External Debt Statistics: Guide for Compilers and Users, 2003 -- Part

PART I

Conceptual Framework

Introduction

2.1 This chapter begins by updating the definitionof external debt so that it is consistent with the con-cepts of 1993 SNA and BPM5. The definition of ex-ternal debt remains based on the notion that if a resi-dent has a current liability to a nonresident thatrequires payments of principal and/or interest in thefuture, this liability represents a future claim on theresources of the economy of the resident, and so isexternal debt of that economy. Such an approachprovides a comprehensive measure of external debtthat is consistent across the range of debt instru-ments regardless of how they may be structured. Thefocus of the definition remains on gross liabilities—that is, excluding any assets.

2.2 A common theme throughout the Guide is thatanalysis of the gross external debt position of aneconomy requires information that, as far as possi-ble, is compatible with related data series bothwithin and among countries. Compatibility en-hances the analytical usefulness and the reliabilityof data by allowing interrelationships with otherrelated macroeconomic data series to be examinedand comparisons across countries to be undertakenon a clear and consistent basis. Also, compatibilityencourages the rationalization of collection proce-dures, through the integration of domestic and ex-ternal debt data (thus lowering of the costs of dataproduction). For these reasons, this chapter intro-duces accounting concepts for the measurement ofexternal debt that are drawn from the 1993 SNA andBPM5.

Definition of External Debt

2.3 The Guide defines gross external debt as follows:Gross external debt, at any given time, is the out-standing amount of those actual current, and notcontingent, liabilities that require payment(s) ofprincipal and/or interest by the debtor at some

point(s) in the future and that are owed to nonresi-dents by residents of an economy.

Outstanding and Actual Current Liabilities

2.4 For a liability to be included in external debt itmust exist and be outstanding. The decisive consid-eration is whether a creditor owns a claim on thedebtor. Debt liabilities are typically establishedthrough the provision of economic value—that is,assets (financial or nonfinancial including goods),services, and/or income—by one institutional unit,the creditor, to another, the debtor, normally under acontractual arrangement.1 Debt liabilities can also becreated by the force of law,2 and by events that re-quire future transfer payments.3 Debt liabilities in-clude arrears of principal and interest. Commitmentsto provide economic value in the future cannot es-tablish debt liabilities until items change ownership,services are rendered, or income accrues; for in-stance, amounts yet to be disbursed under a loan orexport credit commitment are not to be included inthe gross external debt position.

Principal and Interest

2.5 The provision of economic value by the creditor,or the creation of debt liabilities through othermeans, establishes a principal liability for the debtor,which, until extinguished, may change in value overtime. For debt instruments alone, for the use of the

2. The Measurement of External Debt:Definition and Core Accounting Principles

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1In many instances, such as cash purchases by households inshops, economic value is provided against immediate payment, inwhich instance no debt liability is created.

2These liabilities could include those arising from taxes, penal-ties (including penalties arising from commercial contracts), andjudicial awards at the time they are imposed. However, in some in-stances an issue will arise about whether a government has juris-diction to impose such charges on nonresidents.

3These include claims on nonlife insurance companies, claimsfor damages not involving nonlife insurance companies, andclaims arising from lottery and gambling activity.

External Debt Statistics Guide

principal, interest can (and usually does) accrue onthe principal amount, resulting in an interest cost forthe debtor. When this cost is paid periodically, ascommonly occurs, it is known in the Guide as an in-terest payment. All other payments of economicvalue by the debtor to the creditor that reduce theprincipal amount outstanding are known as principalpayments.

2.6 For long-term debt instruments, interest costspaid periodically are defined as those to be paid bythe debtor to the creditor annually or more fre-quently; for short-term instruments (that is, with anoriginal maturity of one year or less), interest costspaid periodically are defined as those to be paid bythe debtor to the creditor before the redemption dateof the instrument.

2.7 The definition of external debt does not distin-guish between whether the payments that are re-quired are principal or interest, or both. For instance,interest-free loans are debt instruments although nointerest is paid, while perpetual bonds are debt in-struments although no principal is to be repaid. Inaddition, while it may normally be expected thatpayments will be made in the form of financial as-sets, such as currency and deposits, the definitiondoes not specify the form in which payments need tobe made. For instance, payments could be made inthe form of goods and services. It is the future re-quirement to make payments, not the form of thosepayments, that determines whether a liability is adebt instrument or not.

