Abstract

The economic and financial crisis is affecting the fiscal accounts of virtually every country. Public sector support for the financial system, fiscal stimulus and the automatic stabilizers, as well as the revenue decline from the downturn in commodity and asset prices, are leading to sharp increases in deficits and debt stocks around the world. Expansionary fiscal policy continues to be necessary in the short term to stimulate economic recovery. But it is now essential that governments reassess the state of their public finances in light of the global crisis and adopt strategies that will ensure medium- and long-term fiscal sustainability. Many of the advanced economies most affected by the crisis are also those where age-related spending will increase markedly in the coming years, adding particular urgency to the need to identify medium-term consolidation strategies. This new paper, which focuses mainly on advanced and emerging market economies, employs projections based on the April 2009 World Economic Outlook to quantify the fiscal implications of the crisis for a cross-section of countries. The authors assess the post-shock fiscal balances and debt outlook, and suggest ways for governments to clarify their strategies for maintaining fiscal solvency.

Appendix I Reporting the Fiscal Impact of Financial Sector Support

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

Reporting the Cost of Direct Interventions

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

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

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

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

Table A1.1

Statistical Treatment of Government Intervention (Under GFSM 1986)

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Note: Assume amount of the capital injection: 100; interest on government securities issued: 5 percent; interest earned on assets acquired by government: 2 percent; interest on cash deposits of government 0 percent; and dividends on shares and other equity: 3 percent.
Government acquires an effective claim on recipient of financial assistance
(i)a Government injects capital in a financial institution by taking up equity to the value of 100, financed from existing cash resources.This exchange of cash assets for an asset acquired for policy purposes directly reduces the overall balance. The secondary impact of acquiring the equity generates some dividend, thus increasing the overall balance to the extent that it is more than interest forgone on the cash deposits. Government’s gross, as well as net, debt remains unchanged.
(i)b Government injects capital in a financial institution by taking up equity to the value of 100, financed by the issuance of securities.In the standard GFSM 1986 the acquisition of a financial asset for policy purposes, funded by the incurrence of a liability, has no influence on the overall balance in the absence of cash flows. The secondary impact of the actual interest payable on the securities reduces the overall balance, in so far as it does not match the receivable dividend income. Government’s stock of gross debt increases with value of securities issued, but net debt remains unchanged.
(ii)a Government injects capital in a financial institution by extending a loan to the bank financed from existing cash resources.This exchange of cash assets for a loan acquired for policy purposes directly reduces the overall balance. The secondary impact of the loan extended is interest receivable, thus increasing the overall balance of government to the extent that it is more than interest forgone on the cash deposit. Government’s gross, as well as net, debt remains unchanged.
(ii)b Government injects capital in a financial institution by extending a loan to the bank financed by the issuance of securities.In the standard GFSM 1986 the acquisition of a financial asset for policy purposes, funded by the incurrence of a liability, has no influence on the overall balance in the absence of cash flows. The secondary impact of the loan extended is interest receivable, thus increasing the overall balance of government to the extent that it is more than interest payable. Government’s gross debt increases with value of securities issued, but net debt remains unchanged.
Government does not acquire an effective claim on recipient of financial assistance
(iii)a Government injects capital in a financial institution but does not acquire an effective claim on the recipient. The injection is financed from existing cash resources.This capital injection directly reduces the overall balance of government due to the capital transfer. In addition, the overall balance could also decrease to the extent that revenue reduces due to interest forgone on the cash deposits. Government’s gross debt remains unchanged, but net debt increases.
(iii)b Government injects capital in a financial institution but does not acquire an effective claim on the recipient. The injection is financed by the issuance of securities.In the standard GFSM 1986 the capital injection has no influence on the overall balance in the absence of cash flows. The secondary impact of the interest cost payable on the securities reduces the overall balance. Government’s gross, as well as net, debt increases with the value of securities issued.
Table A1.1
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Note: Assume interest on government securities issued: 5 percent; interest earned on assets acquired by government: 2 percent; and interest on cash deposits of government 0 percent.
Government assists financial institutions in reducing their liabilities
(iv) Government assumes a bank’s liabilities in respect of a loan outstanding, to the value of 100.In the standard GFSM 1986 the loan assumption has no influence on the overall balance in the absence of cash flows. The secondary impact is a reduction in the overall balance due to the interest payable on the assumed loan. Government’s stock of gross, and net, debt increases with value of assumed loan.
