## _spn0918 - Executive Summary

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### Executive Summary
- Purpose: discusses appropriate methods for disclosing fiscal risks from exogenous shocks and the realization of explicit or implicit contingent obligations of the government.
- Key recommendation: countries should regularly prepare and publish a statement of fiscal risks, ideally accompanying annual budget documents, and including the different types of risks related to already-announced public interventions in support of the financial sector.
- Focus: fiscal risks emerging from recent public interventions in the financial sector, expanding on previous guidance prepared prior to the crisis.

### I. What Are Fiscal Risks?
- Definition: potential differences between actual and expected fiscal outcomes (e.g., fiscal balances and public debt).
- Scope: events that can materialize over the next few years; excludes longer-term predictable spending pressures (e.g., aging).
- Sources of fiscal risks:
  - Exogenous shocks:
    - Slowdown in economic activity reduces revenue and increases social outlays.
    - Sudden exchange rate depreciation can sharply raise public debt where foreign currency–denominated debt share is high.
    - Interest rate shocks threaten countries with high public debts.
    - Aid shortfalls in low-income countries may raise debt.
    - Commodity price declines reduce revenue for commodity exporters.
    - Natural disasters may lead to major repair or compensation costs—up to 10 percent of GDP in smaller economies.
  - Explicit contingent obligations:
    - Contracts (including PPPs) that include explicit government guarantees (loan repayment, minimum volumes/prices).
  - Implicit contingent obligations:
    - Government interventions for moral or political reasons (e.g., protecting depositors beyond insurance schemes, rescuing subnational governments, taking over near-insolvent SOEs).

### II. Why and How Should Fiscal Risks be Disclosed?
- Benefits of disclosure:
  - Invites additional scrutiny of fiscal activities and implications.
  - Builds support for prudent fiscal policies, better risk mitigation, and improved policy responses.
  - Enables quicker policy adjustment when risks increase and helps identify offsetting measures in advance.
  - Allows procedures to limit risks (e.g., parliamentary ceilings on guarantees).
  - Strengthens confidence in public sector accounts, reducing borrowing costs and improving market access.
- Empirical linkage:
  - Fiscal transparency indicators are positively correlated with sovereign ratings after controlling for per capita income, inflation, default history, and political stability.
  - Moving from no disclosure to some disclosure of fiscal risks is associated with an improvement in a country’s credit rating by one full notch (example: from Baa1 to A3 on Moody’s scale).
  - Chart statistics: sample of 56 countries surveyed at different points during 1999–2007; p-value: 0.04.
- Recommended instrument: a “statement of fiscal risks.”
  - Seven countries consolidate information on fiscal risks in a single published document: Australia, Brazil, Chile, Colombia, Indonesia, New Zealand, and Pakistan.
  - Typical content: past experience with risk realization, policies to mitigate/manage risks, and forward-looking risk estimates.
- Forward-looking disclosure formats:
  - Sensitivity analysis to key macro variables; alternative macro scenarios; stress tests; fan charts illustrating probability distributions.
  - Debt sustainability analyses.
  - Quantification of budget exposure to guarantees via option pricing models, stochastic simulation, or risk ratings.
  - Description and quantification of guarantees in PPP projects (face value, expected cash flow payments, net present value).
  - Nature and scope of ongoing litigation against the state.
  - Full-fledged general government or public sector accounts and timely audited SOE accounts as sources.
- Fan chart example (Thailand):
  - Method: joint normal distribution for shocks to real GDP growth, real interest rate on domestic and foreign debt, and rate of change of real effective exchange rate; random draws to generate debt-to-GDP distribution.
  - Results: 20 percent probability that by 2012 public debt would remain in the 35–40 percent of GDP range and a 90 percent chance it would remain in the 25–55 percent range.
  - Actual crisis outcome: debt reached 45 percent of GDP in 2008 and is projected at 48½ percent at end-2009 (slightly outside the initial 90 percent confidence interval for 2009).
- Disclosure caveats:
  - Reporting implicit contingent liabilities could create moral hazard by encouraging undue risk taking if perceived government support is likely.
  - Information that can harm the government’s position in litigation or negotiations should not be disclosed.
  - Fiscal policy should nonetheless consider all fiscal risks, including those not disclosed or explicitly quantified.

