Chapter

Appendix 3. Debt and Related Operations

Author(s):
Sage De Clerck, and Tobias Wickens
Published Date:
March 2015
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This appendix provides guidance on selected issues that may arise in the recording of flows and stock positions related to public sector debt.

Introduction

A3.1 In the recording of debt1 of the general government or public sectors, complex methodological issues can arise with regard to flows (i.e., transactions and other economic flows) and stock positions associated with the debt liabilities. Some of the most common issues are discussed in detail, with examples of their treatment, in Chapter 4 of the PSDS Guide. This appendix provides a summary of the same issues and their treatment.

Debt Reorganization

A3.2 Debt reorganization (also referred to as debt restructuring) is defined as an arrangement involving both the creditor and the debtor (and sometimes third parties) that alters the terms established for servicing an existing debt. Governments are often involved in debt reorganization, as debtor, creditor, or guarantor.

A3.3 Debt reorganization usually involves relief for the debtor from the original terms and conditions of debt obligations. This may be in response to liquidity constraints, where the debtor does not have the cash to meet debt service payments due, or sustainability issues, where the debtor is unlikely to be able to meet its debt obligations in the medium term.

A3.4 A failure by a debtor to honor its debt obligations (e.g., default) does not constitute debt reorganization because it does not involve an arrangement between the creditor and the debtor. Similarly, a creditor can reduce the value of its debt claims on the debtor in its own accounts through debt write offs—unilateral actions that arise, for example, when the creditor regards a claim as unrecoverable, perhaps because of bankruptcy of the debtor, and, as a result, no longer carries the claim on its balance sheet. Again, this is not considered debt reorganization.

A3.5 The four main types of debt reorganization are:

  • Debt forgiveness, which is a reduction in the amount of, or the extinguishing of, a debt obligation by the creditor via a contractual arrangement with the debtor.

  • Debt rescheduling or refinancing (or debt exchange), which is a change in the terms and conditions of the amount owed, which may result in a reduction in debt burden in present value terms.

  • Debt conversion and debt prepayment (or debt buybacks for cash), where the creditor exchanges the debt claim for something of economic value, other than another debt claim, on the same debtor; examples of debt conversion are debt-for-equity swaps, debt-for-real-estate swaps, debt-for-development swaps, and debt-for-nature swaps.2

  • Debt assumption when a third party is also involved.

A3.6 A debt reorganization package may involve more than one of the types just mentioned; for example, most debt reorganization packages involving debt forgiveness also result in a rescheduling of the part of the debt that is not forgiven or cancelled.

Debt Forgiveness

A3.7 Debt forgiveness (or debt cancellation) is defined as the voluntary cancellation of all or part of a debt obligation within a contractual arrangement between a creditor and a debtor. With debt forgiveness, there is a mutual agreement between the parties involved and an intention to convey a benefit. In contrast, with debt write-off, there is no such agreement or intention—it is a unilateral recognition by the creditor that the amount is unlikely to be collected (see paragraphs A3.32–A3.34).3 Debt forgiven may include all or part of the principal outstanding, inclusive of any accrued interest arrears (interest that fell due for payment in the past) and any other interest costs that have accrued. Debt forgiveness includes forgiveness of some, or all, of the principal amount of a credit-linked note arising from an event affecting the entity on which the embedded credit derivative was written. Also included is forgiveness of principal that arises when the debt contract stipulates that the debt will be forgiven if a specified event occurs, such as forgiveness in the case of a type of catastrophe. Debt forgiveness does not arise from the cancellation of future interest payments that have not yet fallen due and have not yet accrued.

A3.8 Debt forgiveness is always recorded as a capital grant or transfer from the creditor to the debtor, which extinguishes the financial claim and the corresponding debt liability. A government or public sector unit may be involved in debt forgiveness as a creditor or a debtor. Market prices are the basis for valuing debt forgiveness, except for loans, where nominal value is used.

A3.9 Although no transactions are recorded for debt forgiveness under the cash basis of recording, the stock positions relating to the debt liability and the corresponding financial asset would reflect the debt forgiveness.

Debt Rescheduling and Refinancing

A3.10 Debt rescheduling and refinancing involve a change in an existing debt contract and its replacement by a new debt contract, generally with extended debt service payments.4 Debt rescheduling involves rearrangements on the same type of instrument, with the same principal value and the same creditor as with the old debt. Debt refinancing entails a different debt instrument, generally at a different value, and possibly with a different creditor.5 For example, a creditor may choose to apply the terms of a Paris Club (see PSDSG, paragraphs 10.125–10.134) agreement either through a debt rescheduling option (changing the terms and conditions of its existing claims on the debtor) or through refinancing (making a new loan to the debtor that is used to repay the existing debt).

Debt rescheduling

A3.11 Debt rescheduling is a bilateral arrangement between the debtor and the creditor that constitutes a formal postponement of debt service payments and the application of new and generally extended maturities. The new terms normally include one or more of the following elements: extending repayment periods, reductions in the contracted interest rate, adding or extending grace periods for the payment of interest and principal, fixing the exchange rate at favorable levels for foreign currency debt, and rescheduling the payment of arrears, if any. In the specific case of zero-coupon securities, a reduction in the principal amount to be paid at redemption to an amount that still exceeds the principal amount outstanding at the time the arrangement becomes effective could be classified as either an effective change in the contractual rate of interest or a reduction in principal with the contractual rate unchanged. Such a reduction in the principal payment to be made at maturity should be recorded as debt forgiveness, or debt rescheduling if the bilateral agreement explicitly acknowledges a change in the contractual rate of interest. Paris Club creditors provide debt relief to debtor countries in the form of rescheduling, which is debt relief by postponement or, in the case of concessional rescheduling, reduction in debt service obligations during a defined period (flow treatment) or as of a set date (stock treatment).

A3.12 With debt rescheduling, the applicable existing debt is recorded as being repaid and a new debt instrument (or instruments) created with new terms and conditions. This treatment does not apply, however, to interest arrears that are rescheduled when the conditions in the existing debt contract remain unchanged. In such a case, the existing debt contract is not considered as rescheduled, only the interest arrears. A new debt instrument is recorded for the rescheduled interest arrears.

A3.13 The debt rescheduling transaction is recorded at the time agreed to by both parties (the contractually agreed time), and at the value of the new debt (which, under a debt rescheduling, is the same value as that of the old debt). If no date is set, the time at which the creditor records the change of terms is decisive. If the rescheduling of obligations due beyond the current period is linked to the fulfillment of certain conditions, when the obligations fall due (such as multiyear Paris Club rescheduling), entries are recorded only in the period when the specified conditions are met.

Debt refinancing

A3.14 Debt refinancing involves the replacement of an existing debt instrument or instruments, including any arrears, with a new debt instrument or instruments. It can involve the exchange of the same type of debt instrument (such as a loan for a loan) or different types of debt instruments (such as a loan for a bond). For example, a public sector unit may convert various export credit debts into a single loan, or exchange existing bonds for new bonds through exchange offers given by its creditor (rather than a change in terms and conditions).