(v) Government provides assistance to banks in providing them with some cash to be used in reducing outstanding liabilities to the value of 20.This assistance directly reduces the overall balance of government due to the capital transfer. The secondary impact of this assistance is a reduction in the overall balance of government to the extent that revenue reduces due to interest forgone on the cash deposits. Government’s stock of gross debt remains unchanged, but net debt increases.
Government purchases bad assets from financial institutions
(vi)a Government purchases bad assets from a bank at market values of 100, financed from existing cash resources.This exchange of cash assets for an asset related to policy purposes directly reduces the overall balance of government. The secondary impact of interest receivable increases the overall balance of government to the extent that it is more than interest forgone on the cash deposit. Government’s stock of gross, and net, debt remains unchanged.
(vi)b Government purchases bad assets from a bank at market values of 100, financed by the issuance of securities.In the standard GFSM 1986 the acquisition of a financial asset in exchange of a liability has no influence on the overall balance in the absence of cash flows. The secondary impact of the actual interest cost reduces overall balance, in so far as it does not match the interest income. Government’s stock of gross debt increases with value of securities issued, but net debt remains unchanged.
(vii)a Government purchases bad assets from a bank at a price of 120 while market value of the asset is 100—financed from existing cash resources.This exchange of cash assets for an asset related to policy purposes directly reduces the overall balance of government. The secondary impact of the asset acquired is interest receivable, thus increasing the overall balance of government to the extent that it is more than interest forgone on the cash deposit. Government’s stock of gross debt remains unchanged but net debt increases with 20.
(vii)b Government purchases bad assets from a bank at a price of 120 while market value of the asset is 100, financed by the issuance of securities.In the standard GFSM 1986 the acquisition of an asset related to policy purposes in exchange for a liability has no influence on the overall balance of government in the absence of cash flows. The secondary impact of the actual interest cost reduces the overall balance, in so far as it does not match the interest income. Government’s stock of gross debt increases with the value of securities issued (120), and the net debt increases with 20.
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Note: Assume interest on government securities issued: 5 percent; interest earned on assets acquired by government: 2 percent; and interest on cash deposits of government 0 percent.
Government assistance through guarantees
(viii) Government provides support to the industry by issuing guarantees to the total amount of 1,000.This issuance of guarantees does not affect the overall balance of government because the transaction is not recorded in the operation of government. Government’s stock of gross, and net, debt remains unchanged because such guarantees are not regarded as government liabilities until such time as these are called. However, for transparency purposes, record the total outstanding amount of guarantees as a memorandum item on the government accounts.
(ix) a Government assumes the obligation to service a one-off principal (10) and interest (1) payment that was guaranteed due to temporary liquidity constraint of a bank (with creating an effective claim on defaulter).In the GFSM 1986 the assumption of debt service has no influence on the overall balance of government in the absence of cash flows. Since the bank remains a going concern, government acquires an effective claim on the bank. The secondary impact of interest receivable increases the overall balance of government to the extent that it is more than interest forgone on the cash deposit. Government’s stock of gross debt increases and net debt remains unchanged.
(ix) b Government assumes the obligation to service a principal (10) and interest payment (1) that was guaranteed, but due to fundamental insolvency issues, government does not obtain an effective claim on the defaulter bank (without creating an effective claim on defaulter).In the GFSM 1986 the assumption of the servicing of a guaranteed loan has no influence on the overall balance of government in the absence of cash flows. The overall balance could decrease to the extent that revenue reduces due to interest forgone on the cash deposits. Government’s stock of gross debt and net debt increase by 11.
(x) a A guarantee to the value of 100 is called. The defaulting bank is being restructured and government obtains an effective claim on the bankThis exchange of cash assets for an asset related to policy purposes directly reduces the overall balance of government. Since the bank remains a going concern, government acquires an effective claim on the bank. The secondary impact of interest receivable increases the overall balance to the extent that it is more than interest forgone on the cash deposit. Government’s stock of gross, and net, debt remains unchanged, while the stock of outstanding guarantees reduces with the amount of the called guarantee.
(x)b A guarantee to the value of 100 is called. The defaulting bank is insolvent and government does not obtain an effective claim on the bank.A called guarantee has the same impact as loan assumption, assuming the loan directly reduces the overall balance of government due to the capital transfer. The secondary impact is a further reduction in the overall balance due to the interest payable on the assumed loan. Government’s stock of gross, and net, debt increases with value of assumed loan, while outstanding guarantees reduce with the same amount.
Table A1.2.

