity to finance its policy objectives and service the ensuing debt without unduly large adjustments, which could otherwise compromise its stability. To this end, the IMF has developed a formal framework for conducting public and external debt sustainability analyses (DSAs) as tools to better detect, prevent, and resolve potential crises. This framework became operational in 2002 (see www.imf.org/external/pubs/ft/dsa/index.htm)

Debt-Sustainability Framework (DSF)

As part of the Millennium Development Goals (MDGs), the IMF and the World Bank have developed a framework to help guide countries and donors in mobilizing the financing of low-income countries’ development needs, while reducing the chances of an excessive build-up of debt in the future. The DSF was introduced in April 2005, and is periodically reviewed, to address this challenge. Under the DSF, debt sustainability analyses (DSAs) are conducted regularly.

Debt Swaps

Debt swaps are exchanges of debt, such as loans or debt securities, for a new debt contract (i.e., debt-to-debt swaps), or exchanges of debt-for-equity, debt-for-exports, or debt-for-domestic currency, such as to be used for projects in the debtor economy (also known as debt conversion).

Debt Workout

The process of working out a satisfactory method whereby the debtor economy can repay external debt, including restructuring, adjustment, and the provision of new money.

Debt Write-Offs

Debt write-offs are unilateral actions through which a creditor can reduce the value of its debt claims on the debtor in its own books. Write-offs may arise, for instance, when the creditor regards a claim as unrecoverable, perhaps because of bankruptcy of the debtor, and so no longer carries it on its books. The corresponding liability should also be removed from the balance sheet of the debtor.

Debtor and Creditor Approach for Defining and Measuring Interest for Debt Securities

Under the debtor approach, when debt securities are issued at a fixed rate, the rate of interest (original yield-to-maturity) payable, and accruing, is fixed at the time the debt security is issued. Under the creditor approach, when debt securities are issued at a fixed rate, the prevailing market rate during the period is used to determine the interest (current yield-to-maturity) paid on a debt security (see BPM6, paragraph 11.52). The external debt position is the same regardless of the method employed to accrue interest.

Debtor Economy

The economy in which the debtor resides.

Debtor Reporting System (DRS)

The World Bank collects through the Debtor Reporting System (DRS) data on external indebtedness from debtor countries that have received either a World Bank loan or an International Development Association (IDA) credit. These data form the core of the detailed country-level debt stock and flow data that are published annually in the Global Development Finance (GDF) publication.

Decision Point

In the context of the HIPC Initiative, the point at which an economy’s eligibility for assistance is determined by the IMF and World Bank Executive Boards on the basis of a debt-sustainability analysis and three years of sound performance under IMF- and World Bank-supported adjustment programs. The international community enters into a commitment at the decision point to deliver assistance at the completion point, provided that the debtor adheres to its policy commitments. The debt-sustainability analysis is essentially a medium-term balance of payments projection that assesses the debt burden of the economy and its capacity to service those obligations. If external debt ratios for that economy fall within or above applicable targets, it will be considered for special assistance: the target is 150 percent for the ratio of the present value of debt to exports, with exceptions to this target in the special case of very open economies with a high debt burden in relation to fiscal revenues (see also Completion Point).

At the decision point, the Executive Boards of the IMF and World Bank will formally decide on an economy’s eligibility, and the international community will commit to provide sufficient assistance by the completion point for the economy to achieve debt sustainability calculated at the decision point. The delivery of assistance committed by the IMF and Bank will depend on satisfactory assurances of action by other creditors.

Deferred Payments

In the context of Paris Club debt reschedulings, obligations that are not consolidated but postponed non-concessionally, usually for a short time, as specified in the Agreed Minute.

Delivery-Versus-Payment (DVP)

Delivery-versus-payment (DVP) refers to the simultaneous exchange of the value of assets and money. This approach is widely used for settlement of securities.

Development Assistance Committee (DAC) of the OECD

Since the early 1960s the OECD’s DAC has grouped the world’s main donors, defining and monitoring global standards in key areas of development and is a unique forum for sharing views and exchanging lessons. Through wide-ranging partnerships for development, the DAC tracks development finance, helping to make sure the finance is invested effectively and promotes good policy. Over the years, the DAC has worked to provide innovative and integrated approaches to a range of development challenges—from climate change to conflict and gender equality—and played a role in forging major international development commitments, including the Millennium Development Goals and the Paris Declaration on Aid Effectiveness. The DAC periodically reviews both the amount and the nature of its members’ contributions to aid programs, both bilateral and multilateral. The DAC does not disburse assistance funds directly, but is concerned instead with promoting increased assistance efforts by its members. The members of the DAC are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Korea, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, the United States, and the European Union (see www.oecd.org/dac).

Direct Investment Enterprise

An entity subject to control or a significant degree of influence by a direct investor. Control or influence may be achieved directly by owning equity that gives voting power in the enterprise, or indirectly by having voting power in another enterprise that has voting power in the enterprise (see BPM6, paragraphs 6.11 and 6.12).

Direct Investor

An entity or group of related entities that is able to exercise control or significant degree of influence over another entity that is resident of a different economy. Control or influence may be achieved directly by owning equity that gives voting power in the enterprise, or indirectly by having voting power in another enterprise that has voting power in the enterprise (see BPM6, paragraphs 6.11 and 6.12).

Disbursed Loans

The amount that has been disbursed from a loan but has not yet been repaid or forgiven.

Disbursements

The transactions of providing financial resources. The two counterparties must record the transaction simultaneously. In practice, disbursements are recorded at one of several stages: provision of goods and services (where trade credit is involved); placing of funds at the disposal of the recipient in an earmarked fund or account; withdrawal of funds by the recipient from an earmarked fund or account; or payment by the lender of invoices on behalf of the borrower. The term “utilized” may apply when the credit extended is in a form other than currency. Disbursements should be recorded gross—the actual amount disbursed.

Domestic Currency

Domestic currency is that which is legal tender in the economy and issued by the monetary authority for that economy, i.e., either that of an individual economy or, in a currency union, that of the common currency area to which the economy belongs. All other currencies are foreign currencies.

Duration

Duration is the weighted average term to maturity of a debt instrument. The time period until the receipt/payment of each cash flow, such as six months, is weighted by the present value of that cash flow, as a proportion of the present value of total cash flows over the life of the instrument. Present value can be calculated using the yield-to-maturity or another interest rate. The more the cash flows are concentrated toward the early part of a debt instrument’s life, the shorter the duration relative to the time to maturity.

E

Eligible Debt or Debt Service

In the context of the Paris Club, debt that can be rescheduled—namely, debt that is contracted before the cutoff date, with maturities of one year or longer.

Enhanced Concessions (or Enhanced Toronto Terms)

See Concessional Restructuring.

ESAF-HIPC Trust

A trust established by the IMF in February 1997 to provide assistance to the countries deemed eligible for assistance under the HIPC Initiative by the Boards of the IMF and the World Bank. Through this trust, the IMF will provide grants (or, in exceptional circumstances, highly concessional loans) that will be used to retire an economy’s obligations falling due to the IMF after the completion point.

Escrow Accounts

In the context of external debt payments, accounts typically held in banks outside of the debtor economy through which a portion of the export proceeds of a debtor is channeled. Typically involve balances of one-year maturity to cover future debt-service payments. Creditors who are the beneficiaries of such accounts thus obtain extra security for their loans and effective priority in debt service.

Exceptional Financing

As an alternative to—or in conjunction with—the use of reserve assets, IMF credit and loans, and liabilities constituting foreign authorities’ reserves, to deal with payments imbalance, exceptional financing denotes any other arrangements made by the authorities of an economy to finance balance of payments needs. The identification of exceptional financing transactions is linked to an analytical concept rather than being based on precise criteria. Among the transactions regarded as exceptional financing transactions are debt forgiveness, debt-for-equity swaps, and other types of transactions relating to debt reorganizations. Under certain circumstances, some borrowings by the government or other sectors might meet the criterion.

Export Credit

A loan extended to finance a specific purchase of goods or services from within the creditor economy. Export credits extended by the supplier of goods—such as when the importer of goods and services is allowed to defer payment—are known as supplier’s credits; export credits extended by a financial institution, or an export credit agency in the exporting economy are known as buyer’s credits (see also Officially Supported Export Credits).

Export Credit Agency

An agency in a creditor economy that provides insurance, guarantees, or loans for the export of goods and services.

Extended Credit Facility (ECF)

The IMF’s Extended Credit Facility (ECF) is a lending window under the PRGT that provides medium-term support to low income countries with protracted balance of payments problems. Financing under the ECF currently carries a zero interest rate, with a grace period of 5½ years, and a final maturity of 10 years (see www.imf.org/external/np/exr/facts/poor.htm).

Extended Fund Facility (EFF)

This IMF lending facility was established in 1974 to assist countries addressing longer-term balance of payments problems reflecting extensive distortions that require fundamental economic reforms. Arrangements under the EFF are thus longer than Stand-By Arrangements—usually 3 years. Repayment is due within four-and-one-half to ten years from the date of disbursement (see Stand-By Arrangement).

