Guarantees

2 Guarantees Part of “balance sheet approach” – trend to look at positions to analyze economic problems, not just flows. Off-balance sheet obligations. Important for assessing vulnerability (can hide debt).

3 Examples of Guarantees Guarantor and Debtor are related entities: Government and government-owned enterprises. Companies and their subsidiaries. Guarantor and Debtor are at arm’s length: Banker’s acceptances and other guarantees on a fee basis. Government support for worthy private projects.

4 Time of recognition Granting of guarantee? Activation of guarantee? After default by guaranteed party.

5 On the activation of a guarantee, if Debtor still exists, three steps occur:  Creditor’s liability to Debtor is eliminated.  Guarantor’s liability to Creditor is created.  Debtor’s liability to Guarantor is (usually) created.  More complex than usual transactions, because three parties involved.

6 Current Treatment (a) Before activation, guarantees are contingent assets and therefore outside the system. (b) No specific guidance on classification of flows on activation in BPM5 or SNA. However: GFSM has injection of equity for continuing subsidiaries and capital transfer otherwise; and ESA95 has injection of equity and capital transfer cases; also mentions other volume changes when the original debtor disappears. For bank guarantees, from general practice, it appears that service charge when issued; other volume changes if not recovered.

7 Decisions External Debt Statistics Guide suggests show expected liabilities under guarantees as a supplementary item. AEG didn’t want to change asset boundary to include guarantees in general as assets, except when they: Amount to a financial derivative; or Are standardized guarantees (e.g., on student loans) – considered to be similar to insurance. On activation: Details still being discussed. Attempt to have single solution, but evidence suggests different (some capital transfer, sometimes financial account transaction).

8 Questions Are guarantees important issues in your country? How should they be recorded?

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