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Prepared by Sandeep Saxena. The note has benefited from comments by M. Fouad, M. Pessoa, R. Allen, Y. Hurcan, Y. Koshima, G. Una, S. Tomas, A. Tieman, C. Roehler, M. Alves, S. De Clerck, P. Lopes, G. Ganelli, E. Papageorgiou, E. Addo Awadzi, K. Vasquez, A. Guscina, H. Weisfeld, K. Nakatani, A. Popescu, N. Kinoshita, and M. Sabates Cuadrado, and the Turkey team.

1

Contingent liabilities are potential obligations that do not arise until a particular discrete event (or events) occurs in the future.

2

The terms “guarantee” and “government guarantee” are used interchangeably in this document.

3

A forthcoming FAD How-To Note discusses public-private-partnerships (PPP)-related guarantees in more detail.

4

See Government Finance Statistics Manual 2014 (IMF 2014) for a classification of guarantees.

5

The cost of a guarantee is typically assessed in terms of “expected payment”—that is, the probability weighted payment, expressed in present value terms, referring to the most likely payment that a government would be expected to make by extending a guarantee. Alternative measures include (1) maximum exposure—the maximum possible loss that a government can suffer by giving a guarantee; (2) exposure at default (EAD)—the likely exposure at the time of default; (3) loss-given-default—EAD adjusted for any possible recoveries, usually expressed as percentage of EAD; and (4) value at risk —the maximum loss a government can suffer at a given confidence interval within a stipulated time.

6

See Irwin 2003 for a detailed discussion on the identification of appropriate fiscal support instruments.

7

See Irwin 2007 for a detailed discussion of valuation techniques.

8

Most statistical analysis–based models are adaptations of “Altman Z-score” developed by Edward Altman for predicting the bankruptcy of firms (Altman 1968).

9

OECD 2017b finds an increasing use of on-lending over guarantees in Denmark, reflecting the cost-effectiveness of the former.

10

A third limit is applied to the PPP-related debt assumption commitments.

11

Sweden charges a premium, over and above the risk-based fee, for administrative expenses, including the cost of risk assessment.

12

In Sweden, parliament can decide to waive the guarantee fee, in full or part, under certain circumstances. In that case, the amount waived is appropriated in the budget as subsidy.

13

Notional reserves are below-the-line accounts that are pooled in the treasury single account. They are used effectively for tracking resources. There is no underlying cash, but notional reserves have the effect of setting aside resources that can be used when needed for meeting obligations.

14

An actual fund invested entirely in the government’s own bonds may be straightforward to manage, but its economic substance is not much different from that of a notional fund.

15

The limit of 95 percent is not applicable to loans and credits provided by regional or international organizations and foreign government institutions. These are fully covered.

16

See Schick 2002 for a detailed discussion on budgeting for fiscal risks.

How to Strengthen the Management of Government Guarantees
Author: International Monetary Fund. Fiscal Affairs Dept.