External Debt (Gross External Debt)

Gross external debt, at any given time, is the outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of interest and/or principal by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy.

F

Face Value

Face value is the undiscounted amount of principal to be paid to the holder at maturity (e.g., the redemption amount of a bond). Sometimes called initial contractual value, for loans, the face value is the original amount of the loan as stated in the loan contract. If the loan is not fully disbursed, then the face value will include future disbursements, just as the face value of a zero-coupon bond includes interest that has not yet accrued. It is also known as “par value” or simply “par.”

Fair Value

Fair value of a debt instrument is a market-equivalent value. It is defined as the amount for which an asset could be exchanged, or a liability settled between knowable, willing parties in an arm’s-length transaction. Therefore, it represents an estimate of what could be obtained if the creditor had sold the financial claim.

Fellow Enterprises

See Affiliates.

Financial Account

The financial account of the balance of payments records transactions that involve foreign financial assets and liabilities and take place between residents and nonresidents (see more detail in BPM6, Chapter 8). The primary basis for classification of the financial account is functional: direct, portfolio, and other investment, financial derivatives and employee stock options, and reserve assets.

Financial Assets

Financial assets are stores of value, over which ownership rights are enforced and from which their owners may derive economic benefits—such as property income and/or holding gains and losses—by holding them over a period of time. Financial assets consist of claims in respect of equity and investment fund shares, debt instruments, financial derivatives and ESOs and the gold bullion component of monetary gold.

Financial Claim

A financial claim (1) entitles a creditor to receive a payment, or payments, from a debtor in circumstances specified in a contract between them; or (2) specifies between the two parties certain rights or obligations, the nature of which requires them to be treated as financial. A financial claim has a counterpart liability.

Financial Derivatives

Financial derivatives are financial instruments that are linked to a specific financial instrument or indicator or commodity, and through which specific financial risks can be traded in financial markets in their own right. The value of a financial derivative derives from the price of an underlying item, such as an asset or index. Unlike debt instruments, no principal amount is advanced to be repaid, and no investment income accrues. Financial derivatives are used for a number of purposes including risk management, hedging, arbitrage between markets, and speculation. Transactions in financial derivatives should be treated as separate transactions rather than integral parts of the value of underlying transactions to which they may be linked.

Financial Intermediaries

Financial intermediaries are institutional units that incur liabilities on their own account for the purpose of acquiring financial assets by engaging in financial transactions on the market. They consist of deposit-taking corporations, investment funds, other financial intermediaries, insurance corporations, and pension funds. The role of financial intermediaries is to channel funds from lenders to borrowers by intermediating between them. The most prevalent way in which financial intermediaries obtain funds is through acceptance of deposits from the public (see SNA 2008, paragraph 4.101 and BPM6, paragraph 4.64(a)).

Flag-of-Convenience Countries

Countries with favorable tax rules and other regulations attracting corporations whose main business (originally, primarily shipping—but increasingly, production or services) is outside the economy.

Flexible Credit Line (FCL)

The FCL is an IMF credit facility designed to meet the increased demand for crisis-prevention and crisis-mitigation lending from countries with robust policy frameworks and very strong track records in economic performance. FCL arrangements are requested by member countries and are approved by the IMF Executive Board, for countries meeting pre-set qualification criteria. The length of the FCL is one to two years (with an interim review of continued qualification after one year) and the repayment period the same as for the SBA. Access is determined on a case-by-case basis, is not subject to the normal access limits, and is available in a single up-front disbursement rather than phased. Disbursements under the FCL are not conditioned on implementation of specific policy understandings as is the case under the SBA. There is flexibility to either draw on the credit line at the time it is approved or treat it as precautionary. In case a member draws, the repayment terms are the same as that under the SBA.

Flow Rescheduling

In the context of the Paris Club, the rescheduling of specified debt service falling due during the consolidation period and, in some cases, of specified arrears outstanding at the beginning of the consolidation period (see Stock-of-Debt Operation).

Foreign Currency

In this Guide, a foreign currency is a currency other than the domestic currency.

Forfaiting

A mechanism, most commonly used in medium- and long-term credit, involving the purchase of promissory notes or bills of exchange by the forfaiter, at a discount. Banks or other financial services entities often own forfait companies.

Fund Credit

See Use of IMF Credit and Loans in Appendix 1.

G

Geographical Distribution of the Financial Flows to Developing Countries (Annual)

An annual publication of the OECD that provides comprehensive data on the volume, origin and types of aid and other resource flows to around 150 developing countries. The data show each country’s intake of official development assistance and well as other official and private funds from members of the OECD’s DAC, multilateral agencies and other key donors. Key development indicators are provided for reference.

Goodwill Clause

Clause used in Paris Club agreements under which creditors agree in principle, but without commitment, to consider favorably subsequent debt-relief agreements for a debtor economy that remains in compliance with the restructuring agreement as well as with its IMF arrangement, and has sought comparable debt relief from other creditors. The clause can be intended for a future flow restructuring or a stock-of-debt operation.

Government Debt Management Performance Assessment (DeMPA)

The DeMPA is designed to help countries improve central government debt management capacity through a comprehensive evaluation of the strengths and weakness of current debt management performance, identifying areas where institutions, legislation, practices, and capacity deficits contribute to less-than fully effective management of government debt and related economic policies. The DeMPA evaluates strengths and weaknesses in public debt management, through a comprehensive set of 15 performance indicators covering six core areas of public debt management: (1) governance and strategy development; (2) coordination with macroeconomic policies; (3) borrowing and related financing activities; (4) cash flow forecasting and cash balance management; (5) operational risk management; and (6) debt records and reporting. Its scope is central government public debt management and closely related functions such as issuance of loan guarantees, on-lending and cash flow forecasting and cash balance management. The World Bank was the lead agency in the process of developing the DeMPA tool. For more information see http://go.worldbank.org/BDYOEXLFL0.

Grace Period and Maturity

The grace period for principal is the period from the date of signature of the loan or the issue of the financial instrument to the first repayment of principal. The repayment period is the period from the first to last repayment of principal. Maturity is the sum of both periods: grace plus repayment periods.

Graduated Payments (or “Blended Payments”)

In the context of Paris Club reschedulings, the term refers to a repayment schedule where principal repayments gradually increase over the repayment period, reflecting an expected improvement in the repayment capacity of a debtor economy. Creditors have made increasing use of the graduated payments, replacing flat payment schedules where equal amounts of principal repayments were made over the repayment period: from the creditor perspective, graduated payments provide for principal repayments starting earlier, and, from the debtor perspective, they avoid a large jump in debt service.

Grant Element

Measure of the concessionality of a loan, calculated as the difference between the face value of the loan and the sum of the discounted future debt-service payments to be made by the borrower expressed as a percentage of the face value of the loan. A 10 percent rate of discount is used by the DAC and the World Bank to measure the grant element of official loans (see also Development Assistance Committee, Concessionality Level, and Official Development Assistance).

Grant-Like Flows

Loans for which the original agreement stipulates that payments to service the debt are to be placed into an account in the borrowing economy and used in the borrowing economy to the benefit of that economy. These transactions are treated as “grants (transfers)” in the OECD-DAC statistics because their repayment does not require a flow of foreign currency across the exchanges. They are nevertheless counted as external debt because the creditor is nonresident. (The classification of these transactions as transfers is not consistent with BPM6 recommendations. In BPM6, transfers are regarded as transactions where a real resource or financial item is provided but no quid pro quo is received. In the above transaction, in return for a reduction in outstanding debt, domestic currency is provided.)

Gross Domestic Product (GDP)

Essentially, the sum of the gross value added of all resident producer units plus that part (possibly the total) of taxes on products, less subsidies on products, that is not included in the valuation of output. For further details, see 2008 SNA, paragraphs 2.138–2.140.

Gross National Income (GNI)

GDP plus net primary income from abroad. For further details, see 2008 SNA, paragraphs 2.143–2.145.

H

Heavily Indebted Poor Countries (HIPCs)

Group of developing countries (economies) classified as being heavily indebted poor countries. These are those countries that are eligible for highly concessional assistance from the International Development Association (IDA), and from the IMF’s Poverty Reduction and Growth Facility (PRGF, previously the Enhanced Structural Adjustment Facility, ESAF), and that face an unsustainable debt situation even after the full application of traditional debt-relief mechanisms.

Helsinki Package

Agreement that came into force in 1992. This agreement prohibits (with some exceptions) the provision of tied aid loans to high-income countries (based on World Bank per capita income), and for commercially viable projects (see also Arrangement on Guidelines for Officially Supported Export Credits).

High-Income Countries

The World Bank classifies as high-income those countries with GNI per capita income of $12,476 or more in 2011. Income classifications are set each year on July 1, and are fixed during the period ending on June 30 of the following year (see http://data.worldbank.org/about/country-classifications).

HIPC Initiative

Framework for action to resolve the external debt problems of heavily indebted poor countries (HIPCs) that was developed jointly by the IMF and the World Bank and was adopted in September 1996. The Initiative envisaged comprehensive action by the international financial community, including multilateral financial institutions, to reduce to sustainable levels the external debt burden on HIPCs, provided they build a track record of strong policy performance.

