## Arrears in the International Investment Position

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---

### SECTION I: THE ISSUE — Background and rationale
- Modern financial systems evolve rapidly and can generate turbulence on financial markets and sharp increases in insolvencies of financial market participants, with adverse effects on real sector entities (BPM6, paragraph 5.99).
- A significant increase in arrears may be a harbinger of an impending economic crisis (example cited: 2008—the subprime debt crisis); the crises of the 90s were also largely debt-driven.
- External debt is among the most important factors to monitor; the pandemic has exacerbated the global accumulation of debt. Developed countries can accumulate debt longer without collapse of their financial system; emerging countries are more exposed to impending consequences.
- Additional granularity of data on arrears by institutional sectors, financial instruments, and currency composition is important for users of external sector statistics.

### Analytical value of arrears breakdowns
- Breakdown by institutional sector:
  - Reveals risk concentration centers causing debt instability.
  - Arrears related to government debt indicate partial loss of government’s ability to service external debt and additional burden on government finance.
  - Arrears under direct investment may be managed by parent companies without litigation and may not increase systemic risk.
- Breakdown by financial instrument:
  - Useful because debt covenants can trigger immediate repayment of instruments if there are arrears on other instruments, causing early redemptions and potential cross-default spillovers.
- Breakdown by currency composition:
  - Helps estimate risk from exceptional foreign borrowing to meet obligations denominated in foreign currencies; liabilities in national currency may be redeemed via additional currency issuance by the central bank.
  - Debt liabilities denominated in different currencies can have various effects on financial soundness.

### Importance of timely, high-quality arrears information
- Timely information on increasing trends in arrears can prompt interventions and support programs to reduce negative consequences.
- Arrears provide evidence of serious short-term liquidity problems and longer-term solvency issues.
- Bridging the data gap on arrears is a top priority for statisticians.

### Definitions and current guidance
- Arrears are defined as amounts that are both unpaid and past the due date for payment (BPM6, paragraph 5.99).
- Arrears can arise from late payment of principal and interest on debt instruments (recorded in the original debt instrument) or from late payments for non-debt instruments and other transactions (recorded in a new debt instrument) (2013 EDS, Appendix 7, paragraph 3).
- Data on arrears should be presented as supplementary items, where significant (BPM6, paragraph 3.57).
- Within the 2013 EDS framework:
  - Total value of arrears is separately identified by sectors in memorandum items to Table 4.1 (2013 EDS, paragraph 4.4).
  - Memorandum Table 4.2 presents arrears at nominal value by sector detailed by principal and interest (2013 EDS, paragraphs 4.9–4.10).
  - Total value of arrears and debt securities by sector are separately identified in memorandum items to Table 5.1 (2013 EDS, paragraph 5.8).

### Historical recording approaches and BPM6 change
- Under BPM5:
  - Arrears were reclassified from the original debt instrument to other assets or other liabilities, short-term (BPM5, paragraph 458).
  - Arrears of amortization and interest were recorded as if paid and a counter-entry made to reflect a new liability (BPM5, paragraphs 458 and 528).
  - In the analytical presentation, only payments of arrears resulting from balance of payments difficulties were included under exceptional financing (BPM5, paragraph 529).
- BPM6 revised principles to harmonize arrears recording across macroeconomic statistics by adopting the accrual basis:
  - Under the accrual basis, repayment of debt is recorded at liquidation of the debt liability; arrears remain recorded with the same instrument until liquidated.
  - Advantage: avoids complex and artificial imputation because there is no need to record transactions related to overdue debt.
- Post-BPM6 presentation:
  - Arrears related to exceptional financing are reflected as memorandum items in balance of payments and included in analytical presentation focused on monetary authorities’ actions (BPM6, paragraph A1.22).
  - Other arrears not related to exceptional financing may be recorded as a supplementary category in total and under the specific financial asset or liability class affected (BPM6, paragraph 5.101).
  - Arrears are not presented as a separate item in standard components of the IIP, limiting analytical usefulness for financial stability assessment.