A3.15 The treatment of debt refinancing transactions is similar to debt rescheduling. The debt being refinanced is extinguished and replaced with a new financial instrument, or instruments. The old debt is extinguished at the value of the new debt instrument, except for nonmarketable debt (e.g., a loan) owed to official creditors.

A3.16 If the refinancing involves a direct debt exchange, such as a loan-for-bond swap, the debtor records a reduction in liabilities under the appropriate debt instrument and an increase in liabilities to show the creation of the new obligation. The transaction is recorded at the value of the new debt (reflecting the current market value of the debt), and the difference between the value of the old and new debt instruments is recorded as a holding gain or loss. However, if the debt is owed to official creditors and is nonmarket-able, the old debt is extinguished at its original value with the difference in value with the new instrument recorded as debt forgiveness (see paragraphs A3.7–A3.9). Where there is no established market price for the new bond, an appropriate proxy is used. For example, if the bond is similar to other bonds being traded, the market price of a traded bond would be an appropriate proxy for the value of the new bond. If the debt being swapped was recently acquired by the creditor, the acquisition price would be an appropriate proxy. Alternatively, if the interest rate on the new bond is below the prevailing interest rate, the discounted value of the bond, using the prevailing interest rate, could serve as a proxy. If such information is not available, the face value of the bond being issued may be used as a proxy. See also debt-for-equity conversion in paragraph A3.21).

A3.17 The balance sheet reflects the changes in the stock positions as a result of the transactions extinguishing the old debt instrument and creating the new debt instrument along with any valuation changes. For example, a loan-for-bond exchange will generally result in a reduction in the liabilities of the debtor (reduction in the claim of the creditor on the debtor) because the loan is recorded at nominal value, while the bond is recorded at market value, which may be lower.

A3.18 If the proceeds from the new debt are used to partially pay off the old (existing) debt, the remaining old debt is recorded being extinguished and a new debt instrument is created (equal to the value of the remaining old debt extinguished), unless the old debt is paid off through a separate transaction.

A3.19 If the terms of any new borrowings are concessional, the creditor could be seen as providing a transfer to the debtor. Debt concessionality is discussed in paragraphs A3.39–A3.41.

Debt Conversion and Debt Prepayment

Debt conversion

A3.20 Debt conversion (swap) is an exchange of debt—typically at a discount—for a nondebt claim (such as equity), or for counterpart funds that can be used to finance a particular project or policy. In essence, public sector debt is extinguished and a non-debt liability created in a debt conversion.

A3.21 A common example of debt conversion is debt-for-equity swaps.6 Determining the value of the equity may be difficult if the equity is not actively traded on a market, as is likely to be the case if the unit that issued the equity is a controlled public corporation. If the equity is not traded, its valuation should be based on one of the methods set out in paragraph 7.173.

A3.22 Further examples of debt conversions are other types of debt swaps (such as external debt obligations for exports or “debt-for-exports”) or debt obligations for counterpart assets that are provided by the debtor to the creditor for the creditor to use for a specified purpose, such as wildlife protection, health, education, and environmental conservation (debt-for-sustainable-development).

A3.23 Direct and indirect debt conversions should be distinguished. A direct swap leads directly to the acquisition of a nondebt claim on the debtor (such as a debt-for-equity swap). An indirect debt conversion involves another claim on the economy, such as a deposit, that is subsequently used to purchase equity.

Debt prepayment

A3.24 Debt prepayment consists of a repurchase, or early payment, of debt at conditions that are agreed between the debtor and the creditor. The debt is extinguished in return for a cash payment agreed between the debtor and the creditor. The transaction is recorded at the value of the debt prepaid. Debt prepayment could be driven by the debtor’s need to reduce the cost of its debt portfolio by taking advantage of favorable economic performance or market conditions to repurchase debt.

A3.25 If the debt is owed to official creditors and is nonmarketable (e.g., a loan), an element of debt forgiveness could be involved (i.e., if the prepayment occurs within an agreement between the parties with an intention to convey a benefit). As explained in the section on debt forgiveness (see paragraph A3.8), a capital transfer or capital grant from the creditor to the debtor is recorded for debt forgiveness, which reduces the value of the outstanding liability/claim.

Debt Assumption and Debt Payments on Behalf of Others

Debt assumption

A3.26 Debt assumption is a trilateral agreement between a creditor, a former debtor, and a new debtor (typically a government unit), under which the new debtor assumes the former debtor’s outstanding liability to the creditor, and is liable for repayment of debt. Calling a guarantee is an example of debt assumption. If the original debtor defaults on its debt obligations, the creditor may invoke the contract conditions permitting the guarantee from the guarantor to be called. The guarantor unit must either repay the debt or assume responsibility for the debt as the primary debtor (i.e., the liability of the original debtor is extinguished). A public sector unit can be the debtor that is defaulting or the guarantor. A government can also, through agreement, offer to provide funds to pay off the debt obligation of another government unit owed to a third party.7

A3.27 The statistical treatment of debt assumption depends on (i) whether the new debtor acquires an effective financial claim on the original debtor, and (ii) if there is no effective financial claim, the relationship between the new debtor and the original debtor and whether the original debtor is bankrupt or no longer a going concern.8 This implies three possibilities (see Figure A3.1):

Figure A3.1Decision Tree for the Statistical Treatment of Debt Assumption

1 An “effective financial claim” is understood to be a claim that is supported by a contract between the new debtor and the original debtor, or (especially in the case of governments) an agreement, with a reasonable expectation to be honored, that the original debtor will reimburse the new debtor.

  • The debt assumer (new debtor) acquires an effective financial claim on the original debtor. The debt assumer records an increase in debt liabilities to the original creditor, and an increase in financial assets, such as in the form of loans, with the original debtor as the counterparty. The original debtor records a decrease in the original debt liability to the creditor and an increase in liabilities, such as in the form of a loan, to the debt assumer. The value of the debt assumer’s claim on the original debtor is the present value of the amount expected to be received by the assumer. If this amount is equal to the liability assumed, no further entries are required.

    If the amount expected to be recovered is less than the liability assumed, the debt assumer records an expense in the form of capital transfer/grant to the original debtor for the difference between the liability incurred and the financial asset acquired in the form of loans. For the debt assumer, gross debt increases by the amount of debt assumed.

  • The debt assumer (new debtor) does not acquire an effective financial claim on the original debtor. This may be the case when the original debtor is bankrupt or no longer a going concern, or when the debt assumer seeks to convey a benefit to the original debtor. The debt assumer records an expense in the form of a capital transfer/grant to the original debtor, and an increase in debt liabilities to the original creditor. The original debtor records revenue in the form of a capital transfer/grant, which extinguishes the debt liability on its balance sheet.

    The exception to this case is when the original debtor is a public corporation that continues to be a going concern, which is discussed next.