2.8 Also, the definition does not specify that thetiming of the future payments of principal and/or in-terest need be known for a liability to be classified asdebt. In many instances, the schedule of payments isknown, such as on debt securities and loans. How-ever, in other instances the exact schedule of pay-ments may not be known. For example, the timing ofpayment might be at the demand of the creditor,such as non-interest-bearing demand deposits; thedebtor may be in arrears, and it is not known whenthe arrears will actually be paid; or the timing of apayment may depend on certain events, such as theexercise of an embedded put (right to sell) or call(right to buy) option. Once again, it is the require-ment to make the payment that determines whetherthe liability is debt, rather than the timing of the pay-ment. So, the liabilities of pension funds and life in-surance companies to their nonresident participants

and policyholders are regarded as debt of those insti-tutions because at some point in time a payment isdue, even though the timing of that payment may beunknown.

Residence

2.9 To qualify as external debt, the debt liabilitiesmust be owed by a resident to a nonresident. Resi-dence is determined by where the debtor and cred-itor have their centers of economic interest—typically, where they are ordinarily located—and notby their nationality. The definition of residence is ex-plained in more detail later in this chapter and is thesame as in BPM5 and the 1993 SNA. Clarification ofthe determination of residence for entities legallyincorporated or domiciled in “offshore centers” isprovided.

Current and Not Contingent

2.10 Contingent liabilities are not included in the de-finition of external debt. These are defined as arrange-ments under which one or more conditions must befulfilled before a financial transaction takes place.4

However, from the viewpoint of understanding vul-nerability, there is analytical interest in the potentialimpact of contingent liabilities on an economy and onparticular institutional sectors, such as government.For instance, the amount of external debt liabilitiesthat an economy potentially faces may be greater thanis evident from the published external debt data ifcross-border guarantees have been given. Indeed, theGuide encourages countries to set up systems to mon-itor and disseminate data on contingent liabilities, asis discussed in more detail in Chapter 9.

Relationship with Instruments in the 1993 SNA

2.11 From the viewpoint of the national accounts,the definition of external debt is such that it includesall financial liabilities recognized by the 1993 SNAas financial instruments—except for shares andother equity, and financial derivatives—that areowed to nonresidents. Shares and other equity areexcluded because they do not require the payment of

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4The exclusion of contingent liabilities does not mean that guar-anteed debt is excluded, but rather that the guaranteed debt is at-tributed to the debtor not the guarantor (unless and until the guar-antee is called).

2 • The Measurement of External Debt

principal or interest. For the same reason, financialderivatives, both forwards and options, are ex-cluded—no principal amount is advanced that is re-quired to be repaid, and no interest accrues on any fi-nancial derivative instrument. Both forwards andoptions are described in more detail in Chapter 3.Nonetheless, an overdue obligation to settle a finan-cial derivatives contract would, like any arrears, be adebt liability because a payment is required. Mone-tary gold and IMF special drawing rights (SDRs) arefinancial assets included in the 1993 SNA but are notdebt instruments because they are, by convention,assets without a corresponding liability.

Core Accounting Principles

2.12 This section considers the concepts of resi-dence, time of recording, valuation, the unit ofaccount and exchange rate conversion, and maturity.Unless otherwise specified, these concepts are ap-plicable throughout the Guide.

Residence5

2.13 Debt liabilities of residents that are owed tononresidents are to be included in the presentation ofan economy’s gross external debt position. Debt lia-bilities owed to residents are excluded. Hence the def-inition of residence is central to the definition of ex-ternal debt. In the Guide, as in the BPM5 and the 1993SNA, an institutional unit—that is, an entity such as ahousehold, corporation, government agency, etc., thatis capable, in its own right, of owning assets, incur-ring liabilities, and engaging in economic activitiesand in transactions with other entities—is a residentof an economy when it has its center of economic in-terest in the economic territory of that country.