- Statement of Fiscal Risks (structure suggestions):
  - Risk categories: macroeconomic risks; contingent obligations (government guarantees); risks from PPPs and SOEs; central government backing of subnational governments; natural disaster risks; fluctuations in value of public sector assets; implicit risks (banking system, ongoing litigation).
  - For each risk: discuss past realization and forward-looking estimates; forward-looking approaches include sensitivity analysis, debt sustainability analysis, option pricing models for guarantees, PPP guarantee quantification, and disclosure of ongoing litigation.
  - Use full general government/public sector accounts and audited SOE accounts as inputs.

### III. Fiscal Risks Stemming from Public Interventions in Support of the Financial System
- Five categories of interventions and their specific risks:
  - Government guarantees:
    - Types: blanket deposit guarantees; guarantees on interbank transactions; guarantees on new debt categories; borrowing guarantees for SMEs, automakers, housing, student loans.
    - Even with fees, subsidy element can be substantial, exposing government balance sheets to large losses if the financial sector deteriorates.
  - Liquidity provision by central banks:
    - Expanded by lengthening instrument duration and broadening eligible collateral to include commercial paper, mortgage-backed securities, student loans.
    - May alter balance sheet size and structure (liquidity, maturities, currencies, asset price volatility), exposing central bank and eventually government to significant risks.
  - Lending operations:
    - Beneficiaries: banks, other financial institutions, and nonfinancial companies.
    - Increase government’s lending portfolio and expose it to counterparty/default risk and interest and exchange rate risk if mismatches arise.
  - Capital injections:
    - Forms: purchases of preferred/ordinary shares, hybrid bonds, convertible notes, subordinated debt.
    - Risks: uncertainty about value of government’s residual claim at time of injection and future valuation changes.
  - Asset purchases:
    - Types: loan portfolios, insured mortgages, commercial paper, corporate bonds, troubled assets, stocks.
    - Expose public sector to valuation risks and, if creating duration/currency mismatches, to interest and exchange rate risk; valuation difficult for illiquid assets.
- Recurrent features of interventions:
  - Operations conducted by governments and other public institutions (central banks, public financial and nonfinancial institutions), producing many off-balance-sheet operations that may become on-budget later.
  - Support design often structured to avoid affecting “headline” fiscal deficits (e.g., guarantees, retained residual claims).
  - Estimating current value of assets taken onto public balance sheet is often difficult; recovery outcomes vary.
  - Individual operations may be reported transparently, but overall risks are rarely reported systematically and integratedly, leaving the public unclear about total fiscal implications.

### IV. Reporting Guidance and GFSM 2001 Application
- GFSM 2001: provides an integrated framework for reporting direct government restructuring operations, focusing on public sector net worth and reconciling stocks, flows, and cash transactions.
- Sovereign balance sheet coverage: should be as broad as possible, including activities by government, central bank, or other public sector entities to reveal size/nature of interventions and impacts on fiscal solvency and policy coordination/institutional efficiency.
- Valuation guidance:
  - When market prices are absent, rely on discounted expected future flows, value of transaction counterpart (e.g., mortgaged property), or prices of similar assets.
  - Particular attention required to estimate fair value of assets and liabilities.

### V. Box 2 — Example of Reporting Government Intervention under GFSM 2001 (Transaction Illustration and Accounting Treatment)
- Transaction example:
  - Government purchase of troubled assets at a price of $150 million, with estimated fair value of $100 million.
- Statement of government operations (accrual flows):
  - Transfer reported as an expense (subsidy), increasing the fiscal deficit by $50 million.
  - Purchase of assets reported at fair value ($100 million) as financing (purchase of financial assets).
  - Funding of operation ($150 million) reported either as a decline in bank deposits or issuance of government bonds.
- Statement of sources and uses of cash (cash flows):
  - Transfer reported as a cash payment for operating activities, declining cash balance by $50 million.
  - Purchase of assets results in a negative cash flow from financing activities of $100 million.
  - If financed through issuance of bonds: issuance results in a positive cash flow from financing activities of $150 million and no change in the stock of cash.
  - If financed from a withdrawal of bank deposits: this withdrawal will not be reported and the stock of cash will decline by $150 billion.
- Government’s balance sheet (stocks):
  - Purchased assets add to government financial assets by $100 million.
  - Financing results in a decline in government’s deposits (assets) or an increase in debt (liability).
  - The deficit reduces government net worth.
- Subsequent treatment:
  - Subsequent changes in asset value reported as holding gains/losses in the statement of other economic flows and will affect government net worth on the balance sheet.
- Supplemental fiscal-risk assessment and reporting recommendations:
  - Use alternative scenarios beyond macro variables to explore different assumptions for prices and recovery rates of financial assets on the government’s balance sheet.
  - When preparing the budget, include allowance/contingency appropriations reflecting the likelihood of risks materializing and have a strategy for fiscal response to unexpected declines in asset values or increased contingent liability likelihood.
  - Medium-term fiscal frameworks and debt sustainability analysis should assume different scenarios for materialization of contingent liabilities, recovery rates, and resources from sale of acquired assets and equity stakes.
  - Detailed information about fiscal risks stemming from government interventions should be disclosed when first incurred and updated regularly in a single “statement of fiscal risks,” including main characteristics of interventions, impacts on the public sector’s balance sheet, and estimates of associated fiscal risks.