  • The debt assumer (new debtor) does not acquire an effective financial claim and the original debtor is a public corporation that continues to be a going concern. The debt assumption amounts to an increase in the equity owned by the debt assumer in the public corporation (original debtor). The debt assumer records an increase in debt liabilities to the original creditor, and an increase in financial assets in the form of equity and investment fund shares. The public corporation records a decrease in the debt liability to the original creditor, and an increase in nondebt liabilities in the form of equity and investment funds shares.

A3.28 A special case is where debt assumption involves the transfer of nonfinancial assets (such as fixed assets or land) from, for example, a public corporation (original debtor) to the debt assumer (new debtor). In this case, the debt assumer records an increase in debt liabilities to the original creditor and the acquisition of a nonfinancial asset(s). If the market value of the nonfinancial asset(s) is equal to the value of the liability assumed, no further entries are required. A capital transfer/grant between the debt assumer and original debtor is recorded for any difference between the value of the liability assumed and the market value of the nonfinancial assets.

A3.29 Although no transactions are recorded for debt assumption under the cash basis of recording, the stock positions would change due to the debt assumption. Any subsequent payments in cash relating to the assumed debt would be recorded as interest, and/or transactions in financial assets other than cash and liabilities, as relevant.

Debt payments on behalf of others

A3.30 Rather than assuming a debt, a public sector unit may decide to repay that debt or make a specific payment on behalf of another institutional unit (original debtor), without a guarantee being called or the debt being taken over. In this case, the debt stays recorded solely on the balance sheet of the other institutional unit, the only legal debtor. While this activity is similar to debt assumption, as the existing debt remains with unaltered terms, debt payment on behalf of others is not considered debt reorganization. Such a situation may occur where a debtor is experiencing temporary liquidity difficulties rather than permanent solvency problems.9

A3.31 The treatment of debt payments on behalf of others depends on whether the public sector unit paying the debt acquires an effective financial claim on the debtor.

  • If the paying unit obtains an effective financial claim on the original debtor, the paying unit records an increase in financial assets (e.g., loans) and a decrease in currency and deposits. The recipient (debtor) records a decrease in the original debt liability and an increase in another liability—which may be debt or nondebt—to the paying unit. If the claim of the paying unit on the debtor is in the form of a debt instrument, gross debt and net debt of the paying unit and recipient (debtor) do not change. However, if the claim of the paying unit on the debtor is in the form of a nondebt instrument—for example, equity:

    • For the paying unit, gross debt remains unchanged, but net debt increases (due to the reduction in its financial assets in the form of currency and deposits).

    • For the recipient (debtor), gross debt and net debt decrease (due to the reduction in the debt liability).

  • If the paying unit does not obtain an effective financial claim on the original debtor, the paying unit records an expense in the form of a capital transfer—classified according to the nature of the recipient—and a decrease in financial assets in the form of currency and deposits. The receiving unit (debtor) records a revenue in the form of a capital transfer—classified according to the nature of the paying unit—and a decrease in the original debt liability.

Other Debt-Related Issues

Debt Write-Offs and Write-Downs

A3.32 Debt write-offs or write-downs refer to unilateral reductions by a creditor of the amount owed to it. This usually occurs when a creditor concludes that a debt obligation has no value or a reduced value because part or all of the debt is not going to be repaid (frequently because the debtor is insolvent). For example, a public corporation that borrowed from the general government unit may be insolvent. As a result, the general government unit’s claim loses some, or all, of its value and is written down or written off on the balance sheet of the government unit (creditor).10 In contrast, a unilateral write-off by a debtor, or debt repudiation, is not recognized in the macroeconomic statistical systems.

A3.33 Unlike debt forgiveness (see paragraphs A3.7–A3.9), which is a mutual agreement and, therefore, a transaction, a debt write-off or write-down is a unilateral action and, therefore, recorded as other changes in the volume of assets. The financial asset is removed from the balance sheet of the creditor and the corresponding liability should be removed from the balance sheet of the debtor, also through other changes in the volume of assets, to maintain consistency in the macroeconomic statistics.11

A3.34 Although no transactions are recorded for a debt write-off or write-down under the cash basis of recording, the stock positions relating to these operations would be reduced, reflecting the debt write-off or write-down.

New Money Facilities

A3.35 In some arrangements that assist the debtor to overcome temporary financing difficulties, new money facilities are agreed with the creditor to repay maturing debt obligations. The two debt instruments involved—the maturing debt obligation and the new money facility—are treated separately.

A3.36 The creditor records a reduction in the original claim on the debtor and an increase in a new claim on the debtor. Similarly, the debtor records a reduction in the original liability to the creditor and an increase in a new liability to the creditor. If the terms of the new borrowings are concessional, the creditor could be seen as providing a transfer to the debtor. (Debt concessionality is discussed in paragraphs A3.39–A3.41.)

Debt Defeasance

A3.37 With defeasance, 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. Defeasance may be carried out by placing the assets and liabilities in a separate account within the institutional unit concerned or by transferring them to another unit. In either case, the macroeconomic statistical systems do not recognize defeasance as affecting the outstanding debt of the debtor. Thus, no transactions with respect to defeasance are recorded in the GFS framework, as long as there has been no change in the legal obligations of the debtor. When the assets and liabilities are transferred to a separate account within the unit, both assets and liabilities should be reported on a gross basis. If a separate entity resident in the same economy is created to hold the assets and liabilities, that new unit should be treated as an ancillary entity and consolidated with the defeasing unit.

A3.38 The sectorization of restructuring agencies (also referred to as “defeasance structures”) is discussed in paragraphs 2.129–2.131.

Debt Concessionality

A3.39 There is no consistent definition or measure of debt concessionality in macroeconomic statistics. However, it is generally accepted that concessional loans occur when units lend to other units and the contractual interest rate is intentionally set below the market interest rate that would otherwise apply. The degree of concessionality can be enhanced with grace periods,12 and frequencies of payments and maturity periods favorable to the debtor.

A3.40 Since the terms of a concessional loan are more favorable to the debtor than market conditions would otherwise permit, concessional loans effectively include a transfer from the creditor to the debtor. However, the means of incorporating the transfer impact within macroeconomic statistics have not been fully developed, although various alternatives have been advanced. Accordingly, until the appropriate treatment of concessional debt is agreed, information on concessional debt should be provided in a memorandum item to the balance sheet (see paragraph 7.246) and/or in supplementary tables.

A3.41 The case of Paris Club debt concessionality is discussed in Chapter 4 of the PSDS Guide.

Debt Arising from Bailout Operations

A3.42 A bailout refers to a rescue from financial distress. It is often used when a government unit provides either short-term financial assistance to a corporation to help it survive a period of financial difficulty, or a more permanent injection of financial resources to help recapitalize the corporation. A bailout may, in effect, constitute nationalization if the government acquires control of the corporation it is bailing out. Bailouts of financial institutions are a case in point. They are likely to involve highly publicized, one-time transactions often involving large amounts and are, therefore, easy to identify.