Following a comprehensive review of the HIPC Initiative, a number of modifications to the Initiative were approved in September 1999 to provide faster, deeper, and broader debt relief and strengthen the links between debt relief, poverty reduction, and social policies.

In 2005, to help accelerate progress toward the UN Millennium Development Goals, the HIPC initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI).

HIPC Trust Fund

The Trust Fund administered by the International Development Association (IDA) to provide grants to eligible heavily indebted poor countries (HIPCs) for relief on debt owed to participating multi-laterals. The Trust Fund will either prepay, or purchase, a portion of the debt owed to a multilateral creditor and cancel such debt, or pay debt service, as it comes due. The HIPC Trust Fund receives contributions from participating multilateral creditors and from bilateral donors. Contributions can be earmarked for debt owed by a particular debtor or to a particular multilateral creditor. Donors can also provide contributions to an unallocated pool and participate in decisions regarding the use of these unallocated funds. The Trust Fund allows multilateral creditors to participate in the Trust Fund in ways consistent with their financial policies and aims to address the resource constraints for certain multilateral creditors (see also ESAF-HIPC Trust).

Home Economy

For corporations, including quasi-corporations, the economy of residence of the head office of the institutional unit.

Host Economy

The economy in which the institutional unit is located.

Houston Terms

See Lower-Middle-Income-Country Terms.

I

IMF Adjustment Program

An adjustment program in a member country of the IMF. An IMF-supported program is a detailed economic program that is based on an analysis of the economic problems of the member country. It specifies the policies being implemented or that will be implemented by the country in the monetary, fiscal, external, and structural areas, as necessary, in order to achieve economic stabilization and set the basis for self-sustained economic growth. It usually, though not necessarily, refers to a program that is supported by the use of IMF resources.

IMF Arrangement

Agreement between the IMF and a member country on the basis of which the IMF provides financial assistance to a member country seeking to redress its balance of payments problems and to help cushion the impact of adjustment. See Appendix 1, Use of IMF Credit and Loans.

Institutional Sector

The grouping of institutional units with common economic objectives and functions (see also Sector Classification).

Institutional Unit

In the 2008 SNA, institutional units are the entities that undertake the activities of production, consumption, and the accumulation of assets and liabilities. In other words, economic activity involves transactions among institutional units be they households or corporations. An institutional unit is defined in the 2008 SNA as “an economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities” (2008 SNA, paragraph 4.2).

Insured (Guaranteed) Export Credit

An export credit that carries a guarantee, issued by an export credit agency, protecting the creditor against political, commercial, or transfer risks in the debtor economy that may prevent the remittance of debt-service payments (see also Export Credit Agency).

Interbank Positions

Asset and liability positions that deposit-taking corporations have with other deposit-taking corporations. As a convention to ensure symmetry, all interbank positions, other than securities and accounts receivable/payable, are classified under deposits.

Interest

For the use of principal, interest can, and usually does, accrue on the principal amount, resulting in an interest cost for the debtor. When this cost is paid periodically, as commonly occurs, it is known in this Guide as an interest payment. Interest can be calculated either on a fixed-interest-rate or on a variable-interest-rate basis. In this Guide, in contrast to a fixed interest rate, which remains unchanged over a period of years, a variable interest rate is linked to a reference index (e.g., the London interbank offered rate, LIBOR), or the price of a specific commodity, or the price of a specific financial instrument that normally changes over time in a continuous manner in response to market pressures (see also Principal).

International Bank for Reconstruction and Development (IBRD)

The International Bank for Reconstruction and Development (IBRD) was set up as an intergovernmental financial institution in 1946 as a result of the Bretton Woods Accord. It is the original agency of the World Bank Group and is commonly referred to as the World Bank (see also World Bank Group).

International Banking Business (BIS Data)

In the consolidated BIS statistics, international claims are defined as banks’ cross-border claims (A) plus local claims of foreign affiliates in foreign currencies (B). Foreign claims are defined as the sum of cross-border claims plus foreign offices’ local claims in all currencies. Therefore, on an immediate borrower basis, foreign claims can be calculated as the sum of international claims (A+B) and local claims in local currency (C).

International Development Association (IDA)

IDA, established in 1960, is the concessional lending arm of the World Bank Group. IDA provides low-income developing countries (economies) with long-term loans on highly concessional terms: typically a ten-year grace period, a 40-year repayment period, and only a small servicing charge.

International Interbank Market

An international money market in which banks lend to each other—either cross-border or locally in foreign currency—large amounts of funds, usually at short term (between overnight and six months).

International Investment Position (IIP)

The IIP is a statistical statement that shows at a point in time the value and composition of (1) financial assets of residents of an economy that are claims on nonresidents and gold bullion held as reserve assets, and (2) liabilities of residents of an economy to nonresidents. The difference between an economy’s external financial assets and liabilities is the economy’s net IIP, which may be positive or negative.

International Monetary Fund (IMF)

Following the Bretton Woods Accords and established in 1945, the IMF is a cooperative intergovernmental monetary and financial institution with 187 member countries. Its main purpose is to promote international monetary cooperation so to facilitate the growth of international trade and economic activity more generally. The IMF provides financial resources to enable its members to correct payments imbalances without resorting to trade and payments restrictions.

International Security Identification Number (ISIN)

The ISIN is a unique international security code issued by National Numbering Agencies (NNAs) to securities issued in their jurisdiction. The Association of National Numbering Agencies (ANNA) is the authority responsible for coordinating all aspects of the implementation of the ISIN numbering system. More information on the ISIN code system is available in Appendix VII of the IMF’s Coordinated Portfolio Investment Survey Guide, 2nd ed. (IMF, 2002).

Issue Price

It is the price at which the investors buy the debt securities when first issued.

J

Joint External Debt Hub (JEDH)

The Joint External Debt Hub (JEDH)—jointly developed by the Bank for International Settlements (BIS), the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD) and the World Bank—brings together external debt data and selected foreign assets from international creditor/market and national debtor sources. The JEDH table distinguishes loans and debt securities (total and due within one year) as well as certain other debt instruments. Some selected information on foreign assets is also included. For more information see www.jedh.org/.

Joint Venture

An enterprise in which two or more parties hold major interests. See also BPM6, paragraphs 4.45–4.46.

L

Late Interest Charges

The additional interest that may be levied on obligations overdue beyond a specified time; in some Paris Club agreements, late interest charges have been specifically excluded from the debt consolidation.

Leverage

Having exposure to the full benefits arising from holding a position in a financial asset, without having to fully fund the position with own funds.

Liability

A liability (1) requires a debtor to make a payment, or payments, to a creditor in circumstances specified in a contract between them; or (2) specifies between the two parties certain rights or obligations, the nature of which requires them to be treated as financial. A liability has a counterpart financial claim.

Line of Credit

An agreement that creates a facility under which one unit can borrow credit from another up to a specified ceiling usually over a specified period of time. Lines of credit provide a guarantee that funds will be available, but no financial asset/liability exists until funds are actually advanced.

Loan Agreement

The legal evidence and terms of a loan.

Loan Guarantee

A legally binding agreement under which the guarantor agrees to pay any or all of the amount due on a loan instrument in the event of nonpayment by the borrower.

Locational Banking Statistics (BIS)

The BIS locational banking statistics gather quarterly data on international financial claims and liabilities of bank offices in the reporting countries. Total positions are broken down by currency, by sector (bank and non-bank), by country of residence of the counterparty and by nationality of reporting banks. Both domestically owned and foreign-owned banking offices in the reporting countries record their positions on a gross (unconsolidated) basis, including those vis-à-vis own affiliates in other countries. These data are consistent with the residency principle of national accounts, balance of payments and external debt statistics.

London Club

A group of commercial banks whose representatives meet periodically to negotiate the restructuring of debts of sovereign borrowers. There is no organizational framework for the London Club comparable to that of the Paris Club.

London Interbank Offered Rate (LIBOR)

The London interbank offered rate for deposits, such as the six-month dollar LIBOR. LIBOR is a reference rate for the international banking markets and is commonly the basis on which lending margins are fixed. Thus, an original loan agreement or a rescheduling agreement may set the interest rate to the borrower at six-month dollar LIBOR plus 1.5 percent, with semiannual adjustments for changes in the LIBOR rate. In addition, interest rate swap rates are quoted in reference to LIBOR, i.e., the quoted rate is the fixed-rate side of the swap because the floating-rate side is LIBOR.

London Terms

See Concessional Restructuring.

Long-Maturities Option

In the context of the Paris Club, an option under which the consolidated amount is rescheduled over a long period of time, but without a reduction in the present value of the debt.

Long-Term External Debt

External debt that has a maturity of more than one year. Maturity can be defined either on an original or remaining basis (see also Original Maturity and Remaining Maturity).

Low-Income Countries

In the context of the Paris Club, countries eligible to receive concessional terms. The Paris Club decides eligibility on a case-by-case basis, but only countries eligible to receive highly concessional IDA credits from the World Bank Group are included. The World Bank classifies as low-income those countries with GNI per capita income of $1,025 or less in 2011. Income classifications are set each year on July 1, and are fixed during the period ending on June 30 of the following year (see http://data.worldbank.org/about/country-classifications).