### VI. Box 3 — Scenario Illustration (Impact of Different Asset Recovery Rates)
- Context and setup:
  - Example: financial crisis in year t; interventions lead to a large increase in direct liabilities and increased value of earlier outstanding debt and explicit guarantees (e.g., due to exchange rate depreciation).
  - In this example, the debt-to-GDP ratio rises to 100 percent in year t.
  - Government undertakes fiscal consolidation over subsequent years while government claims increase (ownership stakes and claims on financial sector institutions).
- Range of outcomes:
  - Given uncertainty over realization of assets, different scenarios can be compared for the path of gross public debt.
  - In this example, the debt stock could vary between 65 percent of GDP and 85 percent of GDP at the end of a five-year period.
- Defined scenarios:
  - Baseline: no immediate privatization, partial realization of other claims; public debt falls as a share of GDP reflecting fiscal effort and asset recovery.
  - “No asset recovery”: public-debt-to-GDP ratio declines solely from fiscal consolidation; includes realization of a small contingent liability in 2011.
  - Intermediate: recovery of assets is only half of that under the baseline.
  - “Positive”: in addition to baseline recovery rates, banks are gradually but fully privatized over the five-year period.

### VII. Concluding Remarks and Policy Messages
- Interventions in support of the financial system generate further fiscal risks.
- Comprehensive, regular, and transparent disclosure helps governments to:
  - Define a management strategy for assets and liabilities taken on the balance sheet.
  - Prepare exit strategies to reduce presence in the financial sector and withdraw support.
- Key recommendation reiterated: Countries should regularly prepare and publish a statement of fiscal risks, ideally accompanying budget documents and including risks stemming from public interventions in support of the financial sector.

*Source: Executive Summary of _spn0918.*

### Executive Summary.......................................................................................3

### _spn0918 - Executive Summary.......................................................................................3

### Executive Summary
- The note discusses appropriate methods for disclosing fiscal risks from exogenous shocks and the realization of explicit or implicit contingent obligations of the government.
- Key recommendation: countries should regularly prepare and publish a statement of fiscal risks, ideally accompanying annual budget documents, and including the different types of risks related to already-announced public interventions in support of the financial sector.
- Focus: fiscal risks emerging from recent public interventions in the financial sector, expanding on previous guidance prepared prior to the crisis.

### I. Introduction
- Fiscal outturns often differ from budget or other fiscal projections due to deviations of economic growth from expectations, unanticipated terms-of-trade shocks, natural disasters, or calls on government guarantees—both explicit and implicit.
- The global financial and economic crisis caused a sharp deterioration in the economic environment and financial markets and prompted government policy responses to stabilize the financial sector and stimulate aggregate demand, resulting in an increase in both public debt and government contingent liabilities that is unprecedented in scale and pervasiveness since the end of World War II.2
- Uncertainty about the timing and strength of the recovery in economic growth raises questions about how quickly increased liabilities can return to more comfortable levels.
- Several countries have increased the disclosure of fiscal risks over the last decade.3
- Recent public sector assistance to troubled financial institutions, and risks stemming from more-uncertain-than-usual economic growth projections, have renewed the importance of proper fiscal risk disclosure.
- Public interventions reported include: liquidity injections; resolution of financial institutions via closure, nationalization, recapitalization, or mergers; establishment of funds to purchase troubled securities; extensions of deposit and other guarantees.
- Transparent reporting is crucial for understanding fiscal stance, fiscal sustainability, and designing exit strategies from extensive financial-sector intervention.