A3.43 Analysts generally refer to “capital injections” made by government into corporations when some significant financial support is provided to capitalize or recapitalize the corporation in financial distress. The 2008 SNA uses “capital injections” to mean a direct intervention that is recorded in macroeconomic statistics either as a capital transfer, a loan, an acquisition of equity, or a combination of these. Direct intervention by general government units may take various forms—for example:

  • Providing recapitalization through an injection of financial resources (“capital injection”) or the assumption of a failed corporation’s liabilities.

  • Providing loans and/or acquiring equity in the corporations in distress (i.e., “requited recapitalization”) on favorable terms, or not.

  • Purchasing assets from the financially distressed corporation at prices greater than their true market value.

A3.44 Indirectly, general government may intervene by extending the range of guarantees it is prepared to offer.

A3.45 Broadly, two main issues arise with bailout operations:

  • The first issue is the sectorization of the entity or unit created to finance or manage the sales of assets and/or liabilities of the distressed corporation. The sectorization is important, in particular, for determining whether its transactions, other economic flows, and stock positions (debt liabilities and other assets and liabilities) are within the general government sector or public corporations sector.

  • The second issue is the appropriate statistical treatment of “capital injections.”

The sectorization issue

A3.46 A government might create a restructuring agency (or “defeasance structure”) in the form of a special purpose entity (SPE), or other type of public body, to finance or to manage the defeasance of impaired assets or repayment of liabilities of the distressed corporation.13 As is the case with all entities in macroeconomic statistics, the sectorization of a restructuring agency should reflect the underlying economic nature of the entity. Thus, the sectorization rules, as outlined in Chapter 2, should be applied to determine whether such an entity or unit should be treated as part of the general government sector or public financial corporations sector:

  • If a public institutional unit is created by government solely to assume management of the assets or liabilities of the distressed corporation, and is not a market producer, the unit should be classified in the general government sector because it is not involved in financial intermediation.

  • If the new unit has other functions and the management of the assets or liabilities of the distressed corporation is a temporary task, its classification as a government unit or a public financial corporation is made according to the rules described in the section on restructuring agencies in paragraphs 2.129–2.131.

Statistical treatment of “capital injections”

A3.47 The assistance provided by government (or another public sector unit) to the unit suffering financial distress is usually recorded as a loan, a capital transfer, or an equity injection. Figure A3.2 provides a decision tree for the statistical treatment of “capital injections.”

Figure A3.2Decision Tree for the Statistical Treatment of “Capital Injections”

1 An “effective financial claim” is understood to be a claim that is supported by a contract between the new debtor and the original debtor, or (especially in the case of governments) an agreement, with a reasonable expectation to be honored, that the original debtor will reimburse the new debtor.

2 A realistic rate of return on funds is indicated by the intention to earn a rate of return that is sufficient to generate dividends or holding gains at a later date, and that is a claim on the residual value of the corporation.

A3.48 When a public sector unit (investor unit), such as a government unit, intervenes by means of a capital injection that is legally in the form of a loan to the corporation in distress, the statistical treatment depends on whether the investor unit obtains an effective financial claim on the corporation, as described in paragraph A3.27.

A3.49 When a public sector unit, such as government, intervenes by means of a capital injection other than a loan to the corporation in distress, the statistical treatment depends on whether a realistic return14 can be expected on this investment:

  • If the public sector unit (investor unit) can expect a realistic return on the investment, the investor unit records an increase in financial assets in the form of equity and investment fund shares, and a decrease in financial assets (e.g., currency and deposits) or an increase in liabilities, depending on how the acquisition of equity is financed. The corporation in financial distress records an increase in financial assets (e.g., currency and deposits), and an increase in nondebt liabilities in the form of equity and investment fund shares.

  • The portion of the investment on which no realistic return can be expected—which may be the entire investment—is treated as a capital transfer.

A3.50 A capital injection in the form of a capital transfer (full or partial) is recorded when the funds are provided:

  • Without receiving anything of equal value in exchange

  • Without a reasonable expectation of a realistic rate of return

  • To compensate for the impairment of assets or capital as a result of large operating deficits accumulated over two or more years, and exceptional losses due to factors outside the control of the enterprise.

A3.51 The unit providing the assistance records expense in the form of a capital transfer and a decrease in financial assets (e.g., currency and deposits) or an increase in liabilities, depending how this capital transfer is financed. The recipient records revenue in the form of a capital transfer and an increase in financial assets in the form of currency and deposits.

A3.52 In determining the magnitude of the capital transfers, the following points need to be taken into account:

  • If the government buys assets from the corporation to be assisted, the amount paid may be more than the true market price of the assets.

  • The purchase of assets should be recorded at the current market price, and, except for loans, a capital transfer should be recorded for the difference between the market price and the actual amount paid.

  • Governments often buy loans from financial institutions during a bailout. Unless a loan becomes tradable and is traded at an established market value, it is always recorded in balance sheets at nominal value. Only if a market for the loans develops and the loans are regularly traded, they are reclassified as securities (see paragraphs 7.157 and 7.163) and also recorded at market value.

  • When government buys a loan that has a fair value much less than its nominal value, no capital transfer for the difference in value is recorded as loans are recorded at nominal value on the balance sheet. Any difference between the price paid and the nominal value is recorded as a valuation change (see BPM6 paragraph 9.33). However, if there is reliable information that some loans are irrecoverable, their value is reduced to zero in the balance sheet (with an “other volume change”) and a capital transfer is recorded equal to the value paid by the government to the corporation. If some or all of these loans subsequently become recoverable, this is shown as a revaluation in the government’s balance sheet.

  • If government extends a guarantee as part of a bailout, the guarantees should be recorded according to whether this is a one-off guarantee or part of a standardized guarantee scheme (see paragraphs 7.254–7.260 for details on the statistical treatment of guarantees).

A3.53 Additional factors should be taken into account for borderline cases, such as the following:

  • If the capital injection is covering large operating deficits accumulated over two or more years or exceptional losses due to factors outside the control of the enterprise, the capital injection is, by definition, a capital transfer.

  • If capital injection is made to a quasi-corporation that has negative equity (see Box 6.3), the capital injection is always a capital transfer.

  • If the capital injection is undertaken for specific purposes relating to public policy in order to compensate a bank in financial distress for anticipated defaults/bad assets/losses within its balance sheet, the capital injection is a capital transfer, unless a realistic return can be expected, in which instance an equity investment is recorded.

  • If there are private shareholders providing a significant share (in proportion to their existing shareholding) of equity during the injection, then the capital injection is an equity investment since the assumption is that private investors would be seeking a return on their investment.

Debt of Special Purpose Entities

A3.54 Special purpose entities (SPEs) are described in paragraphs 2.136–2.139. For GFS, the appropriate units and institutional sectorization of the SPE must be determined. If the SPE is part of the public sector, its debt should be part of the debt of the public sector or relevant subsector.

