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The impact of contingent liability realizations on public finances

Author

Listed:
  • Elva Bova

    (European Commission)

  • Marta Ruiz-Arranz

    (Inter-American Development Bank)

  • Frederik Giancarlo Toscani

    () (International Monetary Fund)

  • Hatice Elif Ture

    (International Monetary Fund)

Abstract

Abstract The 2008 global financial crisis highlighted the significant impact bank bailouts, state-owned enterprise recapitalizations, and other so-called contingent liability realizations can have on public finances. In this paper, we construct a novel dataset of contingent liability realizations in advanced and emerging market economies for the period 1990–2014. We find that when they materialize, contingent liabilities are a major source of fiscal distress. The average gross government payout related to a contingent liability realization is 6% of GDP, but gross payouts can be as high as 40% of GDP for major financial sector bailouts. Contingent liability realizations from different sources are correlated among each other and tend to occur during periods of weak growth and economic crisis, accentuating pressure on public finances during already difficult times. We find that they accounted for as much as one-third of the debt increases after the financial crisis. Indicative evidence suggests that countries with stronger governance indicators and, in particular, more comprehensive coverage of fiscal accounts, suffer more moderate contingent liability realizations. Improved oversight and transparency thus seems to go some way in reducing public financial risks.

Suggested Citation

  • Elva Bova & Marta Ruiz-Arranz & Frederik Giancarlo Toscani & Hatice Elif Ture, 2019. "The impact of contingent liability realizations on public finances," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(2), pages 381-417, April.
  • Handle: RePEc:kap:itaxpf:v:26:y:2019:i:2:d:10.1007_s10797-018-9496-1
    DOI: 10.1007/s10797-018-9496-1
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    References listed on IDEAS

    as
    1. Christofzik, Désirée I. & Kessing, Sebastian G., 2018. "Does fiscal oversight matter?," Journal of Urban Economics, Elsevier, vol. 105(C), pages 70-87.
    2. Lusine Lusinyan & Aliona Cebotari & Ricardo Velloso & Jeffrey M. Davis & Amine Mati & Murray Petrie & Paolo Mauro, 2009. "Fiscal Risks; Sources, Disclosure, and Management," IMF Departmental Papers / Policy Papers 09/01, International Monetary Fund.
    3. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2014. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Journal of Finance, American Finance Association, vol. 69(6), pages 2689-2739, December.
    4. Hana Polackova, 1998. "Contingent Liabilities : A Threat to Fiscal Stability," World Bank Other Operational Studies 11522, The World Bank.
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    More about this item

    Keywords

    Contingent liabilities; Fiscal risks; Public debt; Fiscal crises;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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