2.14 To determine residence, the terms “economicterritory” and “center of economic interest” also re-quire definition. A country’s economic territory con-sists of a geographic territory administered by a gov-ernment; within this geographic territory, persons,goods, and capital circulate freely. Economic territorymay not be identical with boundaries recognized forpolitical purposes, although there is usually a closecorrespondence. For maritime countries, geographicterritory includes any islands subject to the same fis-cal and monetary authorities as the mainland. Interna-

tional (multilateral) organizations have their own ter-ritorial enclave(s) over which they have jurisdictionand are not considered residents of any national econ-omy in which the organizations are located or conductaffairs; although employees of these bodies are resi-dents of the national economy—specifically, of theeconomies in which they are expected to maintaintheir abodes for one year or more.

2.15 An institutional unit has a center of economicinterest and is a resident unit of a country when,from some location (dwelling, place of production,or other premises) within the economic territory ofthe country, the unit engages and intends to continueengaging (indefinitely or for a finite but long periodof time) in economic activities and transactions on asignificant scale. The location need not be fixed aslong as it remains within the economic territory. Forstatistical purposes, the conduct or intention to con-duct economic activities for a year or more in aneconomic territory normally implies residence ofthat economy. But the one-year period is suggestedonly as a guideline and not as an inflexible rule.

2.16 In essence, an institutional unit is a resident ofthe economy in which it is ordinarily located. For in-stance, a branch or subsidiary is resident in the econ-omy in which it is ordinarily located, because it en-gages in economic activity and transactions from thatlocation, rather than necessarily the economy inwhich its parent corporation is located. Unincorpo-rated site offices of major construction and similarprojects, such as oil and gas exploration, that takeover a year to complete and are carried out and man-aged by nonresident enterprises will, in most in-stances, meet the criteria of resident entities in theeconomy in which they are located, and so can haveexternal debt (although the claims on the office by theparent might well represent an equity investment).6

2.17 The residence of offshore enterprises—includ-ing those engaged in the assembly of componentsmanufactured elsewhere, those engaged in trade andfinancial operations, and those located in specialzones—is attributed to the economies in which theyare located. For instance, in some countries, banks,including branches of foreign banks, that are li-censed to take deposits from and lend primarily, or

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5See also BPM5, Chapter IV.

6The classification of parent claims on unincorporated branchesis discussed in more detail in Chapter 3, in the section on directinvestment.


even only, to residents of other economies are treatedas “offshore banks” under exchange control and/orother regulations. These banks usually face differentsupervisory requirements and may not be required toprovide the same amount of information to supervi-sors as “onshore” banks. Nonetheless, the liabilitiesof the offshore banks should be included in the ex-ternal debt statistics of the economy in which theyare located, provided that the liabilities meet the def-inition of external debt.

2.18 Similar issues can arise with “brass plate com-panies,” “shell companies,” or “special purpose enti-ties” (SPEs). These entities may have little physicalpresence in the economy in which they are legally in-corporated or legally domiciled (for example, regis-tered or licensed), and any substantive work of theentity may be conducted in another economy. In suchcircumstances, there might be debate about where thecenter of economic interest for such entities lies. TheGuide attributes external debt to the economy inwhich the entity, which has the liabilities on its bal-ance sheet, and so on whom the creditor has a claim,is legally incorporated, or in the absence of legal in-corporation, is legally domiciled. So, debt issues onthe balance sheet of entities legally incorporated ordomiciled in an offshore center are to be classified asexternal debt of the economy in which the offshorecenter is located. Any subsequent on-lending of thefunds raised through such debt issues to a nonresi-dent, such as to a parent or subsidiary corporation, isclassified as an external asset of the offshore entityand external debt of the borrowing entity.

2.19 In some economies, separate identification ofthe gross external debt (and external assets) of resi-dent “offshore banks” and other “offshore entities”is necessary because of the potential size of their lia-bilities relative to the rest of the economy.

2.20 In contrast, a nonresident may set up an agencyin the resident economy usually to generate businessin that economy. So, for instance, a resident agentmay arrange for its parent foreign bank to lend fundsto a fellow resident (the borrower). Unless the agenttakes the transactions between the borrower and thecreditor bank onto its own balance sheet, the bor-rower records external debt and not the agent. This isbecause the debtor/creditor relationship is betweenthe lending bank and the borrowing entity, with theagent merely facilitating the transaction by bringingthe borrower and lender together. If the agent does

take the transactions onto its balance sheet then it,not the final borrower, should record external debtfrom its parent foreign bank.