### Practical shortcomings and data availability
- Only one-third of countries that contributed to EDS data have arrears data available in the Quarterly External Debt Statistics (QEDS) Database.
- Concerns/shortcomings of current treatment, including special cases:
  - Arrears should be recorded at nominal value (BPM6, paragraph 5.99; 2013 EDS, Appendix 7, paragraph 8). Presenting arrears as part of the appropriate instrument obscures liquidity and market value, and can overstate assets.
  - Debt securities past due and part of portfolio investment are included in total stock for that functional category (BPM6, paragraph 3.56), but there is no methodological justification or practical evidence for this treatment given lack of liquidity; reclassification guidance is lacking.
  - Arrears recorded as part of long-term instruments lack economic rationale; past-due long-term instruments should be reclassified to short-term.

### Methodological issues requiring guidance
- Types of arrears that may warrant exclusion or special treatment:
  - Technical settlement/payment system delays (e.g., 1–2 days) which do not reflect insolvency; these may be excluded.
  - Cancellations or postponements of incoming payments by counterparty banks in contexts of global instability, which do not characterize debtor solvency; these may be excluded.
  - Paragraph 8.59 (BPM6) allows other arrears to be shown as supplementary items.
- Classification ambiguities:
  - Financial derivatives: when a derivative reaches settlement date, unpaid overdue amount is classified as accounts receivable/payable (paragraph 5.82, BPM6), but practice lacks clarity on unpaid option premiums or periodic settlement payments.
  - Bills sold by a bank to a nonresident: if the nonresident does not present the bill for repayment at maturity but the bank is ready to meet its liability, treatment as arrears is ambiguous (2013 EDS, paragraph 2.32 suggests reporting such operational arrears as arrears).
  - Bondholder delays caused by a settlement depository delaying transfer of already-redeemed funds: the issuer met obligations, so issuer’s liability should not be considered arrears; treatment differs from 2013 EDS paragraph 2.32.

### Issues for discussion: Alternatives
- Alternative I:
  - Keep methodological and presentational status quo to avoid overburdening the template in countries with low evidence of arrears.
- Alternative II:
  - Separately identify arrears for each debt instrument in the IIP via “of which” items and provide memorandum information for stocks on accumulated arrears.
  - Requirements and trade-offs:
    - Requires changes in the core IIP framework and additional methodological guidance in the updated manual (presentation of accumulated arrears as a sub-item in IIP).
    - External users will need additional data treatment and aggregation for cross-sector analysis.
  - Potential benefits:
    - Ability for users to evaluate the amount of arrears and its share in the IIP.
    - Dissemination of memorandum items on accumulated arrears provides additional analytical information and comparability with other sources.
    - Provides additional granularity and ability to analyze arrears separately for each debt item.
- Alternative III:
  - Supplementary presentations of arrears in an integrated format (similar to integrated IIP) that include flows, revaluation, and other changes (breakdowns presented in Annex II).
  - Requirements and trade-offs:
    - Enables in-depth analysis of arrears and causes.
    - Would expand information, including compilation of arrears by foreign and national currencies, but requires considerable resources for data compilation and dissemination.
    - Demands consistent methodological guidance on integrated IIP for arrears covering stocks, flows, revaluation, and other changes.
    - Does not imply additional presentation with geographical breakdown; arrears data shown as a whole in relation to the rest of the world.
- Relationship to valuation guidance:
  - Alternatives II and III do not contradict Guidance Note F8 “Valuation of debt securities at both market and nominal value” and help users analyze nominal value of debt instruments separately from arrears.

### Rationale and Benefits of Alternatives II and III (paragraph 25)
- Alternatives II and III:
  - allow users to estimate the liquidity of an IIP item by subtracting the amount of arrears from the total of the item;
  - enable users to estimate more accurately the amount of long-term instruments;
  - contribute to the additional methodological guidance in the updated manual, which is supposed to remove at least some questions raised in paragraph 20.

