Disclosure of Fiscal Risks of Financial Intervention Needed
A new staff note from the International Monetary Fund says countries should do more to disclose and quantify the risks of government interventions into financial markets.
The note, Disclosing Fiscal Risks in the Post-Crisis World, which is not official IMF policy,” discusses appropriate methods for disclosing fiscal risks from exogenous shocks and the realization of explicit or implicit contingent obligations of the government.” In essence it argues that outcomes often deviate from what was intended when the intevention was made, but that this fact is often reflected in projections.
Its key recommendation is that countries should regularly prepare and publish a statement of fiscal risks, ideally accompanying annual budget documents, and including the different types of risks related to already-announced public interventions in support of the financial sector.
It provides an example of how this might be done:
Consider a country that experiences a financial crisis in year t, with the government’s interventions in support of the financial system leading to a large increase in direct liabilities, and the value of earlier outstanding debt and explicit guarantees (contingent liabilities) also increasing sharply due to valuation effects (e.g., because of an exchange rate depreciation). In this example, the debt-to-GDP ratio rises to 100 percent in year t. As a result, the government undertakes fiscal consolidation over the subsequent years.
At the same time, the government’s claims also increase. In this example, the government takes ownership stakes in, and obtains claims on, some financial sector institutions, opening the way for future privatization gains and asset recovery.
Given the uncertainty over the future realization of assets, it is useful to compare different scenarios for the path of gross public debt (see figure). Different scenarios can be run assuming different asset
recovery rates, returns from privatization, and realization of contingent liabilities. All should
be compared to a baseline scenario. In this example, the debt stock could vary between
65 percent of GDP and 85 percent of GDP at the end of a five-year period.
- The baseline scenario assumes no immediate privatization, and a partial realization of other claims. Public debt falls as a share of GDP, reflecting fiscal effort and asset recovery.
- Under a “no asset recovery” scenario, public-debt-to-GDP ratio declines solely as a result of fiscal consolidation. This scenario also includes the realization of a small contingent liability in 2011.
- An intermediate scenario assumes that recovery of assets is only half of that under the baseline scenario.
- A “positive” scenario assumes that in addition to the baseline recovery rates, the banks are gradually, but fully, privatized over the five-year period.
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