Contingent Liabilities: Issues and Practice; Aliona Cebotari; imf working Paper 08/245; October 1, 2008

The monitoring of all public contingent liabilities should be centralized in the fiscal 
policy-making institution. The rationale for this is that the central government often 
implicitly or explicitly underwrites the liabilities of public sector entities, as evidenced by 
numerous bailouts of subnational governments and of financial or nonfinancial public 
institutions. The macro-fiscal department of the ministry of finance, or a department with 
equivalent responsibilities, should be in charge of the overall monitoring of contingent 
liabilities and fiscal risks, even if specific liabilities are managed on a day-to-day basis by 
other entities in the ministry of finance (e.g., the public debt office).
There is also a case for centralizing the actual management of contingent liabilities. The 
main benefit of a centralized management is that it allows a systematic evaluation of the 
relationships among various risks affecting the government’s balance sheet and allows 
adoption of net risk mitigation measures. For instance, if the risks faced in one part of the 
public sector offset risks in another part, this would provide a natural hedge that might 
obviate the need to engage in costly hedging transactions, something that may not be 
apparent if the various parts of the public sector managed their own risks. However, in the 
case of contingent liabilities alone, this is not immediately applicable, given that these 
liabilities usually entail credit risks or catastrophic risks for which there is generally no 
natural hedge and which need to be limited by other means (such as ceilings on exposure). 
 
A similar rationale would argue for integrating the management of conventional and 
contingent liabilities, as well as of assets. This would imply centralizing contingent liability 
management in a public debt management office (DMO) or in the office managing 
government’s assets and liabilities, depending on the setup.
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Additional arguments for this 
arrangement include: (i) the similarities between the expertise needed to manage contingent 
debt with the expertise available in DMOs with the issuance of debts and their financial 
management (for example, risk quantification, coordination of the conventional and 
guaranteed debt issuance in the market by way of managing funding risk; obtaining 
contingency loans); and (ii) the need to manage the risks associated with the contingent 
liabilities by adjustments in conventional debt because of the rigidity of the guarantee 
portfolio, given their linkages to specific projects or borrowers and hence overall illiquidity 
(OECD, 2005a; Currie, 2002). Indeed, several countries have integrated the management of 
contingent liabilities into the DMO (Colombia, Morocco, New Zealand, Slovenia, Sweden) 
(IMF/WB, 2001). In countries that manage the government’s debt portfolio within an asset 
and liability management framework (ALM), the ALM branch is in charge of contingent 
liability management (New Zealand, South Africa).
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In several other countries, contingent 
liability management is located outside the DMO, usually in treasury or finance departments 
(Ireland, Poland, Portugal) (IMF/WB, 2001). 
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As DMOs are not involved in decisions about conventional expenditures, so they should not be involved in 
decisions on which and how many contingent expenditures to incur, although they can play a role in their actual 
issuance, pricing and analysis (OECD, 2005). 
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The AML framework extends the pure liability risks management frameworks by adding public assets, 
thereby providing a more integrated management of all balance sheet risks. 

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