Transcript m3guarantees2

Guarantees: Activation
Comments by Robert Dippelsman
Types of Guarantees
Guarantor and Debtor are related entities:
Government and government-owned enterprises.
Private companies and their subsidiaries.
Guarantor and Debtor are at arm’s length:
Banker’s acceptances and other guarantees on a fee
basis.
Government support for worthy private projects.
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Current Treatment
(a) Before activation, guarantees are contingent assets
and therefore outside the system.
(b) No specific guidance on classification of flows on
activation in BPM5 or SNA. However:
• GFSM has injection of equity for continuing
subsidiaries and capital transfer otherwise; and
• ESA95 has injection of equity and capital transfer
cases; also mentions other volume changes when the
original debtor disappears.
• For bank guarantees, from general practice, it
appears that service charge when issued; other
volume changes if not recovered.
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BOPCOM and AEG
BOPCOM and AEG considered these issues:
On (a), for the creation of the guarantee:
• BOPCOM supported the existing treatment, but with
memorandum items where significant. The Committee
concluded that it was premature to recognize guarantees
before their activation because the implications of
expanding the asset boundary to contingencies were wide
and had not yet been explored beyond the public sector.
• AEG decided to leave the issue open.
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BOPCOM and AEG
Last year, BOPCOM and AEG considered these issues:
On (b), for the activation of the guarantee:
• Issues Paper suggested a mix of capital transfers, other
changes, acquisition of equity, and acquisition of debt,
according to motivation. (Extension of existing treatments
in GFSM and ESA 95.)
• In October 2004, BOPCOM decided although with some
differing views, to regard activation as an other change in
volumes in all cases to avoid the case-by-case consideration.
• In December 2004, AEG decided to treat activation as
involving capital transfers in all cases.
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BOPCOM and AEG
On (b), for the activation of the guarantee:
• In June 2005, BOPCOM concluded that the preliminary
AEG position on the treatment of flows arising from the
activation of a guarantee as capital transfers in all cases
would have problems. The Committee’s preferences are,
first, other changes entries in all cases; or, failing that, a
case-by-case basis classifying flows as a capital transfer,
financial claim, or other change according to specific
criteria.
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TFHPSA has new proposals.
The recognition of an asset before activation in two of the
three cases would make this issue inoperative.
The issue of activation would apply only to one-off
guarantees if TFHPSA approach is adopted.
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On the activation of a guarantee, if Debtor still exists, three
steps occur:
 Creditor’s liability of Debtor is eliminated.
 Guarantor’s liability to Creditor is created.
 Debtor’s liability to Guarantor is (usually created).
If each is a transaction, each activation would involve three
capital transfers.
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Concerns
Quid pro quo:
If Guarantor is owner of Debtor, the guarantee improves
the balance sheet of its subsidiary and therefore its own
assets.
If Guarantor is unrelated to Debtor, the guarantee usually
creates a new claim on Debtor, and therefore the
Guarantor gains a non-equity financial asset.
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Concerns
Proliferation of commercially-motivated and mutually
offsetting capital transfers.
Write-offs of debt by banks are currently other changes in
volumes. Why should write-offs by banks under guarantees
be different?
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