Lower-Middle-Income-Country Terms

In the context of the Paris Club, refers to the rescheduling terms granted, since September 1990, to lower-middle-income countries. These terms are non-concessional and originally provided for flat repayment schedules, but in recent years graduated payment schedules have often been agreed upon for commercial credits, namely, with a maturity of up to 18 years, including a grace period of up to 8 years.

Official development assistance credits are rescheduled over 20 years, including a grace period of up to 10 years. This set of rescheduling terms also includes the limited use of debt swaps on a voluntary basis. The World Bank classifies as lower-middle income those countries with GNI per capita income of between $1,026 and $4,035 in 2011. Income classifications are set each year on July 1, and are fixed during the period ending on June 30 of the following year (see http://data.worldbank.org/about/country-classifications).

Lyon Terms

See Concessional Restructuring.

M

Market Value

Amounts of money that willing buyers pay to acquire something from willing sellers; the exchanges are made between independent parties on the basis of commercial considerations only. The market value of a debt instrument should be based on the market price for that instrument prevailing at the time to which the position statement refers, i.e., current market prices as of the dates involved (beginning or end of the reference period). Chapter 2 provides more details (see also Nominal Value).

Maturity Date (Final)

The date on which a debt obligation is contracted to be extinguished (see also Original Maturity and Remaining Maturity).

Maturity (Defined and Undefined)

Defined maturity refers to a finite time (fixed) period at the end of which the financial instrument will cease to exist and the principal is repaid with interest. Undefined maturity refers to the absence of a contractual maturity. Undefined maturity deposits include demand deposits, checking interest accounts, savings accounts, and money market accounts. Other examples of undefined maturity debt instruments are perpetual bonds.

Maturity Structure

A time profile of the maturities of claims or liabilities. Also known as “maturity profile” or “maturity distribution.”

Millennium Development Goals

The Millennium Development Goals (MDGs) are eight goals—which range from halving extreme poverty to halting the spread of HIV/AIDS and providing universal primary education, all by the target date of 2015—agreed to by all the world’s countries and all the world’s leading development institutions.

Mixed Credits

A credit that contains an aid element, so as to provide concessional credit terms—such as a lower rate of interest or a longer credit period.

Moratorium Interest

Interest charged on rescheduled debt. In the Paris Club, moratorium interest rates are negotiated bilaterally between the debtor and creditor countries and thus can differ among creditors. In the London Club, where all creditors are deemed to have access to funds at comparable rates, the moratorium interest rate applies equally to all rescheduled obligations under an agreement.

Multilateral Creditors

These creditors are multilateral financial institutions such as the IMF and the World Bank, as well as other multilateral development banks.

Multilateral Debt Relief Initiative (MDRI)

The HIPC Initiative entailed coordinated action by multilateral organizations and governments to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries. The MDRI goes further and provides for 100 percent relief to a group of low-income countries on eligible debt (debt claims on countries that have reached, or will eventually reach, the HIPC completion point) from the IMF, the International Development Association (IDA) of the World Bank, and the African Development Fund of the AfDB. The initiative is intended to help the low-income countries advance toward the United Nations’ Millennium Development Goals (MDGs), which are focused on halving poverty by 2015.

Multilateral Tranche Loan

A multilateral tranche loan is a loan facility that comprises a number of different tranches, typically with different maturities or other distinguishing features like terms of borrowing or currency of commitment.

Multiyear Rescheduling Agreement (MYRA)

An agreement granted by official creditors that covers consolidation periods of two or more years in accordance with multiyear IMF arrangements, such as the Extended Fund Facility (EFF) and the Poverty Reduction and Growth Facility (PRGF). The modalities of the agreement are that a succession of shorter consolidations (tranches) are implemented after certain conditions specified in the Agreed Minute are satisfied, such as full implementation to date of the rescheduling agreement and continued implementation of the IMF arrangements.

N

Naples Terms

See Concessional Restructuring.

National Numbering Agencies (NNAs)

NNAs have the sole right to allocate International Security Identification Number (ISIN) codes to securities within their own jurisdiction.

Nationality

Economy of residence of the head office of an institutional entity.

Net Flow

From the viewpoint of a loan, the net flow is gross disbursements less principal repayments.

Net Present Value (NPV) of Debt

The nominal amount outstanding minus the sum of all future debt-service obligations (interest and principal) on existing debt discounted at an interest rate different from the contracted rate.

The concept is closely related to that of opportunity cost: if the debtor has a loan that bears a 3 percent rate of interest, it is clear that the debtor is better off than by borrowing at 10 percent. Nevertheless, by discounting the future debt-service obligations at 10 percent and comparing the outcome with the amount borrowed, the NPV will tell how much the opportunity to borrow at 3 percent, rather than at 10 percent, is worth to the debtor. The NPV can be used to assess the profitability of buying back bonds, although account needs to be taken of how the buyback is to be financed.

The DAC OECD grant element is an NPV concept, since the grant element is the percentage that the NPV, using a 10 percent rate of discount, represents of the face value of the loan. In the context of the Paris Club and the HIPC Initiative, sometimes present value is misdescribed as NPV. (See Present Value, Concessionary Level, and Grant Element.)

Net Resource Transfer

A net resource transfer is a current account deficit excluding any net interest payments.

Nominal Value

The nominal value of a debt instrument is the amount that at any moment in time the debtor owes to the creditor at that moment; this value is typically established by reference to the terms of a contract between the debtor and creditor. The nominal value of a debt instrument reflects the value of the debt at creation, and any subsequent economic flows, such as transactions (e.g., repayment of principal), valuation changes (independent of changes in its market price), and other changes. Conceptually, the nominal value of a debt instrument can be calculated by discounting future interest and principal payments at the existing contractual interest rate(s) on the instrument; the latter may be fixed-rate or variable-rate. Chapter 2 provides more details (see also Market Valuation).

Nonconsolidated Debt

The debt that is wholly or partly excluded from rescheduling. It has to be repaid on the terms on which it was originally borrowed, unless creditors agree otherwise.

Nonperforming Loans

Defined as those loans for which (1) payments of principal and interest are past due by three months (90 days) or more, or (2) interest payments equal to three months (90 days) interest or more have been capitalized (reinvested into principal amount) or payment has been delayed by agreement, or (3) evidence exists to classify a loan as nonperforming even in the absence of a 90 day past due payment, such as when the debtor files for bankruptcy. (See BPM6, paragraphs 7.50–7.53). Nonperforming loans are recorded at nominal value.

Notional (Nominal) Amount of a Financial Derivatives Contract

The notional amount is that underlying a financial derivatives contract and is necessary for calculating payments or receipts, but which may or may not be exchanged.

O

OECD Working Party on Export Credits and Credit Guarantees

This is a forum for discussing export credit issues and for exchanging information among—at the time of publication of the Guide—32 of the 34 member countries of the OECD (only Chile and Iceland do not participate).

Official Development Assistance (ODA)

Official flows to countries and territories on the DAC list of ODA recipients (see www.OECD.org/dac/stats/daclist) and to multilateral development institutions that are administered with the promotion of the economic development and welfare of developing countries as the main objective, and which are concessional in character with a grant element of at least 25 percent (using a fixed 10 percent rate of discount). ODA receipts comprise disbursements by bilateral donors and multilateral institutions. Lending by export credit agencies—with the pure purpose of export promotion—is excluded.

Official Development Assistance (ODA) Loans

Loans with a maturity of over one year meeting the criteria set out in the definition of ODA, provided by governments or official agencies and for which repayment is required in convertible currencies or in kind.

Official Development Bank

A nonmonetary financial corporation controlled by the public sector. It primarily engages in making long-term loans that are beyond the capacity or willingness of other financial institutions.

Official Development Finance (ODF)

Total official flows to developing countries excluding (1) officially supported export credits, (2) official support for private export credits (both are regarded as primarily trade promoting rather than development oriented), and (3) grants and loans for non-developmental purposes. ODF comprises official development assistance (ODA) and other official development finance flows.

Officially Supported Export Credits

Loans or credits to finance the export of goods and services for which an official export credit agency in the creditor economy provides guarantees, insurance, or direct financing. The financing element—as opposed to the guarantee/insurance element—can be extended by an exporter (supplier’s credit), or through a commercial bank in the form of trade-related credit provided either to the supplier, or to the importer (buyer’s credit). It can also be extended directly by an export credit agency of the exporting countries, usually in the form of medium-term finance as a supplement to resources of the private sector, and generally for export promotion for capital equipment and large-scale, medium-term projects. Under the rules of the Arrangement on Guidelines for Officially Supported Export Credits covering export credits with duration of two years or more, up to 85 percent of the export contract value can be officially supported.

Offshore Financial Center

Countries or jurisdictions with financial centers that contain financial institutions that deal primarily with nonresidents and/or in foreign currency on a scale out of proportion to the size of the host economy. Non-resident-owned or -controlled institutions play a significant role within the center. The institutions in the center may well gain from tax benefits not available to those outside the center.