2.21 A regional central bank is an international finan-cial organization that acts as a common central bankfor a group of member countries. Such a bank has itsheadquarters in one country and usually maintains na-tional offices in each of the member countries. Eachnational office acts as central bank for that countryand is treated as a resident institutional unit in thatcountry. The headquarters, however, is an interna-tional organization, and thus a nonresident from theperspective of the national central banks. However, forstatistics relating to the economic territory of thewhole group of member countries, the regional centralbank is a resident institutional unit of this territory.

Time of Recording7

2.22 The guiding principle for whether claims andliabilities exist and are outstanding is determined atany moment in time by the principle of ownership.The creditor owns a claim on the debtor, and thedebtor has an obligation to the creditor.8 Transactionsare recorded when economic value is created, trans-formed, exchanged, transferred, or extinguished.

2.23 When a transaction occurs in assets, both fi-nancial and nonfinancial, the date of the change ofownership (the value date), and so the day the posi-tion is recorded, is when both creditor and debtorhave entered the claim and liability, respectively, intheir books. This date may actually be specified toensure matching entries in the books of both parties.If no precise date can be fixed, the date on which thecreditor receives payment or some other financialclaim is decisive. For example, loan drawings are en-tered in the accounts when actual disbursements aremade, and so when financial claims are established,and not necessarily when an agreement is signed.

2.24 For other transactions, when a service is ren-dered, interest accrues, or an event occurs that cre-ates a transfer claim (such as under nonlife insur-ance), a debt liability is created and exists untilpayment is made or forgiven. Although not usual,like interest, service charges can accrue continu-

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7See also BPM5, Chapter VI.8Thus, the Guide does not recognize any unilateral repudiation

of debt by the debtor.


ously. Although equity securities are not debt instru-ments, dividends once they are declared payable arerecorded in other debt liabilities until paid.

2.25 The Guide recommends that interest costs ac-crue continuously on debt instruments, thus match-ing the cost of capital with the provision of capital.This recommendation is consistent with the ap-proach taken in related international statistical man-uals and in commercial accounting standards (seeBox 2.1). For interest costs that accrue in a recordingperiod, there are three measurement possibilities:(1) they are paid within the reporting period, inwhich instance there is no impact on the gross exter-nal debt position; (2) they are not paid because theyare not yet payable (referred to hereafter as “interestcosts that have accrued and are not yet payable”)—for example, interest is paid each six months on aloan or security, and the gross external debt positionis measured after the first three months of this pe-riod—in which instance the gross external debt posi-tion increases by the amount of interest that has ac-crued during the three-month period; and (3) theyare not paid when due, in which instance the grossexternal debt position increases by the amount of in-terest costs that have accrued during the period andare in arrears at the end of the period.

Interest costs that have accrued and are not yet payable

2.26 Traditionally, external debt-recording systemshave not recorded as external debt interest costs thathave accrued and are not yet payable. At the time ofpublication of this Guide, the preference of manydebt compilers remains to continue to exclude suchinterest costs from the gross external debt position.This is for two reasons. First, for countries with afew large external loans, borrowed at irregular peri-ods, that have annual or semiannual interest pay-ments, significant variation over time in the debtstock could arise from the inclusion of interest coststhat have accrued and are not yet payable. Second,from a practical viewpoint, for some countries theinclusion of such interest costs in the gross externaldebt position could take some time to implement be-cause it could involve a significant change to theirpresent compilation system.

2.27 It is thus recognized that the recording of inter-est costs accruing on deposits and loans may have tofollow national practices and be classified under

other debt liabilities. Nonetheless, for those countriesthat can do so, the Guide recommends including in-terest costs that have accrued and are not yet payableas part of the value of the underlying instruments.That is, the accrual of interest costs not yet payablecontinuously increases the principal amount out-standing of the debt instrument until these interestcosts are paid. This is consistent with the approach inthe 1993 SNA and BPM5. However, in order to main-tain comparability of external debt statistics acrosstime and across countries and to identify the variationintroduced by the timing of recording of interestcosts that have accrued and are not yet payable, theGuide requires that countries recording such interestcosts complete the memorandum item identifying thesectoral and maturity breakdown of the item (as de-scribed in Chapter 4, paragraphs 4.8 and 4.9).