### Outcomes and Recommendations from BPTT Consultations
- Consultation outcome:
  - Views of the Balance of Payments Task Team (BPTT) members were split, with half supporting Alternative II and the others preferring the status quo (Alternative I).
- Rationale of members supporting Alternative I:
  - Consider that the data on arrears are mostly relevant for liabilities.
  - Note that the 2013 EDS appropriately covers these data (e.g., Table 4.1), questioning the need to include them in IIP.
  - Acknowledge analytical usefulness of arrears on the asset side but prefer status quo on the premise that other alternatives would impose additional burden and most countries may not be able to provide such data.
  - Note that data on arrears may not be significant for all countries.
- Rationale of members supporting Alternative II:
  - Alternative II would separately identify arrears for each debt instrument in the IIP via “of which” items through memorandum information in IIP.
  - Enables users to analyze IIP positions in arrears for each debt instrument and combine arrears data in different analytical breakdowns to get an economic intuition of current insolvency risks related to particular sectors.
  - Acknowledges that this alternative requires revision of data collection systems for various sectors and instruments and imposes resource burdens, but asserts benefits of more detailed arrears data will override compilation costs.
  - Suggest collecting arrears of public and private sectors, if possible.
- Drafting team recommendation:
  - Post the current version of the GN for public consultation.
  - Decision on the recommended alternative for discussion in the IMF’s Committee on Balance of Payments Statistics meeting will be based on the updated GN incorporating consultation inputs.
  - In the absence of a majority opinion, the fallback solution of no change in the current standards would apply.

### Rejected Alternative (Alternative III) — Reasons for rejection
- Although it requires only supplementary presentation of arrears data, it received no support, apparently due to the burden associated with compilation of detailed tables proposed under this alternative.
- Compilation costs are expected to exceed potential analytical value, and a supplementary status of the presentation may discourage compilers from prompt actions to disseminate such data.
- Alternative III requires significant additional guidance on presentation of arrears in the IIP (more than the extra guidance required under Alternative II) to be included in the updated IMF’s Balance of Payments and International Investment Position Manual.
- Not all countries disseminate the integrated IIP, so they would be unable to compile such supplementary presentations on arrears.
- Consequently, Alternative III does not meet the cost-benefit principle and should be rejected.

### Coordination, data sharing, and compilation implications
- There is a strong need for coordination of data collection for arrears under any alternative.
- Data sharing is identified as a cornerstone for timely, consistent, and comprehensive statistical data across economic phenomena.
- Enhanced data sharing will improve compilers’ consistent understanding of financial conditions of companies experiencing arrears with nonresident counterparties.

### Questions for Discussion
- 1. Do you agree that arrears are important from the perspective of external sector statistics and its users, and therefore require separate treatment in the international accounts?
- 2. Taking into consideration the strengths and weaknesses of each proposed alternative, which of them do you support?
- 3. Do you have proposals related to the additional breakdowns of arrears, which are not mentioned in the suggested alternatives?
- 4. Do you suppose that methodological concerns and issues raised in this GN require the elaboration of a separate GN to address them?

### Annex — Proposed Supplementary Presentations under Alternative III (summarized)
- Proposed breakdowns for supplementary arrears presentations include:
  - By institutional sectors: Assets and Liabilities broken down into Central Bank; Deposit-Taking Corporations, Except Central Bank; General Government; Other Sectors; Other Financial Corporations; Nonfinancial Corporations, Households, and NPISHS.
  - By type of instrument: Assets and Liabilities broken down into Debt Securities; Financial Derivatives; Loans; Deposits; Trade Credit and Advances; Other Accounts Receivable/Payable.
  - By currency: Assets and Liabilities broken down into Domestic Currency and Foreign Currency.
- Note: "The supplementary data on arrears are not limited by exceptional financing."