Statistical Treatment of Government Intervention (Under GFSM 2001)

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Note: Assume amount of the capital injection: 100 percent; interest on government securities issued: 5 percent; interest earned on assets acquired by government: 2 percent; interest on cash deposits of government: 0 percent; and dividends on shares and other equity: 3 percent.
Government acquires an effective claim on recipient of financial assistance
(i)a Government injects capital in a financial institution by taking up equity to the value of 100, financed from existing cash resources.This exchange of one type of asset for another has no primary impact on net worth of government. The secondary impact of acquiring the equity generates some dividend, thus increasing net worth of government to the extent that it is more than interest forgone on the cash deposits. The implied “cost” of the rescue operation is potential losses in the value of the equity investment. Government’s gross, as well as net, debt remains unchanged.
(i)b Government injects capital in a financial institution by taking up equity to the value of 100, financed by the issuance of securities.This acquisition of a financial asset funded by the incurrence of a liability has no primary impact on the net worth of government. The secondary impact of the actual interest payable on the securities reduces net worth, in so far as it does not match the receivable dividend income. The implied “cost” of the rescue operation is potential losses in the value of the equity investment. Government’s stock of gross debt increases with value of securities issued, but net debt remains unchanged.
(ii)a Government injects capital in a financial institution by extending a loan to the bank, financed from existing cash resources.This exchange of one type of asset for another has no primary impact on net worth of government. The secondary impact of the loan extended is interest receivable, thus increasing net worth of government to the extent that it is more than interest forgone on the cash deposit. The implied “cost” of the rescue operation is potential losses on the loans extended. Government’s gross, as well as net, debt remains unchanged.
(ii)b Government injects capital in a financial institution by extending a loan to the bank, financed by the issuance of securities.This acquisition of a financial asset in exchange for a liability has no primary impact on the net worth of government. The secondary impact of the loan extended is interest receivable, thus increasing net worth of government to the extent that it is more than interest payable. The implied “cost” of the rescue operation is potential losses on the loans extended. Government’s gross debt increases with value of securities issued, but net debt remains unchanged.
Government does not acquire an effective claim on recipient of financial assistance
(iii)a Government injects capital in a financial institution but does not acquire an effective claim on the recipient. The injection is financed from existing cash resources.This capital injection directly reduces net worth of government due to the capital transfer. In addition, net worth could also decrease to the extent that revenue reduces due to interest forgone on the cash deposits. The implied “cost” of the rescue operation is the amount provided. Government’s gross debt remains unchanged, but net debt increases.
(iii)b Government injects capital in a financial institution but does not acquire an effective claim on the recipient. The injection is financed by the issuance of securities.This capital injection directly reduces net worth of government due to the capital transfer. In addition, net worth is further reduced by the interest cost payable on the securities. The implied “cost” of the rescue operation is the value of the securities provided. Government’s gross, and net, debt increases with the value of securities issued.
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Note: Assume interest on government securities issued: 5 percent; interest earned on assets acquired by government: 2 percent; and interest on cash deposits of government: 0 percent.
Government assists financial institutions in reducing their liabilities
(iv) Government assumes a banks liabilities in respect of a loan outstanding, to the value of 100.This loan assumption directly reduces net worth of government due to the capital transfer. The secondary impact is a further reduction in net worth due to the interest payable on the assumed loan. Government’s stock of gross, and net, debt increases with value of assumed loan.
(v) Government provides assistance to the bank in providing it with some cash to be used in reducing outstanding liabilities to the value of 20.This assistance directly reduces net worth of government due to the capital transfer. The secondary impact of this assistance is a reduction in net worth of government to the extent that revenue reduces due to interest forgone on the cash deposits. Government stock of gross debt remains unchanged, but net debt increases.
Governments purchases bad assets from financial institutions
(vi)a Government purchases bad assets from a bank at market value of 100, financed from existing cash resources.This exchange of one type of asset for another has no primary impact on net worth of government. The secondary impact of interest receivable increases net worth of government to the extent that it is more than interest forgone on the cash deposit. The implied “cost” of the rescue operation is potential losses on the assets acquired. Government’s stock of gross, and net, debt remains unchanged.
(vi)b Government purchases bad assets from a bank at market values of 100, financed by the issuance of securities.This acquisition of a financial asset in exchange for a liability has no primary impact on the net worth of government. The secondary impact of the actual interest cost reduces net worth, in so far as it does not match the interest income. The implied “cost” of the rescue operation is potential losses on the assets acquired. Government’s stock of gross debt increases with value of securities issued, but net debt remains unchanged.
(vii)a Government purchases bad assets from a bank at a price of 120 while market value of the asset is 100, financed from existing cash resources.This exchange of one type of asset for another (acquired at a cost higher than market value) directly reduces net worth of government by the amount of the difference between the market value and purchasing price. The secondary impact of the asset acquired is interest receivable, thus increasing net worth of government to the extent that it is more than interest forgone on the cash deposit. The implied “cost” of the rescue operation is potential losses on the assets acquired. Government’s stock of gross debt remains unchanged but net debt increases by 20.