2.28 When bond securities (including deep-discountand zero-coupon bonds), bills, and similar short-termsecurities are issued at a discount (or at a premium),the difference between the issue price and its face orredemption value at maturity is treated, on an accrualbasis, as interest (negative interest) over the life of thebond. When issued at a discount, the interest costs thataccrue each period are recorded as being reinvestedin the bond, increasing the principal amount out-standing. This approach can be described as the capi-talization of interest; it is not a holding gain for the se-curity owner. When issued at a premium, the amountaccruing each period reduces the value of the bond.

Arrears

2.29 When principal or interest payments are notmade when due, such as on a loan, arrears are created(a short-term liability that is included under otherdebt liabilities). But to ensure that the debt is notcounted twice, there is a corresponding reduction inthe appropriate debt instrument (for example, a loan).So, the nonpayment, when due, of principal and/or in-terest results in a reduction in the amount outstandingof the appropriate instrument, such as a loan, and anincrease in arrears, leaving the external debt positionunchanged. Arrears should continue to be reportedfrom their creation—that is, when payments are notmade9—until they are extinguished, such as when theyare repaid, rescheduled, or forgiven by the creditor.

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9In some instances arrears arise for operational reasons ratherthan from a reluctance or inability to pay. Nonetheless, in princi-ple such arrears, when outstanding at the reference date, should berecorded as arrears.


2.30 If debt payments are guaranteed by a thirdparty, and the debtor defaults, the original debtorrecords an arrear until the creditor invokes the con-tract conditions permitting the guarantee to becalled. Once the guarantee is called, the debt pay-ment is attributed to the guarantor, and the arrear of

the original debtor is extinguished, as though repaid.Depending on the contractual arrangements, in theevent of a guarantee being called, the debt is notclassified as arrears of the guarantor but instead isclassified as a short-term other debt liability untilany grace period for payment ends.

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Meaning of the Term “Recording Basis”

In the context of a macroeconomic statistical system, recordingbases are defined mainly according to the time at which transac-tions are recorded in that system. Alternative recording basesare possible because for many transactions there can be a timelag between the change of ownership of the underlying item, thedue date for payment, and the actual date for payment. Also,given the nature of the different recording bases the transac-tions and positions captured by them will also differ.Thus, an im-portant consideration in choosing a recording basis is the infor-mation intended to be conveyed in the statistical system. Forexternal debt statistics, the intention is to provide users of thesedata with a comprehensive measure of external debt liabilities atthe end of the reporting period, and to allow them to identifythe types of flows during the reporting period that affect thesize and composition of these liabilities. Consequently, the Guideintroduces the use of the accrual recording basis, for reasonsexplained below.

Main Types of Recording Bases

Three types of recording bases have most commonly been usedin macroeconomic statistical systems: cash recording; due-for-payment recording; and accrual recording. In practice, variationson each of these main bases are often found.

With cash recording, transactions are recorded when a paymentis made or received, irrespective of when the assets involvedchange ownership. In its strictest form, only those flows that in-volve cash as the medium of exchange are included (that is, cashinflows and outflows).The stocks recorded at the end of the re-porting period in such a system are restricted to cash balances.But in practice, cash reporting basis is often modified to includeother balances such as debt balances. In other words, when cashis disbursed on a debt instrument, an outstanding debt stock isrecorded, and subsequent repayments of principal, in cash, re-duce that outstanding debt.

A due-for-payment recording basis records transactions when re-ceipts or payments arising from the transaction fall due, ratherthan when the cash is actually received or paid. The due-for-payment basis can be considered as a modification of the cashbasis. In addition to cash balances, the due-for-payment basis

takes into account amounts due or overdue for payment.Typi-cally, a due-for-payment basis of recording will record debtstocks on the basis of the redemption amount of the outstand-ing liability—the amount due for payment at maturity.2 Thisamount may differ from the amount originally disbursed for avariety of reasons, including discounts and premiums betweenthe issue and redemption price, repayment of principal, andrevaluation of the debt due to indexation. Also, this recordingbasis will capture debt arising from some noncash transactions,such as arrears and the assumption of debt from one entity toanother (for example, to the government).

On an accrual recording basis, transactions are recorded wheneconomic value is created, transformed, exchanged, transferred,or extinguished. Claims and liabilities arise when there is achange of ownership. The accrual reporting basis thus recog-nizes transactions in the reporting period in which they occur,regardless of when cash is received or paid, or when paymentsare due. Gross external debt positions at the end of a reportingperiod depend on the stock of gross external debt at the begin-ning of the period, and transactions and any other flows thathave taken place during the period.3 The accrual recording basisrecords what an entity owes from the perspective of economic,not payment, considerations.