*Source: International Monetary Fund — Balance of Payments Task Team guidance note on arrears in the International Investment Position.*

### SECTION I: THE ISSUE

### SECTION I: THE ISSUE

### Background and rationale
- Modern financial systems evolve rapidly and can generate turbulence on financial markets and sharp increases in insolvencies of financial market participants, with adverse effects on real sector entities (BPM6, paragraph 5.99).
- A significant increase in arrears may be a harbinger of an impending economic crisis (example cited: 2008—the subprime debt crisis); the crises of the 90s were also largely debt-driven.
- External debt is among the most important factors to monitor; the pandemic has exacerbated the global accumulation of debt. Developed countries can accumulate debt longer without collapse of their financial system; emerging countries are more exposed to impending consequences.
- Additional granularity of data on arrears by institutional sectors, financial instruments, and currency composition is important for users of external sector statistics.

### Analytical value of arrears breakdowns
- Breakdown by institutional sector:
  - Reveals risk concentration centers causing debt instability.
  - Arrears related to government debt indicate partial loss of government’s ability to service external debt and additional burden on government finance.
  - Arrears under direct investment may be managed by parent companies without litigation and may not increase systemic risk.
- Breakdown by financial instrument:
  - Useful because debt covenants can trigger immediate repayment of instruments if there are arrears on other instruments, causing early redemptions and potential cross-default spillovers.
- Breakdown by currency composition:
  - Helps estimate risk from exceptional foreign borrowing to meet obligations denominated in foreign currencies; liabilities in national currency may be redeemed via additional currency issuance by the central bank.
  - Debt liabilities denominated in different currencies can have various effects on financial soundness.

### Importance of timely, high-quality arrears information
- Timely information on increasing trends in arrears can prompt interventions and support programs to reduce negative consequences.
- Arrears provide evidence of serious short-term liquidity problems and longer-term solvency issues.
- Bridging the data gap on arrears is a top priority for statisticians.

### Definitions and current guidance
- Arrears are defined as amounts that are both unpaid and past the due date for payment (BPM6, paragraph 5.99).
- Arrears can arise from late payment of principal and interest on debt instruments (recorded in the original debt instrument) or from late payments for non-debt instruments and other transactions (recorded in a new debt instrument) (2013 EDS, Appendix 7, paragraph 3).
- Data on arrears should be presented as supplementary items, where significant (BPM6, paragraph 3.57).
- Within the 2013 EDS framework:
  - Total value of arrears is separately identified by sectors in memorandum items to Table 4.1 (2013 EDS, paragraph 4.4).
  - Memorandum Table 4.2 presents arrears at nominal value by sector detailed by principal and interest (2013 EDS, paragraphs 4.9–4.10).
  - Total value of arrears and debt securities by sector are separately identified in memorandum items to Table 5.1 (2013 EDS, paragraph 5.8).

### Historical recording approaches and BPM6 change
- Under BPM5:
  - Arrears were reclassified from the original debt instrument to other assets or other liabilities, short-term (BPM5, paragraph 458).
  - Arrears of amortization and interest were recorded as if paid and a counter-entry made to reflect a new liability (BPM5, paragraphs 458 and 528).
  - In the analytical presentation, only payments of arrears resulting from balance of payments difficulties were included under exceptional financing (BPM5, paragraph 529).
- BPM6 revised principles to harmonize arrears recording across macroeconomic statistics by adopting the accrual basis:
  - Under the accrual basis, repayment of debt is recorded at liquidation of the debt liability; arrears remain recorded with the same instrument until liquidated.
  - Advantage: avoids complex and artificial imputation because there is no need to record transactions related to overdue debt.
- Post-BPM6 presentation:
  - Arrears related to exceptional financing are reflected as memorandum items in balance of payments and included in analytical presentation focused on monetary authorities’ actions (BPM6, paragraph A1.22).
  - Other arrears not related to exceptional financing may be recorded as a supplementary category in total and under the specific financial asset or liability class affected (BPM6, paragraph 5.101).
  - Arrears are not presented as a separate item in standard components of the IIP, limiting analytical usefulness for financial stability assessment.