(vii)b Government purchases bad assets from a bank at a price of 120 while market value of the asset is 100, financed by the issuance of securities.This acquisition of an asset (at a cost higher than market value) in exchange for a liability directly reduces net worth of government by the amount of the difference between the market value of the asset acquired and the value of the liability issued. The secondary impact of the actual interest cost reduces net worth, in so far as it does not match the interest income. The implied “cost” of the rescue operation is potential losses on the assets acquired. Government’s stock of gross debt increases with the value of securities issued (120), and the net debt increases by 20.
Table A1.2
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Assume: Interest on government securities issued: 5 percent; interest earned on assets acquired by government: 2 percent; and interest on cash deposits of government: 0 percent.
Government assistance through guarantees
(viii) Government provides support to the industry by issuing guarantees to the total amount of 1,000.This issuance of guarantees does not affect the net worth of government because the transaction is not recorded in the operation of government. Government’s stock of gross, and net, debt remains unchanged because such guarantees are not regarded as government liabilities until such time as these are called. However, for transparency purposes, record the total outstanding amount of guarantees as a memorandum item on the government accounts.
(ix)a Government assumes the obligation to service a one-off principal (10) and interest (1) payment that was guaranteed due to temporary liquidity constraint of a bank.This exchange of one type of asset for another has no primary impact on net worth of government. Since the bank remains a going concern, government acquires an effective claim on the bank. The secondary impact of interest receivable increases net worth of government to the extent that it is more than interest forgone on the cash deposit. The implied “cost” of the assistance is potential losses on the assets acquired. Government’s stock of gross debt increases and net debt remains unchanged.
(ix)b Government assumes the obligation to service a principal (10) and interest payment (1) that was guaranteed, but due to fundamental insolvency issues, government does not obtain an effective claim on the defaulter bank.The assumption of this obligation directly reduces net worth of government due to the capital transfer. In addition, net worth could also decrease to the extent that revenue reduces due to interest forgone on the cash deposits. Government’s stocks of gross debt and net debt increase by 11.
(x)a A guarantee to the value of 100 is called. The defaulting bank is being restructured and government obtains an effective claim on the bank.This exchange of one type of asset for another has no primary impact on net worth of government. Since the bank remains a going concern, government acquires an effective claim on the bank. The secondary impact of interest receivable increases net worth of government to the extent that it is more than interest forgone on the cash deposit. The implied “cost” of the assistance is potential losses on the assets acquired. Government’s stock of gross, and net, debt remains unchanged, while the stock of outstanding guarantees reduces with the amount of the called guarantee.
(x)b A guarantee to the value of 100 is called. The defaulting bank is insolvent and government does not obtain an effective claim on the bank.A called guarantee has the same impact as loan assumption, assuming the loan directly reduces net worth of government due to the capital transfer. The secondary impact is a further reduction in net worth due to the interest payable on the assumed loan. Government’s stock of gross, and net, debt increases with value of assumed loan, while outstanding guarantees reduce with the same amount.

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

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

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

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

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

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

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

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

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

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

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

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

Reporting the Cost of Indirect Interventions

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

Quasifiscal Operations

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

In practice, it will be important to

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

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

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

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

Contingent Liabilities

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

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

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

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

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

Appendix II Financial Sector Support Measures

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

Table A2.1.

Upfront Gross Fiscal Cost and Estimated Recovery Rate

(In percent of GDP, unless otherwise indicated)

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Source: IMF staff estimates. See Appendix III for details.

In percent of upfront outlays.

Weighted by PPP GDP of 2007.

Table A2.2.

Hypothetical Net Cost from Financial Sector Support Measures: Illustrative Scenarios

(In percent of GDP, unless otherwise indicated)

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Source: IMF staff estimates.

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

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

Weighted by PPP GDP of 2007.

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

Table A2.3.

Financial Sector Support Operations in Selected Countries

(As of May 2009; in local currencies, unless otherwise stated)

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