### II. What Are Fiscal Risks?
- Definition: fiscal risks refer to potential differences between actual and expected fiscal outcomes (e.g., fiscal balances and public debt).
- Such deviations occur because budgets are based on assumptions that may not materialize and some operations may initially be conducted off-budget. Most deviations are small and manageable, but some shocks can impose major, unexpected burdens (e.g., severe financial crisis converting low-debt country into one with severe debt overhang).
- Fiscal risks discussed here refer to events that can materialize over the next few years; longer-term predictable spending pressures (e.g., aging) are excluded.4

- Fiscal risks stem from:
  - Exogenous shocks:
    - Slowdown in economic activity reduces revenue and increases social outlays.
    - Sudden exchange rate depreciation can sharply raise public debt, particularly where foreign currency–denominated debt share is high.
    - Interest rate shocks threaten countries with high public debts.
    - Aid shortfalls in low-income countries may raise debt.
    - Commodity price declines reduce revenue for commodity exporters.
    - Natural disasters may lead to major repair or compensation costs—up to 10 percent of GDP in smaller economies (Freeman and others, 2003).
  - Explicit contingent obligations:
    - Contracts (including PPPs) often include explicit government guarantees (loan repayment, minimum volumes/prices) that trigger automatic budget obligations.
  - Implicit contingent obligations:
    - Government interventions for moral or political reasons (e.g., protecting depositors beyond insurance schemes, rescuing subnational governments to prevent default, taking over near-insolvent SOEs to preserve strategic goods/services).

### III. Why and How Should Fiscal Risks be Disclosed?
- Benefits of disclosure:
  - Invites additional scrutiny of fiscal activities and implications.
  - Builds support for prudent fiscal policies, better risk mitigation, and improved policy responses.
  - Enables quicker policy adjustment when risks increase and helps identify offsetting measures in advance.
  - Allows procedures to limit risks (e.g., parliamentary ceilings on guarantees).
  - Strengthens confidence in public sector accounts, reducing borrowing costs and improving market access.
- Empirical linkage:
  - Fiscal transparency indicators are positively correlated with sovereign ratings after controlling for per capita income, inflation, default history, and political stability.6
  - Moving from no disclosure to some disclosure of fiscal risks is associated with an improvement in a country’s credit rating by one full notch (example: from Baa1 to A3 on Moody’s scale).
- Chart 1 summary:
  - Chart reports 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.
  - Sample: 56 countries surveyed at different points during 1999–2007.
  - Chart statistics: p-value: 0.04.
- Recommended instrument: a “statement of fiscal risks.”
  - Currently seven countries consolidate information on fiscal risks in a single published document (Australia, Brazil, Chile, Colombia, Indonesia, New Zealand, and Pakistan).
  - Statements typically submitted to parliament alongside budget documents; sometimes mandated by fiscal responsibility laws.
  - Content usually includes past experience with risk realization, policies to mitigate/manage risks, and forward-looking risk estimates (see Box 1).
- Forward-looking disclosure formats:
  - Sensitivity analysis to key macro variables, alternative macro scenarios, stress tests, fan charts illustrating probability distributions.
  - Debt sustainability analyses.
  - Quantification of budget exposure to guarantees via option pricing models, stochastic simulation, or risk ratings.
  - Description and quantification of guarantees in PPP projects (face value, expected cash flow payments, net present value).
  - Nature and scope of ongoing litigation against the state.
  - Full-fledged general government or public sector accounts and timely audited SOE accounts as sources.
- Fan charts:
  - Example: Thailand public debt forecast (prepared early 2008) using identity relating debt t to debt t–1, primary balance t, stock-flow adjustments, and four variables: real GDP growth, real interest rate on domestic and foreign debt, and rate of change of real effective exchange rate.
  - Distribution assumed joint normal; random shocks drawn and debt-to-GDP recursively calculated and ranked.
  - Thailand example results: 20 percent probability that by 2012 public debt would remain in the 35–40 percent of GDP range and a 90 percent chance it would remain in the 25–55 percent range.
  - Actual crisis outcome: debt reached 45 percent of GDP in 2008 and is projected at 48½ percent at end-2009 (slightly outside the initial 90 percent confidence interval for 2009).

- Disclosure caveats:
  - Disclosure could generate moral hazard in some instances: reporting on implicit contingent liabilities might create perception government will cover losses, encouraging undue risk taking.
  - Information that can harm the government’s position in litigation or ongoing negotiations should not be disclosed.
  - Fiscal policy should nonetheless consider all fiscal risks, including those not disclosed or explicitly quantified.7

- Box 1 (Statement of Fiscal Risks) highlights structuring by risk categories:
  - Macroeconomic risks (growth, terms-of-trade, exchange and interest rates).
  - Contingent obligations (government guarantees).
  - Risks from PPPs and SOEs.
  - Central government backing of subnational governments.
  - Natural disaster risks.
  - Fluctuations in value of public sector assets.
  - Implicit risks (banking system, ongoing litigation) generally not disclosed to avoid moral hazard, but announced/undertaken actions should be disclosed.
  - For each risk: discuss past realization and forward-looking estimates; forward-looking approaches include sensitivity analysis, debt sustainability analysis, option pricing models for guarantees, PPP guarantee quantification, and disclosure of ongoing litigation.
  - Full general government/public sector accounts and audited SOE accounts are useful sources.