A3.55 As noted in paragraphs 2.41–2.45, governments may establish public corporations that sell goods or services exclusively to government, without tendering for a government contract in competition with the private sector. Such a public corporation is called an artificial subsidiary and should be classified as part of the general government sector (its parent unit). Often, such government artificial subsidiaries are set up as SPEs. These units, which are legally corporations, should be classified as part of the general government sector and their debt liabilities are thus part of general government debt.

A3.56 A government may conduct fiscal activities through an entity that is resident abroad. For example, a government may fund its outlays by issuing securities abroad through an SPE. This SPE is not part of the general government sector in either home or host economy. Such entities are not treated in the same way as embassies and other territorial enclaves because they operate under the laws of the host economy. Governments may be direct investors in these units/entities. However, special imputations of transactions and stock positions between the government and the SPE abroad must be used to ensure that any fiscal operations undertaken through nonresident entities are reflected in the transactions and stock positions of the home government concerned.15 As a result, the government will show an actual, or imputed, debt to its SPE arising from any debts the SPE incurs on behalf of the government.

A3.57 When an SPE entity resident in one economy borrows on behalf of the government of another economy, and the borrowing is for fiscal purposes, the statistical treatment in the accounts of that government is as follows:

  • At the time of borrowing—A transaction creating a debt liability of the government to the borrowing entity is imputed equal to the amount borrowed. The counterpart entry is an increase in the government’s equity in the borrowing entity.

  • At the time funds or assets acquired with the funds (as applicable) are transferred to the government—A transaction for the flow of funds or assets is recorded, matched by a reduction of the government’s equity in the borrowing entity by the same amount.

  • At the time expenses are incurred, or assets are transferred by the borrowing entity to a third party (i.e., are not transferred to the government), where applicable—A current or capital transfer between the government and the entity is imputed, with the matching entry of a reduction in the value of the government’s equity.

A3.58 These entries are made symmetrically for both the government and the borrowing entity. The entries do not affect the transactions or stock positions between the borrowing entity and its creditors or other third parties, which are recorded as they occur, with no imputations.

Debt Arising from Securitization

A3.59 Securitization occurs when a unit, named the originator, conveys the ownership rights over financial or nonfinancial assets, or the right to receive specific future flows, to another unit, named the securitization unit. In return, the securitization unit pays an amount to the originator from its own source of financing. The securitization unit obtains its own financing by issuing debt securities using the assets or rights to future flows transferred by the originator as collateral.16 When asset-backed securities are issued by a public sector unit, they form part of public sector debt.

A3.60 Securitization results in debt securities for which coupon or principal payments (or both) are backed by specific financial or nonfinancial assets or future revenue streams. A variety of assets or future revenue streams may be used for securitization, including residential and commercial mortgage loans, consumer loans, government loans, and credit derivatives. A general government unit may issue debt securities backed by specific earmarked revenue. In macroeconomic statistical systems, the ability to raise taxes or other government revenue is not recognized as a government asset that could be used for securitization.17 Nevertheless, the earmarking of future revenue, such as receipts from toll roads, to service debt securities issued by a general government (or public sector) unit may resemble securitization (see paragraphs A3.64 and A3.66).

A3.61 Securitization schemes vary within and across debt securities markets. At the broadest level, a distinction is made about whether a securitization unit is involved. In securitization schemes where debt securities are issued by a securitization unit, the issuing institutional unit is a financial intermediary in the financial corporations sector. The securitization unit is often an SPE. However, as described in paragraph 2.137, resident SPEs functioning in only a passive manner relative to general government and carrying out fiscal activities are not treated as separate institutional units in the macroeconomic statistical systems. Such SPEs are treated as part of the general government sector regardless of their legal status—therefore:

  • If a securitization unit is involved, four types of schemes may be distinguished from a macroeconomic statistics perspective:

    • True-sale securitization,18 which is schemes involving a true transfer (sale) of assets—from a macroeconomic statistics perspective19—from the original asset owner’s balance sheet to that of the securitization unit

    • No true-sale securitization,20 which is schemes that do not involve a true transfer of assets—from a macroeconomic statistics perspective—from the original asset owner’s balance sheet to that of the securitization unit (see footnote 19)

    • No asset securitization,21 which is schemes involving securitization of future revenue streams that are not recognized as assets in macroeconomic statistics

    • Synthetic securitization with a securitization unit,22 which is schemes involving the transfer of credit risk only (but not the transfer of assets), through a securitization unit.

  • If no securitization unit is involved, two types of securitization are possible:

    • On-balance sheet securitization,23 which is schemes in which the original asset owner issues new debt securities and there is no transfer of assets

    • Synthetic securitization without a securitization unit,24 which is schemes involving the transfer of credit risk only (but not the transfer of assets), through the direct issue of debt securities by the original asset owner.

A3.62 True-sale securitization involves debt securities issued by a securitization unit where the underlying assets have been transferred from the original asset owner’s (i.e., the originator’s) balance sheet to that of the securitization unit. The securitization unit uses the proceeds from selling the debt securities to investors to finance the acquisition of the assets. The revenue stream from the pool of assets (typically, interest payments and principal repayments on the loans) is used to make the coupon payments and principal repayments on the debt securities issued. In case of a true-sale securitization by a public sector unit, the original asset owner’s gross debt remains unchanged. The gross debt of the securitization unit increases as a result of the securities issued. If this unit is a public financial corporation, its debt is part of public sector debt. A resident securitization “unit” controlled by a government unit that is an SPE but does not meet the requirements of an institutional unit is treated as part of general government regardless of its legal status. Such an SPE’s debt is part of general government’s debt (see also paragraph A3.61).

A3.63 If no true sale had taken place from a macroeconomic statistics perspective (see footnote 19), the amount received from the securitization unit by the public sector unit as the originator is treated as borrowing, usually in the form of a loan.25 The debt securities issued by the securitization unit are part of public sector debt, if the securitization unit is part of the public sector.

A3.64 No asset securitization involves securitization of future revenue streams. As mentioned in paragraph A3.60, the ability to raise taxes or other government revenue is not recognized as a government asset that could be used for true-sale securitization. In most cases, it is not the rights to the future revenue that are used as collateral, but the obligation of the public sector unit to use a sufficient amount of the future income to repay the borrowing in full. If more income is earned than is needed to repay the borrowing, the excess is retained by the public sector unit. So, if “rights” to future government revenue are transferred to a securitization unit, the amount received from the securitization unit by the public sector unit, arising from the proceeds of the debt securities issue, is treated as borrowing, usually in the form of a loan.26 The revenue stream continues to accrue to government and government uses these proceeds to repay the loan from the securitization unit. The debt securities issued by the securitization unit are part of public sector debt if the securitization unit is part of the public sector.

A3.65 Synthetic securitization involves transfer of the credit risk related to a pool of assets without transfer of the assets themselves, either through a securitization unit or through the direct issuing of debt securities by the original asset owner.