One-Off Guarantees

One-off guarantees occur in situations in which the conditions of the loan or of the security that is guaranteed are so particular that it is not possible for the degree of risk associated with it to be calculated with any degree of precision. They are recognized only as financial assets and liabilities from the time they are activated. (See BPM6, paragraph 5.68.)

Organisation for Economic Co-operation and Development (OECD)

The mission of the OECD is to promote policies that will improve the economic and social well-being of people around the world. The OECD provides a forum in which governments can work together to share experiences and seek solutions to common problems. It works with governments to understand what drives economic, social and environmental change and measures productivity and global flows of trade and investment. The OECD analyses and compares data to predict future trends. It sets international standards on a wide range of things, from agriculture and tax to the safety of chemicals.

Original Maturity

The period of time from when the financial asset/liability was created to its final maturity date.

Other Official Flows (OOFs)

Official flows of a creditor economy that are not undertaken for economic development purposes or, if they are mainly for development, whose grant element is below the 25 percent threshold that would make them eligible to be recorded as ODA. They include export credits extended or rescheduled by the official sector.

Own Offices

Different offices of the same entity, including head offices, branch offices, and subsidiaries. Also sometimes called “related offices.”

P

Paris Club

An informal group of creditor governments that has met regularly in Paris since 1956 to provide debt treatment to countries experiencing payment difficulties; the French treasury provides the secretariat. Creditors reschedule a debtor country’s public debts as part of the international support provided to an economy that is experiencing debt-servicing difficulties and is pursuing an adjustment program supported by the IMF. The Paris Club includes—at the time of publication of the Guide—19 permanent members, associates members, and observers (including the IMF and the World Bank). The core creditors are mainly OECD member countries, but other creditors may participate as relevant for a debtor economy.

Pass Through Funds (Funds in Transit)

Consist of funds that pass through an enterprise resident in an economy to an affiliate in another economy, so that the funds do not stay in the economy of that enterprise. These funds are often associated with direct investment. Such flows have little impact on the economy they pass through. Debt liability positions associated with these funds are recorded in the gross external debt position. These positions are classified as direct investment: intercompany lending, unless they are debt between selected financial intermediaries or nonaffiliated enterprises in which case they are classified under the relevant debt instrument.

Permanent Debt

Loan capital that represents a permanent interest.

Political Risk

The risk of non-payment on an export contract or project due to action taken by the importer’s host government. Such action may include intervention to prevent transfer of payments, cancellation of a license, or events such as war, civil strife, revolution, and other disturbances that prevent the exporter from performing under the supply contract or the buyer from making payment. Sometimes physical disasters such as cyclones, floods, and earthquakes come under this heading.

Positions

In contrast to the accounts that show flows, a balance sheet (including the IIP) shows the positions (also known as stocks) of assets and liabilities held at one point in time by each unit or sector or the economy as a whole. Balance sheets are normally constructed at the start and end of an accounting period but they can in principle be constructed at any point in time. Positions result from the accumulation of prior transactions and other flows. (See 2008 SNA, paragraph 2.33.)

Post-Cutoff-Date Debt

See Cutoff Date.

Poverty Reduction and Growth Facility (PRGF)

An IMF facility known until November 1999 as the Enhanced Structural Adjustment Facility (ESAF). The PRGF was replaced by the Extended Credit Facility (EFC), which became operative in January 2010 (see Extended Credit Facility, EFC).

Poverty Reduction and Growth Trust (PRGT)

In January 2010, the IMF established a Poverty Reduction and Growth Trust (PRGT) to make its financial support more flexible and tailored to the diversity of low-income countries. The PRGT is a trust fund that holds donor resources with the purpose of subsidising lending to low-income countries. The PRGT has three lending windows, the Extended Credit Facility, Rapid Credit Facility, and Standby Credit Facility.

Precautionary and Liquidity Line (PLL)

The PLL is an IMF credit facility designed to meet flexibly the liquidity needs of member countries with sound economic fundamentals but with some remaining vulnerabilities that preclude them from using the Flexible Credit Line (FCL). The PLL combines qualification (similar to the FCL) with focused ex-post conditions that aim at addressing the identified vulnerabilities in the context of semi-annual monitoring. Duration of PLL arrangements can be either six months or one to two years. Access under the six-month PLL is limited to 250 percent of quota in normal times, but this limit can be raised to 500 percent of quota in exceptional circumstances due to exogenous shocks, including heightened regional or global stress. One- to two-year PLL arrangements are subject to an annual access limit of 500 percent of quota and a cumulative limit of 1,000 percent of quota. The repayment terms of the PLL are the same as for the SBA.

Premium

In the context of export credits, the amount paid, usually in advance, by the party to an export agency for its facilities. Cover will often not be fully effective until the premium has been paid. Premiums are normally calculated on the basis of the exposure, length of credit, and the riskiness of transacting with the importing economy. Premium income, an important source of revenue for export credit agencies, is intended to cover the risk of nonpayment of the credit.

Present Value (PV)

The present value (PV) is the discounted sum of all future debt service at a given rate of interest. If the rate of interest is the contractual rate of the debt, by construction, the present value equals the nominal value, whereas if the rate of interest is the market interest rate, then the present value equals the market value of the debt. In debt-reorganization discussions, the present value concept is used to measure, in a consistent manner, the burden sharing of debt reduction among creditors. This can be illustrated by the following example.

Debtor A owes 100 to both creditor B and creditor C. The maturity of both loans is the same. Creditor B’s loan has an interest rate of 3 percent and that of C an interest rate of 6 percent. The “market rate” is assumed to be 8 percent, i.e., B and C could have lent the money at this higher rate. So, for both B and C, the opportunity cost of lending at their respective interest rates, rather than at the market rate, can be calculated by discounting future payments at the market rate of 8 percent (present value), and comparing the outcome with the outstanding nominal value of 100. If PV(B) represents the present value for B and PV(C) represents the present value for C, then:

PV(B) < PV(C) < 100

PV(B) is less than PV(C) because the size of the future payments to be made by A to B is less than those to be made to C. In turn, the payments by A to C are less than would have been the case if a market rate of interest had been charged. This is illustrated by the annual interest payments. Debtor A would annually pay 3 to B; 6 to C; and 8 at the market rate of interest.

In deciding upon burden sharing of debt reduction, since B’s claims on A are already lower than those of C, despite the same nominal value, debt reduction required from B might well be less than that required from C. So, it can be seen that by using a common interest rate to discount future payments, the burden on the debtor of each loan can be quantified in a comparable manner.

Present Value of Debt-to-Exports Ratio (PV/X)

Present value (PV) of debt as a percentage of exports (usually of goods and services) (X). In the context of the Paris Club and HIPC Initiative, sometimes present value is misdescribed as net present value (NPV). In this context NPV/X has the same meaning as PV/X.

Previously Rescheduled Debt

Debt that has been rescheduled on a prior occasion. This type of debt was generally excluded from further rescheduling in both the Paris and London Clubs until 1983. Since then, however, previously rescheduled debt has frequently been rescheduled again for countries facing acute payment difficulties.

Principal

The provision of economic value by the creditor, or the creation of debt liabilities through other means, establishes a principal liability for the debtor, which, until extinguished, may change in value over time. For debt instruments alone, for the use of the principal, interest can, and usually does, accrue on the principal amount, increasing its value.

Principal Repayment Schedule

The repayment schedule of principal by due date and installment amount.

Private Creditors

Creditors that are neither governments nor public sector agencies. These include private bondholders, private banks, other private financial institutions, and manufacturers, exporters, and other suppliers of goods that have a financial claim.

Provisioning

Funds set aside in an entity’s account for potential losses arising from financial claims that are not serviced by the debtor, and/or from claims on the entity arising out of insurance cover and/or guarantees given. In many export credit agencies’ accounts, provisions are divided into general and specific provisions. General provisions apply to the overall business, while specific provisions are on a case-by-case basis. Banks make provisions.

Public Sector Debt

Total public sector debt consists of all debt liabilities of resident public sector units to other residents and nonresidents.

Public Sector External Debt

Total public sector external debt consists of all debt liabilities of resident public sector units to nonresidents.

Public Sector Debt Statistics (PSD) Database

The Public Sector Debt Statistics (PSD) database, jointly developed by the World Bank and the International Monetary Fund, brings together detailed quarterly central government, general government, and public sector debt data of selected countries, initially mainly developing/emerging market economies. The main purpose of the PSD database is to facilitate timely dissemination in standard formats of public sector debt data. By bringing such data and metadata together in one central location, the database supports macroeconomic analysis and cross-country comparison. The PSD database includes country and cross-country tables, and enables users to query and extract data, by country, group of countries, and specific public debt components. For more information see www.worldbank.org/qpsd.

Q

Quantitative (or Cover) Limits

A ceiling on the amount of insurance or credit that an export credit agency will provide under certain circumstances. Limits can apply to individual buyers or to total exposure on buying countries or to maximum contract sizes.