### IV. Fiscal Risks Stemming from Public Interventions in Support of the Financial System
- Recent interventions can be classified into five categories, each with specific risks:
  - Government guarantees:
    - Include blanket deposit guarantees; guarantees on interbank transactions; guarantees on some categories of new debt; borrowing guarantees for specific firms/sectors (SMEs, automakers, housing, student loans).
    - While fees may be charged, in most instances the subsidy element is substantial, exposing government balance sheets to large losses if the financial sector deteriorates.
  - Liquidity provision by central banks:
    - Expanded by lengthening duration of instruments and broadening eligible collateral to include commercial paper, mortgage-backed securities, and student loans.
    - Operations may not immediately affect central bank net worth but alter balance sheet size and structure (liquidity, maturities, currencies, asset price volatility), exposing central bank (and eventually government) to significant risks.
  - Lending operations:
    - Beneficiaries include banks, other financial institutions, and nonfinancial companies (e.g., automakers).
    - While not affecting government net worth if loan value remains unimpaired, lending increases government’s lending portfolio and exposes it to counterparty/default risk and, if mismatches arise, interest and exchange rate risk.
  - Capital injections:
    - Forms include purchases of preferred/ordinary shares, hybrid bonds, convertible notes, and subordinated debt.
    - Immediate risk: uncertainty about the value of government’s residual claim on the institution at time of injection (may be smaller than paid). Fiscal risks also stem from future changes in value of residual claims.
  - Asset purchases:
    - Include purchase of loan portfolios, insured mortgages, commercial paper, corporate bonds, troubled assets, and/or stocks.
    - Expose public sector to valuation risks and, if creating duration/currency mismatches, to interest and exchange rate risk.
    - Valuation is difficult, especially for assets with illiquid markets.

- Recurrent features of interventions:
  - Operations conducted by governments and other public institutions (central banks, public financial and nonfinancial institutions), leading to many off-balance-sheet operations not directly reflected in government accounts but potentially becoming on-budget later.
  - Design of support operations often structured to avoid affecting “headline” fiscal deficits (e.g., via guarantees or retained residual claims).
  - Estimating current value of assets taken onto public balance sheet is often difficult; some assets may ultimately be fully recovered, others not.
  - Individual operations may be reported transparently, but overall risks are rarely reported systematically and integratedly, leaving the public confused about total fiscal implications.

- Reporting guidance and GFSM 2001:
  - GFSM 2001 provides an integrated framework for reporting direct government restructuring operations, focusing on public sector net worth and reconciling stocks, flows, and cash transactions (see Box 2).
  - Application issues:
    - Sovereign balance sheet coverage should be as broad as possible, including activities by government, central bank, or other public sector entities to reveal size/nature of interventions and impacts on fiscal solvency and policy coordination/institutional efficiency.
    - Particular attention to estimating fair value of assets and liabilities; when market prices are absent, rely on discounted expected future flows, value of transaction counterpart (e.g., mortgaged property), or prices of similar assets.

### V. Concluding Remarks
- The note emphasizes the importance of regular, comprehensive, and transparent disclosure of fiscal risks—especially those arising from public interventions in the financial sector—to improve fiscal policy design, market confidence, and the ability to manage and mitigate risks.

