Guarantees Nuno Silva Geneva, April 2006 Joint UNECE/Eurostat/OECD/ Meeting on National Accounts and update of SNA

What are debt guarantee? Debt guarantees are arrangements in which a guarantor agrees to pay a creditor if a debtor defaults. For general government, giving a guarantee is a way to support economic activities without a need for an immediate cash outlay. Guarantees have a significant impact on the behaviour of economic agents by modifying the lending and borrowing conditions on financial markets.

The AEG decisions  In the 1993 SNA only guarantees that are classified as financial derivatives are recorded  However, important contingencies should be provided as supplementary information  The AEG argued that this treatment should be modified for three reasons:  (i) the supplementary data is currently not reported  (ii) the need to delineate across economic events that lead to guarantees  (iii) the convergence with international accounting standards that quantify the underlying liability, notably in the public sector

Case 1: Financial derivatives  Those that are actively traded on financial markets, such as credit default swaps  The derivative would be based on the risk of default of a reference instrument and so not actually linked to an individual loan or bond

Case I: The accounting treatment  The purchaser pays a fee – this is recorded as a transaction in financial derivatives  Changes to the value of the derivative are recorded as revaluations  The reference instrument defaults – this is also recorded as a transaction in financial derivatives

Case 2: Standardised guarantees  Similar types of credit risk for a large number of cases  It is not possible to estimate precisely the risk of default of each individual loan but  It is possible to estimate how many out of a large number of similar loans will default  It is possible for the guarantor to determine suitable fees

Case 2: The accounting treatment (1)  These guarantees are to be recorded like insurance  When fees cover costs…  If a publicly controlled market guarantor sells guarantees for premiums that do not fully cover the costs…  If a government unit provides the guarantee to a creditor without a fee…

Case 2: The accounting treatment (2)  The value of the output and consumption…  The initial value of the financial asset and liability…  The expected cost of calls should be spread over time  Claims would be recorded like insurance claims

Case 2: The accounting treatment (3)  Property income is imputed… and deemed to be reinvested…  Other changes in the financial asset and liability are recorded as other changes in the volume of assets  The asset is always recorded in the balance sheet of the entity that holds the right to claim and receive funds  Rerouting transactions are needed when…

Case 3: One-off guarantees  It is not possible to accurately calculate the degree of risk associated with the debt  In most cases they are considered a contingency and is not recorded as a financial asset or liability  As an exception, one-off guarantees might be treated as if these guarantees were called at inception

Case 3: The accounting treatment  The activation of a one-off guarantee is treated in the same way as a debt assumption  In most instances, the guarantor is deemed to make a capital transfer to the original debtor  The amount of debt assumed should be recorded at the time the guarantee is actually activated and the debt assumed

Questions?