Quarterly External Debt Statistics (QEDS)

The Quarterly External Debt Statistics (QEDS) database, jointly developed by the World Bank and the International Monetary Fund, brings together detailed external debt data of countries that subscribe to the IMF’s Special Data Dissemination Standard (SDDS) and of countries that participate in the IMF’s General Data Dissemination System (GDDS). The QEDS database includes country and cross-country tables, and enables users to query and extract data, by country, group of countries, and specific external debt components. The QEDS database is a collaborative undertaking of the World Bank and the IMF, and it is part of an ongoing effort to improve the transparency, timeliness, and availability of external debt statistics. The database has been endorsed by the TFFS. For more information see www.worldbank.org/qeds.

R

Rapid Credit Facility (RCF)

The IMF’s Rapid Credit Facility is a lending window under the PRGT that provides rapid financial assistance with limited conditionality to LICs facing an urgent balance of payments need. The RCF streamlines the Fund’s emergency assistance for LICs, and can be used flexibly in a wide range of circumstances. Financing under the RCF currently carries a zero interest rate, has a grace period of five-and-one-half years, and a final maturity of ten years (see www.imf.org/external/np/exr/facts/poor.htm).

Rapid Financing Instrument (RFI)

The RFI is an IMF lending facility that was introduced to replace and broaden the scope of the earlier emergency assistance policies. The RFI provides rapid financial assistance with limited conditionality to all members facing an urgent balance of payments need. Access under the RFI is subject to an annual limit of 50 percent of quota and a cumulative limit of 100 percent of quota. Emergency loans are subject to the same terms as the FCL, PLL and SBA, with repayment within three-and-one-quarter to five years.

Recoveries

Repayments made to an export credit agency by a borrowing economy after the agency has paid out on claims by exporters or banks.

Redemption Price

It is the amount to be paid by the issuer to the holder at maturity.

Refinancing

See Debt Refinancing.

Reinsurance by Export Credit Agencies

Export credit agencies may reinsure amounts originally insured by a private sector insurer or commercial bank (some large official agencies are also providing reinsurance for smaller official agencies); e.g., a private insurer might keep the commercial risk of a loan on its own books, but seek reinsurance against specific political risks. In addition, some export credit agencies may receive reinsurance from their governments or purchase it in the private reinsurance market.

Remaining (Residual) Maturity

The period of time until debt payments fall due. In the Guide, it is recommended that short-term remaining maturity of outstanding external debt be measured by adding the value of outstanding short-term external debt (original maturity) to the value of outstanding long-term external debt (original maturity) due to be paid in one year or less. These data include all arrears.

Repayment Period

The period during which the debt obligation is to be repaid.

Rephasing

A revision of the terms of repayment of a debt obligation.

Reporting Banks

In BIS terminology, all those deposit-taking institutions (plus some non-deposit-taking financial institutions) that submit data to be included in the BIS International Banking Statistics.

Repudiation of Debt

A unilateral disclaiming of a debt instrument obligation by a debtor. It is not recognized as a change in position, and does not affect the gross external debt position.

Rescheduling

See Debt Rescheduling.

Rescheduling Agreement

An agreement between a creditor, or a group of creditors, and a debtor to reschedule debt. This term is sometimes used loosely to apply to a debt-reorganization/restructuring agreement, one element of which is rescheduling.

Rights Accumulation Program

An IMF program of assistance established in 1990 whereby a member economy with long overdue obligations to the IMF, while still in arrears, may accumulate “rights” toward a future disbursement from the IMF on the basis of a sustained performance under an IMF-monitored adjustment program. Countries incurring arrears to the IMF after end-1989 are not eligible for assistance under this program. Rights Accumulation Programs adhere to the macroeconomic and structural policy standards associated with programs supported by the Extended Fund Facility (EFF) and the Poverty Reduction and Growth Facility (PRGF), and performance is monitored, and rights accrue, quarterly.

S

Sector Classification

In the 2008 SNA and BPM6, institutional sectors are formed by the grouping of similar kinds of institutional units according to their economic objectives and functions.

Short Positions

Short positions occur when an institutional unit sells securities for which it is not the economic owner. The short position is shown as a negative asset, rather than a liability.

Short-Term Commitments or Credits

In the context of export credits, short-term commitments are those that provide for repayment within a short period, usually six months (although some export credit agencies define short-term credits as those with repayment terms of up to one or two years). Short-term business represents the bulk of that of most export credit agencies and normally includes transactions in raw materials, commodities, and consumer goods.

Short-Term Debt

Debt that has maturity of one year or less. Maturity can be defined either on an original or remaining basis (see also Original Maturity and Remaining Maturity).

Sovereign Debt

Sovereign debt is often used by financial markets and fiscal analysts as debt that has been contracted by the national government. Unlike grouping of the public sector, which is based on institutional units, “sovereign” is defined on a functional basis. Normally “sovereign issuer” of debt is the government (usually national or federal) that de facto exercises primary authority over a recognized jurisdiction whose debt are being considered. Consequently, sovereign debt is debt that has been legally contracted by the national government.

Special Accounts

In the context of the Paris Club, deposits into special accounts were first introduced in 1983 for debtor countries that had a history of running into arrears. After signing the Agreed Minute, the debtor makes monthly deposits into an earmarked account at the central bank of one of the creditor countries. The deposit amounts are roughly equal to the moratorium interest that is expected to fall due on the rescheduled debt owed to all Paris Club creditors combined, and any other payments falling due during the consolidation period. The debtor then draws on the deposited funds to make payments as soon as the bilateral agreements with the individual Paris Club creditors are signed and as other payments fall due.

Special Purpose Entities

Special purpose entities (SPEs) are flexible legal structures in particular jurisdictions, which offer various benefits that may include any or all of low or concessional tax rates, speedy and low-cost incorporation, limited regulatory burdens, and confidentiality.

Typical features of these entities are that their owners are not residents of the territory of incorporation, other parts of their balance sheets are claims on or liabilities to nonresidents, they have few or no employees, and they have little or no physical presence.

Stand-By Arrangements (SBA)

The bulk of non-concessional IMF assistance is provided through SBAs. The SBA is designed to help countries address short-term balance of payments problems. Program targets are designed to address these problems and disbursements are made conditional on achieving these targets (‘conditionality’). The length of an SBA is typically 12–24 months, and repayment is due within three-and-one-quarter to five years of disbursement. SBAs may be provided on a precautionary basis—where countries choose not to draw upon approved amounts but retain the option to do so if conditions deteriorate—both within the normal access limits and in cases of exceptional access. The SBA provides for flexibility with respect to phasing, with front-loaded access where appropriate.

Stand-By Credit

A commitment to lend up to a specified amount for a specific period, to be used only in a certain contingency.

Standby Credit Facility (SCF)

The IMF’s Standby Credit Facility is a lending window under the PRGT that provides financial assistance to LICs with short-term balance of payments needs. The SCF replaced the High-Access Component of the Exogenous Shocks Facility (ESF), and can be used in a wide range of circumstances, including on a precautionary basis. Financing under the SCF currently carries a zero interest rate, with a grace period of four years, and a final maturity of eight years (see www.imf.org/external/np/exr/facts/poor.htm).

Standstill

This is an interim agreement between a debtor economy and its commercial banking creditors that defers principal repayments of medium- and long-term debt and rolls over short-term obligations, pending agreement on debt reorganization. The objective is to give the debtor continuing access to a minimum amount of trade-related financing while negotiations take place and to prevent some banks from abruptly withdrawing their facilities at the expense of others.

Stock Figures

The value of financial assets and liabilities outstanding at a particular point in time.

Stock-of-Debt Operation

In the context of the Paris Club, restructuring of the eligible stock of debt outstanding. These restructuring operations were granted to Egypt and Poland in 1991 and, partially, for Russia and Peru in 1996 and are being implemented for low-income countries under Naples, Lyon, and Cologne terms (see Concessional Restructuring), provided that certain conditions are met: the debtor economy has implemented earlier flow rescheduling agreements for at least three years and has an appropriate arrangement with the IMF.

Straight-Line Repayment

A repayment schedule with equal installments at fixed intervals throughout the amortization schedule.

Stress Test

A stress test is a “what if” scenario that takes the world as given but assumes a major change in one or more variables in order to see what effect this would have on various indicators. For instance, for an economy, the impact on growth, inflation, and external debt of a huge change in oil prices could be considered. Stress tests are particularly useful for financial institutions: for instance, an individual entity might consider the impact on net worth of a sharp movement in financial market prices, in order to help determine the appropriate level of capital to hold.

Structural Adjustment Facility (SAF)/Enhanced Structural Adjustment Facility (ESAF)

The SAF was established by the IMF in 1986 and is no longer operational. The ESAF was established by the IMF in 1987 and was made a permanent, rather than a temporary, facility in September 1996. It was renamed the Poverty Reduction and Growth Facility (PRGF) in November 1999. (See Poverty Reduction and Growth Facility (PRGF). The PRGF was replaced by the ECF in January 2010.

Subordination Strategy

The policy of Paris Club creditors is that loans extended after the cutoff date are not subject to rescheduling; therefore, pre-cutoff date loans are effectively subordinated to post-cutoff loans. (See Cutoff Date.)

Supplier’s Credit

A financing arrangement under which an exporter extends credit to the buyer.