*Source: Executive Summary of _spn0918.*

### Box 2. An Example of Reporting Government Intervention under GFSM 2001

### Box 2. An Example of Reporting Government Intervention under GFSM 2001

### Illustration of a single intervention (transaction details and accounting treatment)
- Transaction: government purchase of troubled assets at a price of $150 million, with estimated fair value of $100 million.
- Statement of government operations (accrual flows):
  - The transfer is reported as an expense (subsidy), contributing to a decline in the net lending/borrowing balance (i.e., an increase in the fiscal deficit) of $50 million.
  - The purchase of assets is reported at fair value ($100 million), as financing (purchase of financial assets).
  - The funding of the operation ($150 million) is reported either as a decline in bank deposits or the issuance of government bonds.
- Statement of sources and uses of cash (cash flows):
  - The transfer is reported as a cash payment for operating activities, contributing to a decline in the cash balance of $50 million.
  - The purchase of assets results in a negative cash flow from financing activities of $100 million.
  - If financed through the issuance of bonds, the issuance results in a positive cash flow from financing activities of $150 million and there will not be any change in the stock of cash.
  - If financed from a withdrawal of bank deposits, this withdrawal will not be reported and the stock of cash will decline by $150 billion.
- Government’s balance sheet (stocks):
  - The purchased assets add to government financial assets (by $100 million).
  - The financing of the operation will result in a decline in government’s deposits (assets) or an increase in its debt (liability).
  - The deficit will result in a decline in the government’s net worth.
- Subsequent treatment:
  - Subsequent changes in the value of the assets are reported as holding gains/losses in the statement of other economic flows and will affect the government’s net worth as reported on its balance sheet.

### Recommended supplemental fiscal-risk assessment and reporting
- An assessment of fiscal risks could be based on an analysis of alternative scenarios:
  - Beyond analysis of changes in macroeconomic variables (as in commonly used debt-sustainability analyses), alternative scenarios could explore implications of different assumptions with regard to prices and recovery rates of the financial assets on the government’s balance sheet.
  - Box 3 illustrates a format for a chart presenting scenarios involving different outcomes for the debt/GDP ratio under various assumptions for recovery rates.
- Fiscal risks associated with financial sector restructuring costs should be incorporated in fiscal analysis and the budget process:
  - When preparing the budget, some allowance needs to be made for the possibility that some risks and contingent liabilities will materialize.
  - The government should have in place a strategy regarding how fiscal policy would respond to unexpected declines in the value of financial assets held by the government (or to an increase in the likelihood that contingent liabilities will materialize).
  - The government can include contingency appropriations in the budget, whose magnitude would reflect the likelihood of fiscal risks materializing.
- Medium-term fiscal frameworks and debt sustainability analysis should assume different scenarios regarding:
  - Materialization of contingent liabilities.
  - Recovery rates of debt repayments by recapitalized agencies.
  - Resources generated from the sale of acquired assets and equity stakes.
- Disclosure practice:
  - Detailed information about fiscal risks stemming from government interventions should be disclosed when first incurred and updated on a regular basis.
  - Such information should be published in a single “statement of fiscal risks.”
  - The type of information reported could include the main characteristics of the interventions, their impact on the public sector’s balance sheet, and estimates of their associated fiscal risks.

### Box 3 — Using scenarios to illustrate the impact of different asset recovery rates (summary)
- Context and setup:
  - Example: country experiences a financial crisis in year t; government interventions lead to a large increase in direct liabilities, and value of earlier outstanding debt and explicit guarantees increases sharply (e.g., because of an exchange rate depreciation).
  - In this example, the debt-to-GDP ratio rises to 100 percent in year t.
  - The government undertakes fiscal consolidation over subsequent years while government claims increase (ownership stakes and claims on financial sector institutions).
- Range of outcomes:
  - Given uncertainty over realization of assets, different scenarios can be compared for the path of gross public debt.
  - In this example, the debt stock could vary between 65 percent of GDP and 85 percent of GDP at the end of a five-year period.
- Defined scenarios in the example:
  - Baseline scenario:
    - Assumes no immediate privatization, and a partial realization of other claims.
    - Public debt falls as a share of GDP, reflecting fiscal effort and asset recovery.
  - “No asset recovery” scenario:
    - Public-debt-to-GDP ratio declines solely as a result of fiscal consolidation.
    - This scenario also includes the realization of a small contingent liability in 2011.
  - Intermediate scenario:
    - Assumes that recovery of assets is only half of that under the baseline scenario.
  - “Positive” scenario:
    - Assumes that in addition to the baseline recovery rates, the banks are gradually, but fully, privatized over the five-year period.

### Concluding policy message (from the box and surrounding text)
- Interventions in support of the financial system, while often necessary, generate further fiscal risks.
- Comprehensive reporting helps governments to:
  - Define a management strategy for assets and liabilities taken on the balance sheet.
  - Prepare exit strategies to reduce presence in the financial sector and withdraw support.
- Key recommendation:
  - Countries should regularly prepare and publish a statement of fiscal risks, ideally accompanying budget documents and including risks stemming from public interventions in support of the financial sector.

*Box 2. An Example of Reporting Government Intervention under GFSM 2001 — source PDF content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/spn/2009/_spn0918.pdf_