  • Synthetic securitization with a securitization unit: The owner of a pool of assets buys credit default swaps (CDS) (protection buyer) from the securi-tization unit (protection seller) for a premium to obtain protection against possible default losses on the pool of assets.27 The protection seller issues a debt instrument. The proceeds from the issue of debt securities by the securitization unit are invested in low-risk, low-return financial assets (such as deposits), and the income accrued on this investment, together with the premium from the CDS, finances coupon payments on the debt securities due by the securitization unit to the investors. On maturity, the holders of the debt securities are reimbursed, provided there has been no default on the pool of assets. If there is a default, the protection buyer is compensated by the protection seller for the default losses related to the pool of assets, while the holders of the debt securities (investors) suffer losses for the same value, a realized holding gain for the protection seller.

    The debt securities issued by the securitization unit are part of public sector debt if the securitization unit is part of the public sector.

  • Synthetic securitization without a securitization unit: The owner of the asset issues credit-linked notes (CLN). 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. There is usually a higher interest rate to compensate the investors for taking on higher risks. Credit protection for the pool of assets is sold by the investors to the protection buyer (or issuer of the CLN) by buying the CLN. Repayment of principal and interest on the notes is conditional on 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, investors receive the redemption value of the note minus the value of the default losses.

    With synthetic securitization without a securitization unit, the debt securities (CLN) issued by a public sector unit are part of that unit’s debt.

A3.66 On-balance sheet securitization involves debt securities backed by a future revenue stream generated by the assets. The assets remain on the balance sheet of the debt securities issuer (the original asset owner), typically as a separate portfolio. There is no securitization unit involved. The issue of debt securities provides the original asset owner with funds and the debt securities form part of the original asset owner’s debt.

Debt Arising from Off-Market Swaps

A3.67 In macroeconomic statistics, swaps give rise to financial derivatives, which are nondebt instruments (see paragraph 7.215). However, off-market swaps have a debt component.

A3.68 An off-market swap is a swap contract that has a nonzero value at inception as a result of having reference rates priced differently from current market values—that is, “off-the-market.” Such a swap results in a lump sum being paid, usually at inception, by one party to the other. The economic nature of an off-market swap is a combination of borrowing (i.e., the lump sum), in the form of a loan, and an on-market swap (financial derivative). The loan component of an off-market swap is debt and, if a public sector unit receives the lump-sum payment, this will be part of public sector debt. Examples of swaps contracts that may involve off-market reference rates include interest rate and currency swaps.

A3.69 Because the economic nature of an off-market swap is equivalent to a combination of a loan and a financial derivative, two stock positions are recorded in the balance sheet:

  • A loan—a debt instrument—which is equal to the nonzero value of the swap at inception and with a maturity date equivalent to the expiration date of the swap

  • A financial derivative (swap) component—a nondebt instrument—that has a market value of zero at inception.

A3.70 The loan position is a liability of the party that receives the lump sum, while the derivative position may appear either on the financial asset or liability side, depending on market prices on the balance sheet date.

A3.71 Future streams of flows relating to these stock positions are also partitioned between those relating to the loan and financial derivative component, respectively.

On-Lending of Borrowed Funds

A3.72 On-lending of borrowed funds refers to a resident institutional unit, A (usually central government), borrowing from another institutional unit(s), B (usually a nonresident unit), and then on-lending the proceeds from this borrowing to a third institutional unit(s), C (usually state or local governments, or public corporation (s)), where it is understood that unit A obtains an effective financial claim on unit C. On-lending of borrowed funds is motivated by several factors—for example:

  • Institutional unit A may be able to borrow from unit B at more favorable terms than unit C could borrow from unit B

  • Institutional unit C’s borrowing powers are limited by factors such as foreign exchange regulations; only unit A can borrow from nonresidents.

A3.73 On-lending results in (at least) two separate financial claims. These claims should not be offset against each other in government finance and public sector debt statistics; institutional unit B has a debt claim on unit(s) A, and unit(s) A has a debt claim on unit C, which may be consolidated (see paragraph A3.76). Depending on the residence of institutional unit(s) B and C, respectively, these debt liabilities (and the corresponding financial claims) are classified as domestic or external.

A3.74 The statistical treatment of the two claims to be recorded if the resident institutional unit (A), which on-lends the borrowed funds to unit(s) C, obtains an effective financial claim on unit(s) C, depends on:

  • The residence of the creditor(s) from which unit A is borrowing (i.e., unit(s) B)

  • The residence of unit(s) C to which unit A is on-lending the borrowed funds (see Table A3.1).

Table A3.1Summary of the Statistical Treatment of On-Lending of Borrowed Funds by Institutional Unit A
1. Unit A borrows from unit(s) BDepending on the residence of institutional unit(s) B, unit A has a domestic/external debt liability to unit(s) B. (Institutional unit(s) B has a domestic/external financial claim on unit A.)
2. Unit A on-lends to unit(s) CDepending on the residence of institutional unit(s) C, unit A has a domestic/external financial claim on unit(s) C. (Institutional unit(s) C has a domestic/ external liability to unit A.)

A3.75 The classification of the debt liability of institutional unit A to unit(s) B depends on the type of instrument(s) involved: typically, such borrowing is in the form of loans and/or debt securities. In such cases, institutional unit A’s debt liabilities in the form of loans and/or debt securities increase (credit) as a result of the borrowing from unit(s) B, with a corresponding increase (debit) in unit A’s financial assets in the form of currency and deposits. These events result in an increase in the gross debt position of unit A, but no change in its net debt position.

A3.76 The debt liability of institutional unit(s) C to unit A, as a result of the on-lending of the borrowed funds, is typically in the form of a loan. In other words, institutional unit C’s debt liabilities increase (credit) as a result of the borrowing from unit A, with a corresponding increase (debit) in unit C’s financial assets in the form of currency and deposits. Institutional unit A’s financial assets (e.g., loans) will increase (debit) as a result of the on-lending to unit C and its financial assets in the form of currency and deposits will decrease (credit). If institutional unit(s) C is classified to the same sector, subsector, or group of units as unit A, this debt liability (and corresponding financial claim) is eliminated in consolidation.

A3.77 The amortization of each of the debt liabilities (and corresponding financial assets) is recorded in the books of the unit in whose balance sheet the debt liability appears. Thus, if institutional unit A has a debt liability to unit B, the amortization of this (usually external) liability (debit) is recorded in the books of unit A, even if these borrowed funds were on-lent to unit C.

A3.78 Similarly, the amortization of institutional unit C’s (usually domestic) debt liability (debit) to unit A is recorded in the books of unit C. Unit A would record a decrease (credit) in its (domestic) financial claims on unit C. The amortization of institutional unit C’s debt liability to unit A improves unit C’s gross debt position, while its net debt position remains the same.

