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1
Sovereign Balance Sheet and Accounting
for the Fiscal Response to the Global
Financial Crisis
Marco Cangiano
IMF – Fiscal Affairs Department
10th Annual OECD Public Sector Accruals Symposium
Paris, March 8-9, 2010
2
Outline
Setting the scene: the fiscal challenge
Range of interventions: a quick overview
Sovereign balance sheet: an old idea whose time
has come?
Definition
Issues
Challenges
Issues for discussion
3
Fiscal Challenge: Stylized Facts
The scale of the problem is unprecedented
Demographic trends remain unfavorable
Although financial sector support only a small
part of the increase in gross debt…..
….scale and range of interventions also
unprecedented…..
….thus, challenging the way we account for and
report on the state of public finance
60 65 70 75 80 85 90 95
100 105 110
2000 2002 2004 2006 2008 2010 2012 2014
General government debt
Fiscal Outlook in Advanced Countries
(all variables in percent of GDP)
4
- 7 - 6 - 5 - 4 - 3 - 2 - 1 0 1 2 3 4
2000 2002 2004 2006 2008 2010 2012 2014
Primary balance
Structural primary balance
- 9 - 8 - 7 - 6 - 5 - 4 - 3 - 2 - 1 0
2000 2002 2004 2006 2008 2010 2012 2014
Overall balance
5
Fiscal Challenge: Stylized Facts
G-7 PPP-Weighted Public Debt, percent of GDP
0
20
40
60
80
100
120
140
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Japan Adjusted G-7 Average Gross Government Debt
G-7 Average Gross Government Debt
6
Decomposition of Government
Debt Increase, 2007 - 2014 (Total debt increase: 35.5 percent of GDP)
Other: 6
Fiscal stimulus: 3 ½
Financial support: 3
Higher interest payments: 4
Revenue loss from lower asset prices
and financial profits: 9
Automatic stabilizers: 10
7
Financial System Support Measures
Between January 2008-June 2009, about 5 percent of
GDP pledged—3 percent actually used
More than 50 countries among advanced, emerging,
and developing countries
Instruments: deposit insurance, guarantees,
recapitalization, asset swaps/purchases, direct lending,
and liquidity facilities
Agencies: central banks, treasuries, public
corporations, state-owned banks
8
Sovereign Balance Sheet: New Idea?
Not particularly new—see earlier IMF work on BSA,
GFSM 2001 framework, SWF, more recently BPM 6
But its appeal has been revamped in light of global
crisis and nature of interventions
The concept is easy to grasp—less so to implement:
Comprehensive information of all public assets and liabilities
as analytical tool to assist governments managing their resources
while taking into account their combined implications
9
Sovereign Balance Sheet:
Institutional Coverage
Non-Financial Financial Total Net Worth
A L A L A L (A-L)
Non-Financial Financial Total Net Worth
A L A L A L (A-L)
Sovereign/Whole-of-Government
General government
Central government
Including:
Budgetary central government
Other central government agencies
e.g., Social security institutions
Subnational governments
Public enterprises 1/
Financial
e.g., Central bank
Deposit insurance fund
SWF
AMC
Non-financial
1/ If market producers.
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Sovereign Balance Sheet: Issues
Coverage: comprehensiveness relies at the moment on
―control,‖ but is this the relevant concept?
Institutional independence needs to be preserved, but
who manages the sovereign balance sheet?
How are tensions going to be resolved between
general government levels, particularly in a federal
system? And with ―independent‖ central banks?
Tensions also emerge across government (i.e., non-
profit) institutions and commercially-run public
enterprises
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Sovereign Balance Sheet:
Prerequisites
Ongoing work with IPSASB is looking at how
interventions have been accounted for and reported
on in a few advanced economies
Not surprisingly, the answer is…very differently
This is a key problem as the magnitude of the fiscal
adjustment will require concerted efforts
Agreeing on the ―correct‖ figures is not a trivial
exercise
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What are the
Challenges/Prerequisites?