T

Technical Arrears

Technical arrears occur when payments due under the existing agreement are not made, and arrears arise, even though the creditor has agreed in principle to reschedule debt but the new agreement has yet to be signed and implemented. Such arrears might typically arise in the context of Paris Club agreements between the time of the Paris Club rescheduling session and the time when the bilateral agreements are signed and implemented (see Appendix 7, paragraph 5).

Technical Cooperation Grants

There are two basic types of technical cooperation: (1) free-standing technical cooperation (FTC), which is the provision of resources aimed at the transfer of technical and managerial skills or of technology for the purpose of building up general national capacity without reference to the implementation of any specific investment projects; and (2) investment-related technical cooperation (IRTC), which denotes the provision of technical services required for the implementation of specific investment projects.

Terms-of-Reference Rescheduling

Paris Club rescheduling involving only a small number of creditors. Typically, this does not require a rescheduling meeting between the debtor economy and its creditors, with the agreement being reached through an exchange of letters.

Tied-Aid Loans

Bilateral loans that are linked to purchases of goods and services by the debtor economy from the creditor economy.

Toronto Terms

See Concessional Restructuring.

Total Official Flows (Gross or Net)

The sum of official development assistance (ODA) and other official flows (OOF). Represents the total (gross or net) disbursements by the official sector of the creditor economy to the recipient economy (debtor economy).

Trade-Related Credits

Trade-related credits is a wider concept that, in addition to trade credit and advances, also captures other credits provided to finance trade activity, including through banks. It is defined as including trade credit and advances, trade-related bills, and credit provided by third parties to finance trade, such as loans from a foreign financial or export credit institution to the buyer.

Tranche

A particular portion of a financial claim or liability with its own specific terms as opposed to the general terms governing the whole claim or liability.

Transfer Arrears

Transfer arrears are arrears that arise not from the ability of the original debtor to provide national currency but from the inability of the monetary authorities to provide foreign exchange to another resident entity, so preventing that entity from servicing its foreign currency debt (see Appendix 7, paragraph 5).

Transfer Clause

A provision that commits the debtor government to guarantee the immediate and unrestricted transfer of foreign exchange in all cases, provided that the private sector pays the local currency counterpart for servicing its debt.

Transfer Risk

The risk that a borrower will not be able to convert local currency into foreign exchange, and so be unable to make debt-service payments in foreign currency. The risk normally arises from exchange restrictions imposed by the government in the borrower’s economy. This is a particular kind of political risk.

Transfers

Transfers are transactions where there is a transfer of a real resource or a financial item without a quid pro quo.

U

Undisbursed

Funds committed by the creditor but not yet utilized by the borrower. In BIS terminology, this refers to open lines of credit that are legally binding on lending banks. A transaction in the balance of payments or a position in the international investment position (IIP) is only recorded when an actual disbursement takes place.

Unrecovered Claims

See Claim Payments.

Upper-Middle-Income Countries

In the context of the Paris Club, countries not considered lower-middle-income or low-income countries. These countries receive non-concessional rescheduling terms, originally with flat repayment schedules, but in the 1990s increasingly with graduated payment schedules that have a maturity of up to 15 years and a grace period of two to three years for commercial credits. Official development assistance credits are rescheduled over ten years, including a grace period of five to six years. The World Bank classifies as upper-middle income those countries with GNI per capita income of between $4,036 and $12,475 in 2011. Income classifications are set each year on July 1, and are fixed during the period ending on June 30 of the following year (see http://data.worldbank.org/about/country-classifications).

V

Vienna Initiative

The European Bank Coordination “Vienna Initiative” is a framework for safeguarding the financial stability of emerging Europe. The Initiative was launched at the height of the first wave of the global crisis in January 2009. It brought together all the relevant public and private sector stakeholders of EU-based cross-border banks active in emerging Europe, which own much of the banking sectors in that region and also hold a significant part of government securities. The Initiative has provided a forum for decision making and coordination that helped prevent a systemic banking crisis in the region and ensured that credit kept flowing to the real economies during the crisis. The European Bank for Reconstruction and Development, European Investment Bank, European Commission, IMF, and the World Bank played a key role in the creation and further development of the Vienna Initiative (see www.vienna-initiative.com/).

W

World Bank Group

Founded in 1944, the World Bank Group (or World Bank) consists of five closely associated institutions: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). The World Bank is the world’s largest source of development assistance; its main focus is on helping the poorest people and the poorest countries through IDA credits (concessional lending) and on providing IBRD loans to low- and middle-income countries for developmental purposes. To achieve its poverty-reduction mission, the World Bank focuses on investing in people, particularly through basic health and education; protecting the environment; supporting and encouraging private business development; and promoting reforms to create a stable macroeconomic environment and long-term economic growth.

Write-Off

See Debt Write-off.

Y

Yield-to-Maturity

The yield-to-maturity rate is the rate at which the present value of future interest and principal payments, i.e., all future cash flows from the bond, equals the price of the bond.

Appendix 4. External Debt Statistics, International Investment Position, and National Accounts

1. In the Guide, linkages between external debt statistics, the international investment position (IIP), and the national accounts have been developed and explained. This appendix further explains the relationship between external debt statistics and the IIP (within external sector statistics), and between the national accounts and the IIP, such that data on the IIP can be incorporated into the external account components of the rest of the world account of the national accounts system, bringing compilation and collection efficiency gains as well as analytical benefits.

The Link between External Debt Statistics and the IIP

2. The BPM6 gives increased emphasis to the IIP statistics in international accounts compilation and analysis. As mentioned in Chapter 4, provided that debt securities are valued at market value, the gross external debt position, as presented in the Guide, equals the debt liabilities in the IIP statement, i.e., the gross external debt position equals total IIP liabilities excluding all equity (equity shares and other equity) and investment fund shares and financial derivatives and employee stock options (ESOs), allowing comparability across datasets. Table A4.1 provides a summary presentation of the IIP that facilitates the identification of debt liabilities covered, and the corresponding items in the gross external debt position (as presented in Table 4.1).1 The columns show the breakdown of the IIP by institutional sector, and the assets and liabilities by functional category are shown in the rows, with debt instruments separately identified in the liabilities section of the table (shaded areas in the table do not cover debt liabilities). The last column identifies the debt item as shown in the gross external debt position (Table 4.1).

Table A4.1

International Investment Position and External Debt Statistics

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In the IIP standard components, debt instruments classified as direct investment are not required to be presented broken down by type of instrument. Debt securities may be separately compiled as a supplementary item.

Note: shaded areas do not cover debt liabilities. NA = Not Applicable.

3. In the IIP, positions of financial assets and liabilities should, in general, be valued as if they were acquired in market transactions on the balance sheet reporting date (BPM6, paragraph 3.84). Whereas the basic valuation method for debt securities is the market value, the nominal value is encouraged as a supplementary item (BPM6, paragraph 7.30). The Guide recommends that debt instruments be valued at the reference date at nominal value, and, for debt securities, at market value as well. For instance, Table 4.1 provides information on both values for debt securities. In addition, Table 7.16 provides a framework for reconciling nominal and market valuation of debt securities included in the gross external debt position. Nonnegotiable instruments include loans, deposits, and other accounts receivable/payable, and the primary valuation for positions in these instruments is nominal value in both datasets—IIP and external debt statistics. Therefore, data consistency between debt instruments (liabilities) recorded in the IIP and in the gross external debt position can be ensured.

4. As discussed in Chapter 15, the financial structure of economies—the composition and size of the liabilities and assets on the economy’s financial balance sheet—has been an important source of vulnerability. Data series described and presented in Part I of the Guide—notably sector, currency and maturity breakdown of external debt data—facilitate the examination of potential vulnerabilities of balance sheets of key sectors of an economy. To support this type of analysis, a currency composition and remaining maturity analysis of the IIP is also additional information in the BPM6: memorandum and supplementary tables to the standard components of the IIP respectively provide a presentation of currency composition of assets and liabilities and of remaining maturity of long-term debt liabilities, with a breakdown by sector.2 These definitions and tables are consistent with the presentation adopted in the Guide.

The Link Between the IIP and the National Accounts

5. As mentioned in the BPM6, Appendix 7, the international accounts are closely linked to the System of National Accounts (SNA) and there are many similarities in the underlying accounting system. The SNA records the exchanges between the domestic economy and the rest of the world as if the rest of the world were a distinct institutional sector of the economy. From this perspective, the international accounts mirror the rest of the world sector, recording the exchanges (flows and positions) of all resident units with the nonresident units from the domestic economy perspective.

Financial Accounts and Balance Sheets in the SNA

6. The financial account records transactions that involve financial assets and liabilities and that take place between resident institutional units and between resident institutional units and the rest of the world. The left-hand side of the account—as presented in the SNA—records acquisitions of financial assets less disposals, while the right-hand side records incurrence of liabilities less their repayment.3

7. The financial account is the final account in the full sequence of accounts that records transactions between institutional units. Net saving is the balancing item of the use of income accounts, and net saving plus net capital transfers receivable or payable can be used to accumulate nonfinancial assets. If they are not exhausted in this way, the resulting surplus is called net lending. Alternatively, if net saving and capital transfers are not sufficient to cover the net accumulation of nonfinancial assets, the resulting deficit is called net borrowing.