Stock Positions and Related Flows with the IMF

A3.79 This section briefly describes the stock positions and flows in countries’ financial assets and liabilities arising from membership in the International Monetary Fund (IMF), as they relate to public sector debt statistics. Debt data compilers first have to determine in which public sector unit(s) to record the stock positions and related flows with the IMF. Stock positions and flows in financial assets and liabilities of member countries with the IMF are usually recorded in the accounts of the public sector unit as determined by the legal and institutional arrangements in the member country.

A3.80 The IMF conducts its dealings with a member through the fiscal agency and the depository:

  • Each member country designates a fiscal agency to conduct financial transactions with the IMF on behalf of the member.28

  • Each member is also required to designate its central bank as a depository for the IMF’s holdings of the member’s currency.29 In most member countries, the central bank is both the fiscal agency and the depository.

A3.81 The next sections discuss member countries’ quotas in the IMF, their reserve positions in the IMF, remuneration (interest) receivable from the IMF, the account that is used for administrative payments (the “No. 2 Account”), and their Special Drawing Rights (SDRs) allocations and holdings.

Quotas

A3.82 Member countries are assigned a quota on joining the IMF. A quota is the capital subscription, expressed in SDRs, that each member must pay the IMF on joining and consists of two components:

  • Reserve asset component—A member is required to pay 25 percent of its quota in SDRs or in currencies specified by the IMF. This 25 percent portion is a component of the member’s reserve assets and is known as the “reserve tranche.” In the public sector unit’s accounts, subscribing this portion is shown as a transaction involving an increase in external financial assets in the form of currency and deposits—that is, the reserve tranche position, which is a liquid claim on the IMF (debit), offset by an equal reduction in existing external financial assets30 (credit).

  • Domestic currency component—The remaining 75 percent of the quota is payable in the member’s own currency at the designated depository. The payment is made either in domestic currency (IMF No. 1 Account) or if the member country so chooses, by issuance of a promissory note (in the IMF Securities Account). The No. 1 Account is used for the IMF’s operational transactions (e.g., purchases and repurchases), and small transfers may be made from this account to the No. 2 Account, which is used for the payment of local administrative expenses incurred by the IMF in the member’s currency.31 The promissory notes are encashable by the IMF on demand. The domestic portion of the quota payment is not recorded in the public sector unit’s accounts, because it is considered in economic terms to be of a contingent nature. No interest is payable on either the deposit account or the note.

A3.83 There are periodic reviews of the size of member quotas. Recording transactions that reflect a change in a member’s quota is the same as the recording that takes place when the quota is initially paid.

Reserve position in the IMF

A3.84 A member country’s reserve position in the IMF equals the sum of the reserve tranche plus any indebtedness of the IMF (under bilateral loan agreements, notes, or participation in standing borrowing agreements such as the General Agreements to Borrow and New Agreements to Borrow) in the General Resources Account that is readily available to the member country (for further details, see BMP6, paragraph 6.85). The reserve tranche represents the member’s unconditional drawing right on the IMF, created by the foreign exchange portion of the quota subscription, plus increases (decreases) through the IMF’s sale (repurchase) of the member’s currency to meet the demand for use of IMF resources by other members in need of balance of payments financing. A member’s reserve position in the IMF constitutes part of its reserve assets (external financial assets).

A3.85 To utilize its reserve tranche in the IMF, a member must present a declaration of a balance of payments need and purchase foreign exchange from the IMF with its own currency. The domestic currency, equal to the value of the foreign exchange, is paid into the IMF’s No. 1 Account with the member’s depository or through the issuance to the IMF of a noninterest-bearing promissory note recorded in the IMF’s Securities Account. The transaction is recorded in the public sector unit’s accounts as a reduction in the member’s external financial assets in the form of currency and deposits (i.e., the reserve tranche position in the IMF), which is offset by an increase in the member’s external financial assets (i.e., foreign exchange).

Credit and loans from the IMF

A3.86 A member may make use of IMF credit or concessional loans under the trusts administered by the IMF (for financing for low-income countries) to acquire additional foreign exchange from the IMF. The use of IMF credit and concessional loans results in the same outcome—that is, the member entering into these agreements has access to foreign exchange in return for agreeing to meet a set of conditions. Both IMF credit and concessional loans are classified in the public sector unit’s accounts as external liabilities in the form of loans, although the two types of arrangements are executed in different ways:

  • When a member country uses IMF credit, it “purchases” foreign exchange from the IMF in return for its domestic currency deposited in the IMF No. 1 Account (or backed by the issuance of a promissory note). Use of IMF credit is shown as the member’s loan liability (denominated in SDRs) in the accounts of the public sector unit, reflecting the economic nature of the transaction. Liabilities under IMF credit arrangements are extinguished when the member uses foreign exchange to “repurchase” its domestic currency.

  • The concessional loans, also denominated in SDRs, result in the member borrowing foreign exchange with a commitment to repay. Such loans do not affect the IMF No. 1 Account. Repayments must be made in SDRs or freely useable currencies.

A3.87 If the value of the member’s domestic currency changes in relation to the SDR, “maintenance of value payments” are made once a year in the No. 1, No. 2, and Securities Accounts in domestic currency to maintain a constant SDR liability. Because the liability is denominated in SDRs, the maintenance of value payments are not entered as transactions in the central bank’s accounts, but as holding gains/losses (revaluations) when the domestic currency is used as the unit of account.

A3.88 When the central bank passes on proceeds from IMF borrowing to a general government unit:

  • The central bank has a domestic financial claim (loan) on the general government unit and the general government unit has a domestic debt liability to repay (principal and interest).

  • The central bank has an external debt liability to repay, and may use the debt service payments received from the general government unit to do so.

Remuneration

A3.89 The IMF pays its members “remuneration” quarterly (in SDRs) on the basis of their reserve tranche position, except for a small portion related to prior quota payments in gold that are interest-free resources to the IMF. This remuneration should be recorded on an accrual basis as interest income (revenue) of the public sector unit, which is realized as an increase in its external financial assets in the form of currency and deposits.

IMF No. 2 Account

A3.90 As discussed in paragraph A3.82, the IMF No. 2 Account is used by the IMF for administrative payments and is reflected as a liability in the public sector unit’s accounts. Transactions involving the No. 2 Account are recorded as increases or decreases in this liability and are offset by the source of funds (in the case of an increase) or the use of funds (in the case of a decrease). When the IMF transfers funds from the No. 1 Account to the No. 2 Account, the public sector unit’s accounts will show an increase in its reserve tranche (i.e., currency and deposits). The increase reflects the reduction in IMF holdings of the member’s currency in the No. 1 Account and is offset by an increase in the member’s liabilities relating to currency and deposits.