### Practical shortcomings and data availability
- Only one-third of countries that contributed to EDS data have arrears data available in the Quarterly External Debt Statistics (QEDS) Database.
- Concerns/shortcomings of current treatment, including special cases:
  - Arrears should be recorded at nominal value (BPM6, paragraph 5.99; 2013 EDS, Appendix 7, paragraph 8). Presenting arrears as part of the appropriate instrument obscures liquidity and market value, and can overstate assets.
  - Debt securities past due and part of portfolio investment are included in total stock for that functional category (BPM6, paragraph 3.56), but there is no methodological justification or practical evidence for this treatment given lack of liquidity; reclassification guidance is lacking.
  - Arrears recorded as part of long-term instruments lack economic rationale; past-due long-term instruments should be reclassified to short-term.

### Methodological issues requiring guidance
- Types of arrears that may warrant exclusion or special treatment:
  - Technical settlement/payment system delays (e.g., 1–2 days) which do not reflect insolvency; these may be excluded.
  - Cancellations or postponements of incoming payments by counterparty banks in contexts of global instability, which do not characterize debtor solvency; these may be excluded.
  - Paragraph 8.59 (BPM6) allows other arrears to be shown as supplementary items.
- Classification ambiguities:
  - Financial derivatives: when a derivative reaches settlement date, unpaid overdue amount is classified as accounts receivable/payable (paragraph 5.82, BPM6), but practice lacks clarity on unpaid option premiums or periodic settlement payments.
  - Bills sold by a bank to a nonresident: if the nonresident does not present the bill for repayment at maturity but the bank is ready to meet its liability, treatment as arrears is ambiguous (2013 EDS, paragraph 2.32 suggests reporting such operational arrears as arrears).
  - Bondholder delays caused by a settlement depository delaying transfer of already-redeemed funds: the issuer met obligations, so issuer’s liability should not be considered arrears; treatment differs from 2013 EDS paragraph 2.32.

### Issues for discussion: Alternatives
- Alternative I:
  - Keep methodological and presentational status quo to avoid overburdening the template in countries with low evidence of arrears.
- Alternative II:
  - Separately identify arrears for each debt instrument in the IIP via “of which” items and provide memorandum information for stocks on accumulated arrears.
  - Requirements and trade-offs:
    - Requires changes in the core IIP framework and additional methodological guidance in the updated manual (presentation of accumulated arrears as a sub-item in IIP).
    - External users will need additional data treatment and aggregation for cross-sector analysis.
  - Potential benefits:
    - Ability for users to evaluate the amount of arrears and its share in the IIP.
    - Dissemination of memorandum items on accumulated arrears provides additional analytical information and comparability with other sources.
    - Provides additional granularity and ability to analyze arrears separately for each debt item.
- Alternative III:
  - Supplementary presentations of arrears in an integrated format (similar to integrated IIP) that include flows, revaluation, and other changes (breakdowns presented in Annex II).
  - Requirements and trade-offs:
    - Enables in-depth analysis of arrears and causes.
    - Would expand information, including compilation of arrears by foreign and national currencies, but requires considerable resources for data compilation and dissemination.
    - Demands consistent methodological guidance on integrated IIP for arrears covering stocks, flows, revaluation, and other changes.
    - Does not imply additional presentation with geographical breakdown; arrears data shown as a whole in relation to the rest of the world.
- Relationship to valuation guidance:
  - Alternatives II and III do not contradict Guidance Note F8 “Valuation of debt securities at both market and nominal value” and help users analyze nominal value of debt instruments separately from arrears.

*Source: IMF — SECTION I: THE ISSUE*

### 25.      In relation to the issues, highlighted in paragraphs 19–20, both Alternatives II and  III:

### Arrears in the International Investment Position

### Rationale and Benefits of Alternatives II and III
- Alternatives II and III:
  - allow users to estimate the liquidity of an IIP item by subtracting the amount of arrears from the total of the item;
  - enable users to estimate more accurately the amount of long-term instruments;
  - contribute to the additional methodological guidance in the updated manual, which is supposed to remove at least some questions raised in paragraph 20.