The different approaches of the three recording bases can be il-lustrated by the example of a loan, on which interest costs arepaid periodically until the loan is repaid at maturity. The initialloan disbursement would be recorded in all three recordingbases at the same time—that is, when the disbursement ismade.All three systems would record a debt liability.4 However,on an accrual reporting basis, interest costs are recorded as ac-cruing continuously, reflecting the cost of the use of capital, andincreasing the outstanding amount of the debt liability duringthe life of the loan, until the interest costs become payable. Buton a cash or due-for-payment basis, no such increase wouldarise.

Interest payments on the loan and repayment of principal at ma-turity are recognized at the same time in all three systems, pro-

Box 2.1. The Choice of a Recording Basis: The Case for Accrual Accounting1

1This box draws on Efford (1996), which was prepared in the con-text of the development of the Government Finance Statistics Manual,IMF (2001).

2This is the approach taken in the IMF’s A Manual on GovernmentFinance Statistics (1986); see p. 217.

3In the 1993 SNA, economic flows in financial assets and liabilitiesare limited to those financial assets and liabilities for which eco-nomic value can be demonstrated or observed.

4On the basis of the descriptions above of the cash, due-for-payment, and accrual reporting bases. For each reporting basis, therecan be modifications of approach.


Valuation10

2.31 The Guide recommends that debt instrumentsare valued at the reference date at nominal value,

and, for traded debt instruments, at market value aswell. The nominal value of a debt instrument is ameasure of value from the viewpoint of the debtorbecause at any moment in time it is the amount thatthe debtor owes to the creditor. This value is typi-cally established by reference to the terms of a con-

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Box 2.1 (concluded)

10See also BPM5, Chapter V.

vided that these payments are made in the reporting period inwhich they are due. But if payments are not made when due, ar-rears would be recorded on the due-for-payment and accrualrecording bases, but not on the cash basis (although in practice,a cash-based system might well be modified to include arrears).In the due-for-payment and accrual recording bases, a debt pay-ment would be recorded as though made by the debtor, with anassociated increase in (short-term) liabilities (arrears). Arrearsare reduced when the payment is actually made. On a cash basis,no transactions would be recorded until the (overdue) paymentis actually made; no arrears are recorded.

Thus, from the above example it can be seen that the accrualrecording basis will record transactions at the same time as orbefore the cash and due-for-payment bases, and the due-for-pay-ment basis would record transactions at the same time as or be-fore the cash basis. For positions, on a cash basis, only amountsdisbursed in cash and repaid in cash are taken into account; on adue-for-payment basis, amounts disbursed and repaid in cash arerecognized along with any outstanding liabilities arising fromnoncash transactions—such as arrears; the accrual recordingbasis, in contrast, recognizes all existing liabilities regardless ofwhether cash has been disbursed or repaid, or payment is dueor not.

Measuring External Debt Positions

Disadvantages of Cash and Due-for-Payment Bases

Both the cash and the due-for-payment bases have deficienciesin providing a comprehensive measure of gross external debtpositions.

The cash recording basis contains information “only” on debtarising from cash flows; noncash transactions are not covered(for example, the provision of goods and services on which pay-ment is delayed, and liabilities not met are not recognized, suchas arrears). Thus, it provides insufficient coverage of externaldebt.Though the due-for-payment approach, as an extension ofthe cash basis, includes noncash transactions such as arrears andindexation, it still provides an incomplete measure of externaldebt. For instance, on a due-for-payment recording basis, pay-ments not yet due for goods and services already delivered arenot considered debt (unless, for example, there is a contractualagreement to extend trade credit). Also, interest is not recordeduntil due for payment, regardless of whether interest is in theform of a discount to the face value on issuance or in the formof interest payments (that is, paid periodically).