8. The key features of financial accounts are that (1) they identify the liabilities that institutional sectors use to finance their deficits, and the financial assets that institutional sectors use to allocate their surpluses; (2) they facilitate analysis of the flow of funds between different institutional sectors of the economy; (3) they place emphasis on stock variables such as financial assets and debt; and (4) they are developed from detailed information on the various institutional sectors and their activities in financial assets/liabilities.

9. Assets, both nonfinancial and financial, and liabilities can be aggregated across all types so as to show the total value of assets less liabilities, or net worth, of an institutional unit or group of units.4 Tables describing this sort of aggregation are called balance sheets. A balance sheet may be drawn up for institutional units, institutional sectors and the total economy.5 A similar account is drawn up showing the stock levels of assets and liabilities originating in the total economy held by nonresidents and of foreign assets and liabilities held by residents. In the BPM6 this account is called the IIP but is drawn up from the point of view of residents whereas in the SNA it is drawn up from the point of view of the rest of the world with the rest of the world being treated in the same way as domestic sectors (2008 SNA, paragraph 13.2). In this context, the balance sheet in the SNA measures the stocks of assets, both nonfinancial and financial, and liabilities aggregated across all types and institutional sectors6 so as to derive at the end the net worth by institutional sector and total economy.

10. Net worth is defined as the value of all the assets owned by an institutional unit or sector less the value of all its outstanding liabilities. For the economy as a whole, the balance sheet shows the sum of non-financial assets and net claims on the rest of the world. This sum is often referred to as national wealth (2008 SNA, paragraph 13.4).

11. The balance sheet completes the sequence of accounts, showing the ultimate result of the entries in the production, distribution and use of income, and accumulation accounts. The existence of a set of balance sheets integrated with the flow accounts encourages analysts to look more broadly when monitoring and assessing economic and financial conditions and behavior.

12. The balancing item on the balance sheets is net worth. For the IIP, it is the net IIP, which is mirrored by the net worth for the rest of the world sector. Unlike the SNA’s balance sheets, the IIP covers only financial assets and liabilities. Nonfinancial assets are excluded as they do not have a counterpart liability or other international aspect.7 In the case of financial claims, the cross-border element arises when one party is a resident and the other party is a nonresident. In addition, while gold bullion is an asset that has no counterpart liability, it is included in the IIP when held as a reserve asset, because of its role as a means of international payments.

A Simplified Version of the Balance Sheet

13. The balance sheet records assets on the left-hand side and liabilities and net worth on the right-hand side, as do the accumulation accounts for changes in these items. A balance sheet relates to the values of assets and liabilities at a particular point in time. The SNA provides for balance sheets to be compiled at the beginning of the accounting period (with the same values as at the end of the preceding period) and at its end. The SNA then provides for a complete recording of the changes in the values of the various items in the balance sheet between the beginning and end of the accounting period to which the flow accounts of the SNA relate. Changes in net worth can thus be explained fully only by examining the changes in all the other items that make up the balance sheet (2008 SNA, paragraph 13.10). In Table A4.2, only the closing positions for a limited number of classes of assets are shown.

Table A4.2

Simplified Version of Balance Sheet Accounts

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Source: BPM6, Chapter 2 and 2008 SNA, Chapter 13.

For the purpose of this table, the counterpart liability of “monetary gold and SDRs” holdings is fully shown, as a liability of the rest of the world, to derive the net financial claims of the rest of the world (−487) which mirrors the net IIP.

14. The economy consists of five resident sectors—nonfinancial and financial corporations, general government, households, and NPISH—all of which have relationships with the rest of the world sector. Table A4.2 is a matrix of various balance sheets that shows nonfinancial as well as financial assets and liabilities by sector and instrument, e.g., households hold nonfinancial assets of 1545 as well as financial assets of 3465. For each financial asset/liability, the rows show total assets by sector, and the matching of liability positions. For each sector, the columns show financial assets owned or liabilities incurred, and also the net worth of the sector. The need for consistency among the rows and columns helps to minimize errors in the data.

15. Table A4.2 may be further simplified to show only the balance sheets of the total economy and the rest of the world sector. In Table A4.3, the net worth of the total economy—its national wealth, 5590—equals the sum of a country’s nonfinancial assets—5103—plus its net financial claims on the rest of the world—487. In the balance sheet for the total economy, all financial assets and liabilities between residents are netted out in the consolidation to leave only the net financial assets position (positive or negative) on the rest of the world. For the rest of the world balance sheet, only financial assets and liabilities are shown, e.g., in the balance sheet figures, the value of financial assets of the domestic economy for currency and deposits is 1571 and of liabilities is 1573. This implies that the rest of the world has a net asset with the domestic economy of 2 for currency and deposits. Table A4.3 shows that the asset position of the rest of the world is 116 and the liability position 114. So in the IIP the domestic economy has a net liability position of 2 for currency and deposits.

Table A4.3

Balance Sheet of the Total Economy and the Rest of the World

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Source: BPM6, Chapter 2 and 2008 SNA, Chapter 13.

For the purpose of this table, the counterpart liability of “monetary gold and SDRs” holdings is fully shown, as a liability of the rest of the world, to derive the net financial claims of the rest of the world (-487) which mirrors the net IIP.

A More Detailed Version of Balance Sheets

16. Financial accounts may be expanded into three dimensions to track each instrument category, the financial claims of each sector on each other sector. By indicating who has lent to whom and with what instrument, such a matrix lends considerable analytical power to financial accounts. As with the two-dimensional approach described above, the interlocking row and column constraints of the three dimensional matrix provide an important check on the consistency of data. This is because for each sector, each transaction involves at least, and usually, two balance sheet changes, and similarly for each party of the transaction, each transaction involves two balance sheet changes, e.g., the issue of a new debt security by a nonfinancial corporation that is purchased by a nonresident results in the following entries: the nonfinancial corporation reports the increase in debt securities liabilities, and an increase in currency and deposit assets; while the nonresident reports an increase in debt securities assets, and a reduction in currency and deposits assets.

17. The full three-dimensional matrix is an important analytical tool but, because of the cost and/or the conceptual complexity, relatively few countries have full flow of funds data.8 Table 27.4 in the 2008 SNA, not shown here, illustrates the type of detail that a country may wish to develop. This format facilitates the more detailed financial analysis just described by showing transactions in assets cross-classified by type of asset and by the debtor sector in the first part of the table, and the type of liability cross-classified by the creditor sector in a similar, second part. The sectors transacting in assets or liabilities form the columns of the table while the type of asset, disaggregated by sector of debtor (or creditor in the second part of the table), is shown in the rows. It is also instructive to compile exactly similar tables in terms of the stocks of financial assets and liabilities. Using both matrices, all assets, liabilities, and counterpart combinations can be found.

Comparison Summary of the Rest of the World Balance Sheet Account and the IIP Classification

18. Appendix 7 of BPM6 makes a summary account of the complete concordance between the SNA and the BPM6 in respect to residency, valuation, time of recording, conversion procedures and coverage of flows and stocks. Additionally, Chapter 2 of BPM6—Overview of the Framework—includes a separate annex (Annex 2.2) illustrating with a numeric example (1) the overview of the integrated economic accounts as presented in the 2008 SNA and (2) the links between the financial instruments and the functional categories including the conversion of data from instrument to functional category (Tables A4.2 and A4.3 above are based on this numerical example). Furthermore, BP and IIP standard components (see BPM6, Appendix 9) include the SNA codes, where appropriate, which facilitates comparison between the international accounts and the SNA.

19. The classification system of the SNA and BPM6 employs consistent coverage and terminology. There is, however, a major presentational difference regarding the grouping of the financial assets and liabilities by functional categories as primary level of classification in the external accounts with impact on the financial account, the IIP and the investment income, and the use of the instruments and sectors by the SNA for the same categories.9 The functional categories are the primary classification used for each of financial transactions, positions, and income in the international accounts.

20. Five functional categories of investment are distinguished in the international accounts: (1) direct investment, (2) portfolio investment, (3) financial derivatives (other than reserves) and employee stock options, (4) other investment, and (5) reserve assets. The functional categories are built on the classification of financial assets and liabilities, but with an additional dimension that takes into account some aspects of the relationship between the parties and the motivation for investment. However, data by functional category are further subdivided by instrument and institutional sector, which makes it possible to link them to the corresponding SNA and monetary and financial statistics items. Table A4.4 (Table 6.1 of BPM6) shows the linkages between the financial assets classification and the functional categories.10

Table A4.4

Link between Financial Assets Classification and Functional Categories

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Source: BPM6, Table 6.1.Note: DI = direct investment; PI = portfolio investment; FD = financial derivatives (other than reserves) and employee stock options; OI = other investment; RA = reserve assets.X shows applicable functional categories (x shows cases considered to be relatively uncommon) for the most detailed instrument categories.

SDRs: Assets = Reserve assets; Liabilities = Other investment.

Unlisted shares must be liquid, as stated in the BPM6, paragraph 6.87.