The relative importance of various types of contingent liabilities is country-specific, but
implicit liabilities have generally been the most costly. In terms of incidence, by far the
most widespread form of contingent liability is guarantees, particularly loan guarantees,
which exist in virtually all countries. In terms of the overall impact, however, implicit
liabilities are the most serious. The fiscal bill of financial system bailouts, for example,
averaged about 13 percent of GDP in some 40 crisis episodes, but was as high as 55 percent
(Laeven and Valencia, 2008).
9
Standard & Poor’s estimates that the average fiscal exposure
to risk from the financial sector, during a reasonable worst case banking crisis, was about
27 percent of GDP across some 75 countries rated in mid-2008.
10
For the U.S., this exposure
was estimated by the Standard & Poor’s at 24½ percent of GDP—in line with the median for
the triple-A rated countries—a large portion of which has already been taken on explicitly by
end-September 2008 after a string of financial sector bailouts, including that of Fannie Mae
and Freddie Mac. Natural disasters and terrorist related events have also been very costly,
with economic losses sometimes reaching 200 percent of GDP (e.g., Hurricane Ivan in
Grenada in 2004).
III. M
ITIGATING
R
ISKS
A
SSOCIATED WITH
C
ONTINGENT
L
IABILITIES
Avoiding taking on contingent liabilities is altogether not a realistic or even feasible option
for most governments. Every country—knowingly or unknowingly—has engaged in, and is
exposed to, contingent liabilities and associated risks. The key question is therefore not
whether to take on any contingent liabilities, but which contingent liabilities to take on and
why. Emerging good practices point to the importance of dealing with risks from contingent
liabilities before taking them on, particularly through an appropriate framework to guide such
decisions, transferring risks or costs related to contingent liabilities to the private sector, and
other safeguards, such as early parliamentary involvement and proper budgeting for the risks.
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