Advantage of an Accrual Basis

The accrual recording basis, which has long been used as thebasis for commercial accounting, provides the most comprehen-sive information of the bases described, because it measures ex-ternal debt on the basis of whether a creditor has ownership ofa financial claim on a debtor.The accrual basis provides the mostconsistent measure of external debt, both in terms of coverageand size, in that it is indifferent (1) to the form of payment—debt can be created or extinguished through cash and/or non-cash payments (that is through the provision of value); (2) to thetime of payment—debt is created or extinguished dependent onthe time at which ownership of a claim is established or relin-quished; and (3) to whether the future payments required onexisting liabilities are in the form of principal or interest.5 As fi-nancial markets continue to innovate, this consistency ofapproach helps to ensure that the size and coverage of externaldebt is determined foremost by economic, and not payment,considerations.6

Finally, recording external debt on an accrual basis has the ad-vantage of being consistent with other macroeconomic statisti-cal systems, such as the 1993 SNA and the BPM5, both of whichemploy an accrual basis of recording.These systems provide in-formation on the types of economic flows during the reportingperiod that affect the size and composition of external debt.The Government Finance Statistics Manual (IMF, 2001) and theMonetary and Financial Statistics Manual (IMF, 2000d) are also onan accrual recording basis. Besides enhancing comparability ofinformation across different sets of macroeconomic statisticsfor data users, the adoption of a common recording basiswould also contribute to a reduction in compilation coststhrough the ability to use common data series in related statis-tical systems.

5In principle, under an accrual reporting basis the stock of exter-nal debt at any one moment in time reflects past transactions andother economic flows, and, provided that the same valuationmethod is employed, equals the discounted value of future pay-ments of interest and principal. For instance, if financial marketsconvert interest into principal, such as through stripped securities,the process of conversion has no impact on the measured stock ofexternal debt because no new debt is created (although on a mar-ket value basis there could be valuation consequences arising fromsuch a conversion).

6Although information on payment arrangements might well bevaluable in its own right.


tract between the debtor and creditor, and it is fre-quently used to construct debt ratios, such as thosedescribed in Chapter 15. The market value of atraded debt instrument is determined by its prevail-ing market price, which, as the best indication of thevalue that economic agents currently attribute to spe-cific financial claims, provides a measure of the op-portunity cost to both the debtor and the creditor.11 Itis the valuation principle adopted in the 1993 SNAand BPM5.

2.32 The nominal value of a debt instrument reflectsthe value of the debt at creation; any subsequent eco-nomic flows, such as transactions (for example, re-payment of principal); valuation changes (includingexchange rate and other valuation changes other thanmarket price changes); and any other changes. Con-ceptually, the nominal value of a debt instrument canbe calculated by discounting future interest and prin-cipal payments at the existing contractual interestrate(s) 12 on the instrument; these interest rates maybe fixed rate or variable rate. For fixed-rate instru-ments and instruments with contractually predeter-mined interest rates, this principle is straightforwardto apply because the future payment schedule and therate(s) to apply are known,13 but it is less straightfor-ward to apply to debt liabilities with variable ratesthat change with market conditions. The appendix atthe end of this chapter provides examples of calculat-ing the nominal value of a debt instrument by dis-counting future payments of interest and principal.

2.33 Face value has been used to define nominalvalue in some instances, since face value is the undis-counted amount of principal to be repaid. While ofinterest in showing amounts contractually due to bepaid at a future date, the use of face value as nominal

value in measuring the gross external debt positioncan result in an inconsistent approach across all in-struments and is not recommended. For instance, theface value of deep-discount bonds and zero-couponbonds includes interest costs that have not yet ac-crued, which is counter to the accrual principle.

2.34 The market value of a traded debt instrumentshould be determined by the market price for that in-strument prevailing on the reference date to whichthe position relates. The ideal source of a marketprice for a traded debt instrument is an organized orother financial market in which the instrument istraded in considerable volume and the market priceis listed at regular intervals. In the absence of such asource, market value can be estimated by discount-ing future payment(s) at an appropriate market rateof interest. If the financial markets are closed on thereference date, the market price that should be usedis that prevailing on the closest preceding date whenthe market was open. In some markets the marketprice quoted for traded debt securities does not takeaccount of interest costs that have accrued but arenot yet payable, but in determining market valuethese interest costs need to be included.

Nontraded debt instruments

2.35 As does BPM5, the Guide recommends thatdebt instruments that are not traded (or tradable) inorganized or other financial markets—such as loans,currency and deposits, and trade credit—be valuedat nominal value only.14 The nominal value of a debtinstrument could be less than originally advanced ifthere have been repayments of principal, debt for-giveness, or other economic flows, such as arisingfrom indexation, that affect the value of the amountoutstanding. The nominal value of a debt instrumentcould be more than originally advanced because, forexample, of the accrual of interest costs, or othereconomic flows.