Fiscal risk, contingent liabilities (and assets)
Accounting framework and standards
Reporting entities
Valuation of assets, in particular, treatment of
gains and losses
13
Fiscal Risk
Disclosure of explicit and implicit contingent
obligations (off-balance sheet)
Publish a statement of fiscal risks with annual
budget documents, including the different types
of risks related to announced public
interventions in support of the financial sector
Empirical evidence suggests a link between
greater fiscal risk disclosure and better sovereign
credit ratings (next slide)
14
Fiscal Risk Disclosure and Sovereign
Credit Ratings
The sample consists of 56 countries, surveyed at different points during 1999–2007. The scatter plot reports the
orthogonal components of sovereign bond ratings and fiscal risk disclosure to per capita income, GDP
growth, inflation, fiscal balance, current account balance, external debt, default history, and political stability.
-3
-2
-1
0
1
2
3
-0.4 -0.2 0.0 0.2 0.4
So
vereig
n r
ati
ng
s
Fiscal risk disclosure
p-value: 0.04
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Reporting entity
International public sector accounting standards (IPSAS) as well as
statistics (GFSM 2001) require that government financial statements
provide a consolidated view of the finances of all entities controlled by
the government for accounting purposes
The existence of control in the context of consolidated financial report
does not in any way indicate that there is necessarily control over the
manner in which statutory/professional functions are performed by an
entity
Control may have become less relevant in light of global crisis, even in
light of SNA 2008 clarification
A different standard may be required, that capture the responsibility a
government has vis-à-vis taxpayers, i.e., how a government is
accountable
16
Accounting Frameworks and Standards
The accounting basis defines the timing of recognition of
economic events in the financial statements and, therefore,
determines whether particular assets, liabilities, revenues or
expenses are reported
Integrated framework, based on the accrual accounting
concept, in accordance with explicit national or international
standards
Frameworks that focus mainly on reporting cash flows may
provide less comprehensive information, if any, on assets and
actual or contingent liabilities
17
Valuation
The choice of accounting policies on valuation and related
gains and losses have a direct impact on the measurement of
key indicators such as fiscal surplus or deficit.
Adherence to accepted accounting standards will enhance
countries’ accountability.
Generally GAAPs require ―fair value‖ asset valuation
Recent developments have led to pressures for a retreat from
marking-to-market
Recent proposed IFRS amendments to accounting for
financial instruments retain a preference for ―fair value‖ and
limit alternatives to simple debt instruments held for their
underlying cash flows
18
Issues for Discussion
Fiscal risk statement: increasingly good practice, but
far from being comprehensive or reliable
Is control the relevant concept? Wouldn’t
accountability be a better concept?
Accounting framework and standards, including
valuation criteria: mandatory vs. voluntary?
Timeliness for decisions makers
Last, who is the ultimate decision maker in managing
the sovereign balance sheet? Or, who is accountable
for it?
19
Selected IMF References IMF, 2010, Broadening Financial Indicators in the Special Data
Dissemination Standard, March 10, 2010
IMF, 2009, Crisis-Related Measures in the Financial System and
Sovereign Balance Sheet Risks, July 31, 2009
http://www.imf.org/external/np/sec/pn/2009/pn09118.htm
IMF, 2009, Disclosing Fiscal Risks in the Post-Crisis World, IMF Staff
Position Note, SPN/09/18, July 2009
www.imf.org/external/pubs/ft/spn/2009/spn0918.pdf
Fiscal Risks—Sources, Disclosures and Management, IMF Fiscal Affairs
Department, 2009 www.imf.org/external/pubs/ft/dp/2009/dp0901.pdf
IMF, 2007, Manual on Fiscal Transparency.
IMF, 2006, Public Private Partnerships, Government Guarantees, and
Fiscal Risk
http://www.imf.org/external/pubs/cat/longres.cfm?sk=18587.0