### Outcomes and Recommendations from BPTT Consultations
- Consultation outcome:
  - Views of the Balance of Payments Task Team (BPTT) members were split, with half supporting Alternative II and the others preferring the status quo (Alternative I).
- Rationale of members supporting Alternative I:
  - Consider that the data on arrears are mostly relevant for liabilities.
  - Note that the 2013 EDS appropriately covers these data (e.g., Table 4.1), questioning the need to include them in IIP.
  - Acknowledge analytical usefulness of arrears on the asset side but prefer status quo on the premise that other alternatives would impose additional burden and most countries may not be able to provide such data.
  - Note that data on arrears may not be significant for all countries.
- Rationale of members supporting Alternative II:
  - Alternative II would separately identify arrears for each debt instrument in the IIP via “of which” items through memorandum information in IIP.
  - Enables users to analyze IIP positions in arrears for each debt instrument and combine arrears data in different analytical breakdowns to get an economic intuition of current insolvency risks related to particular sectors.
  - Acknowledges that this alternative requires revision of data collection systems for various sectors and instruments and imposes resource burdens, but asserts benefits of more detailed arrears data will override compilation costs.
  - Suggest collecting arrears of public and private sectors, if possible.
- Drafting team recommendation:
  - Post the current version of the GN for public consultation.
  - Decision on the recommended alternative for discussion in the IMF’s Committee on Balance of Payments Statistics meeting will be based on the updated GN incorporating consultation inputs.
  - In the absence of a majority opinion, the fallback solution of no change in the current standards would apply.

### Rejected Alternatives (Alternative III)
- Alternative III was rejected for the following reasons:
  - Although it requires only supplementary presentation of arrears data, it received no support, apparently due to the burden associated with compilation of detailed tables proposed under this alternative.
  - Compilation costs are expected to exceed potential analytical value, and a supplementary status of the presentation may discourage compilers from prompt actions to disseminate such data.
  - Alternative III requires significant additional guidance on presentation of arrears in the IIP (more than the extra guidance required under Alternative II) to be included in the updated IMF’s Balance of Payments and International Investment Position Manual.
  - Not all countries disseminate the integrated IIP, so they would be unable to compile such supplementary presentations on arrears.
  - Consequently, Alternative III does not meet the cost-benefit principle and should be rejected.

### Coordination and Data Sharing
- There is a strong need for coordination of data collection for arrears under any alternative.
- Data sharing is identified as a cornerstone for timely, consistent, and comprehensive statistical data across economic phenomena.
- Enhanced data sharing will improve compilers’ consistent understanding of financial conditions of companies experiencing arrears with nonresident counterparties.

### Questions for Discussion
- 1. Do you agree that arrears are important from the perspective of external sector statistics and its users, and therefore require separate treatment in the international accounts?
- 2. Taking into consideration the strengths and weaknesses of each proposed alternative, which of them do you support?
- 3. Do you have proposals related to the additional breakdowns of arrears, which are not mentioned in the suggested alternatives?
- 4. Do you suppose that methodological concerns and issues raised in this GN require the elaboration of a separate GN to address them?

### Annex — Proposed Supplementary Presentations under Alternative III (summarized)
- Proposed breakdowns for supplementary arrears presentations include:
  - By institutional sectors: Assets and Liabilities broken down into Central Bank; Deposit-Taking Corporations, Except Central Bank; General Government; Other Sectors; Other Financial Corporations; Nonfinancial Corporations, Households, and NPISHS.
  - By type of instrument: Assets and Liabilities broken down into Debt Securities; Financial Derivatives; Loans; Deposits; Trade Credit and Advances; Other Accounts Receivable/Payable.
  - By currency: Assets and Liabilities broken down into Domestic Currency and Foreign Currency.
- Note: "The supplementary data on arrears are not limited by exceptional financing."

---


_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/bptt/b7-arrears-in-international-investment-position.pdf_