Special Drawing Rights (SDRs)

A3.91 The SDR is an international reserve asset created by the IMF in 1969. The SDR is administered by the IMF’s SDR Department, which is required by the IMF’s Articles of Agreement to keep its accounts strictly separate from those of the General Department. Members participating in the SDR Department incur the financial asset or liability position unto itself. Given that financial claims on and liabilities to members in the SDR system are attributed on a cooperative basis, a residual partner category—other nonresidents—is used as the counterparty to SDR holdings and allocations.32

A3.92 SDR allocations received by a country are recorded as a liability in the form of SDRs (part of gross debt of the public sector unit) with a corresponding entry for SDR holdings as a financial asset. The calculation of a public sector unit’s net debt takes into account SDR holdings and SDR allocations. Interest income on SDR holdings (revenue) and interest expense on SDR allocations are accrued on a gross basis to the outstanding financial asset and liability, respectively.

A3.93 The SDR allocation is debt of the recipient (i.e., the participant in the SDR Department), and forms part of public sector debt. The SDR holdings are part of the public sector’s financial assets. However, the international statistical systems do not specify on which balance sheet SDR holdings and allocations should be recorded (e.g., the central bank or a general government entity such as the ministry of finance or treasury). This is because SDR allocations are made to IMF members that are participants in the SDR Department of the IMF, and it is for those members to follow domestic legal and institutional arrangements to determine the ownership and recording of SDR allocations and SDR holdings in the public sector.

A3.94 For GFS and public sector debt statistics, it is particularly relevant in which public sector unit’s accounts the SDR holdings and allocations are recorded. If the SDR allocation is recorded on the government’s balance sheet, the allocation is part of general government debt. If the SDR allocation is on the central bank’s balance sheet, the allocation is not part of general government debt but still part of public sector debt.

A3.95 SDRs are held exclusively by participants, the IMF, through the General Resources Account, and prescribed holders,33 and are transferable among them. At the time of the SDR allocation, the amounts recorded as SDR allocations (liabilities) and holdings (financial assets) are identical and on the same public sector unit’s balance sheet. This public sector unit—as official holder—may, subsequently, exchange some or all of its SDR holdings (financial asset) with other official holders for freely usable currency(ies). In this case, the SDR allocations and holdings on the balance sheet of the public sector unit are no longer identical; the SDR holdings are less than the allocations because they have been converted into freely usable currencies (i.e., currency and deposits). As a result, interest payable on the SDR allocation of public sector unit will be larger than interest receivable on its SDR holdings. Interest receivable on the SDR holdings exchanged will accrue to the new holder.

Gross debt and net debt are defined in paragraphs 7.236–7.245.

Some agreements described as debt swaps are equivalent to debt forgiveness from the creditor together with a commitment from the debtor country to undertake a number of development, environmental, etc., expenses. These transactions should be considered under debt forgiveness, as counterpart funds are not provided to the creditor.

Debt forgiveness is unlikely to arise between commercial entities.

If the original terms of the contract provide that the maturity or interest rate terms, or both, change as a result of, for example, a default or decline in credit rating, then this involves a reclassification. In practice, these reclassification entries cancel out within the same instrument category unless the original and new terms have a different principal, different instrument classification, or different maturity classification. In contrast, if the original terms of a debt (typically a loan or debt security, but also other debt instruments) are changed through renegotiation by the parties, this is treated as transactions in the repayment of the original debt and the creation of a new debt liability.

From the debtor perspective, debt refinancing may involve borrowing from a third party to repay a creditor. The definition of debt refinancing used here is a narrower concept reflecting transactions between the debtor and same creditor only.

Often, a third party is involved in a debt-for-equity swap, buying the claims from the creditor and receiving equity in a public corporation (the debtor).

For example, a central government unit offering to provide funds to pay off the debt of a local government unit owed to a bank.

An “effective financial claim” is understood to be a claim that is supported by a contract between the new debtor and the original debtor, or (especially in the case of governments) an agreement, with a reasonable expectation to be honored, that the original debtor will reimburse the new debtor. A “going concern” is understood to be an entity in business, or operating for the foreseeable future.

Debt payments on behalf of others are different from the case where debt may be considered to be assumed at inception when a guarantee has a very high likelihood to be called, as described in paragraph 7.258.

If a bankruptcy still allows some of the debt to be settled, it is possible that the creditor writes off only a part of the claim.

Provisions by the creditor for bad debts or expected losses (sometimes referred to as “write-down”) are not recorded in macroeconomic statistics.

The grace period is the period from the disbursement of the loan until the first payment due by the debtor.

In the case of banks with impaired assets, such entities are commonly referred to as “bad banks.”

A realistic rate of return on funds is indicated by the intention to earn a rate of return that is sufficient to generate dividends or holding gains at a later date, and that is a claim on the residual value of the corporation.

The reason for having a special approach for government entities is that, unlike in the private sector, the nonresident entity undertakes functions at the behest of general government for public policy, not commercial purposes. Without this approach, a misleading picture of government expenditure and debt could arise.

For a detailed discussion of securitization, see Handbook on Securities Statistics, Bank for International Settlements, European Central Bank, and International Monetary Fund, May 2009, as well as the 2008 SNA, paragraphs 22.131–22.133. The Handbook also considers that securitization can occur when there is no securitization unit or transfer of assets.

For example, future tax revenue has not yet accrued, presumably because the event that leads to the tax liability has not yet taken place, and consequently no asset exists on the government balance sheet.

“Type 2” schemes in the Handbook on Securities Statistics and the “first case” of securitization in the 2008 SNA.

To be treated as a sale, the asset must already appear on the balance sheet of the public sector unit (e.g., central government) and there must be a full change of ownership to the securitization unit, as evidenced by the transfer of the risks and rewards linked to the asset. The following must be considered: (i) The purchase price should equal the current market price, otherwise it is not a sale; and (ii) if the originator (e.g., central government) guarantees repayment of any debt related to the asset acquired by the securitization unit, it is unlikely that all of the risks associated with the asset have been transferred and there is, therefore, no sale.

Derived from the “first case” of securitization in the 2008 SNA.

The “second case” of securitization in the 2008 SNA.

“Type 3” schemes in the Handbook on Securities Statistics.

“Type 1” schemes in the Handbook on Securities Statistics.

“Type 3” schemes in the Handbook on Securities Statistics.

When both the originator and the securitization unit are in the public sector, this loan will be eliminated from public sector debt through consolidation.

When both the originator and the securitization unit are in the public sector, this loan will be eliminated from public sector debt through consolidation.

A credit default swap is a financial derivative whose primary purpose is to trade credit default risk.

The fiscal agency may be the member’s treasury (ministry of finance), central bank, official monetary agency, stabilization fund, or other similar agency. The IMF can deal only with, or through, the designated fiscal agency.

If the member has no central bank, it shall designate such other institution as may be acceptable to the IMF.

The type of instrument varies.

When the IMF uses funds from the No. 2 Account to pay for the acquisition of goods and services, the member country shows a reduction in this account and an offset transaction in the use of goods and services.

See paragraph 7.264 for a discussion of the classification of the counterparty by institutional sector.

The IMF has prescribed a limited number of international financial institutions as holders of SDRs.

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