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

Contingent liabilities can be explicit or implicit. Explicit contingent liabilities are 
obligations based on contracts, laws, or clear policy commitments. These are, with few 
exceptions, liabilities that the government deliberately chooses to take on. They include: 
• Loan guarantees: state guarantees to repay a third party borrowing in case it defaults; 
• Export guarantees: guarantee against the importer reneging on the contract, the 
government taking actions that preclude fulfillment of the contract, or sovereign default;  
• Other financial guarantees: exchange rate guarantees; minimum pension guarantees 
under private pension schemes; income, profit, and rate of return guarantees, such as 
under PPP arrangements; deposit guarantees; guarantees of pension savings; 
• Government insurance programs:
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crop or flood insurance, war-risk insurance; 
• Natural disaster spending, in the case of infrastructure directly under government 
responsibility, such as buildings, roads, ports, hospitals, and universities; 
• Legal claims against the government related, for example, to privatization, liquidation of 
agencies, and personnel management; 
• Indemnities: commitments to accept the risk of loss or damage another party might 
suffer; 
• Uncalled capital: obligation to provide additional capital on demand to an entity of which 
it is a shareholder, e.g. official international financial institutions; 
Implicit contingent liabilities, on the other hand, are political or moral obligations and 
sometime arise from expectations that government would intervene in the event of a crisis or 
a disaster, or when the opportunity cost of not intervening is considered to be unacceptable. 
Implicit contingent liabilities include:
• Bailouts of public enterprises, financial institutions, subnational governments, and private 
firms that are either strategically important or “too big to fail”; 
• Natural disaster relief, in the case of uninsured damage from natural disasters;
• Environmental cleanup spending. 
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The main difference between an insurance program and a guarantee is that with the latter there is no onus on 
the insured to prove the cause of the loss (NERA, 2000). 

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