2.36 For debt instruments that accrue no interest—for example, liabilities arising because dividends are

14

11In the HIPC Initiative (see Appendix V), a representative mar-ket rate is used to discount future payments. This provides anothermeasure of opportunity cost and is specific to countries in thatprogram.

12A single rate is usually used to discount payments due in allfuture periods. In some circumstances, using different rates forthe various future payments may be warranted. Even if a singlerate of discount is used, dependent on the time until due, a differ-ent discount factor applies to each payment. For example, at arate of discount of 10 percent, the discount factor for paymentsone year hence is 0.909 (or 1/(1 + 0.1)) and for payments twoyears hence is 0.826 (or 1/(1 + 0.1)2) and so on. See also the ex-ample in Table 2.1.

13For a debt liability on which the interest rate steps up or downby contractually predetermined amounts over its life, the time pro-file of the discount factors to be applied to future payments wouldbe nonlinear, reflecting these step changes.

14International statistical manuals consider that for nontradedinstruments, nominal value is an appropriate proxy for marketvalue. Nonetheless, the development of markets, such as for creditderivatives linked to the credit risk of individual entities, is in-creasing the likelihood that market prices can be estimated evenfor nontraded instruments. As these markets extend, considerationmight be given to compiling additional information on market val-ues of nontraded debt.


declared but not yet payable—the nominal value isthe amount owed. If there is an unusually longtime15 before payment is due on an outstanding debtliability on which no interest costs accrue, then thevalue of the principal should be reduced by anamount that reflects the time to maturity and an ap-propriate existing contractual rate, and interest costsshould accrue until actual payment is made.

2.37 For some debt, such as a loan, repayment maybe specified in a contract in terms of quantities ofcommodities or other goods to be paid in install-ments over a period of time. At inception the valueof the debt is equal to the principal advanced. Therate of interest, which will accrue on the principal, isthat which equates the present value of the requiredfuture provision of the commodity or other good,given its current market price, to the principal out-standing. Conceptually, this type of contract isequivalent to the indexation of a loan, and so the ini-tial rate of interest that accrues will change as themarket price of the specified item changes, subjectto any contractual arrangement (for example, limitsin monetary terms on the maximum and minimumvalue that is to be paid by the debtor). When pay-ments are made in the form of the good or commod-ity, the value of the principal outstanding will be re-duced by the market value of the good or commodityat the time the payment is made.

2.38 In contrast, the value of the commodities, othergoods, or services to be provided to extinguish atrade credit liability, including under barter arrange-ments, is that established at the creation of the debt;that is, when the exchange of value occurred. How-ever, as noted above, if there is an unusually longtime before payment, the value of the principalshould be reduced by an amount that reflects thetime to maturity and an appropriate existing contrac-tual rate, and interest costs should accrue until actualpayment is made.

2.39 The Guide recognizes the debt liabilities ofpension funds and insurance companies to their non-resident participants and policyholders. The debt lia-bility for a defined-benefit pension scheme is thepresent value of the promised benefits to nonresi-

dents; while for a defined-contribution scheme thedebt liability is the current market value of the fund’sassets prorated for the share of nonresidents’ claimsvis-à-vis total claims.16 For life insurance, the debtliability is the value of the reserves held against theoutstanding life insurance policies issued to nonresi-dents. The debt liability to nonresidents of nonlifeinsurance companies is the value of any prepay-ments of premiums by nonresidents, and the presentvalue of amounts expected to be paid out to nonresi-dents in settlements of claims, including disputed,but valid, claims.

2.40 For arrears, the nominal value is equal to thevalue of the payments—interest and principal—missed, and any subsequent economic flows, such asthe accrual of additional interest costs.

2.41 For nontraded debt instruments where thenominal value is uncertain, the nominal value can becalculated by discounting future interest and princi-pal payments at an appropriate existing contractualrate of interest.

Traded debt instruments

2.42 The Guide recommends that debt instrumentstraded (or tradable) in organized and other financialmarkets be valued at both nominal and marketvalue.17 For a traded debt instrument, both nominaland market value can be determined from the valueof the debt at creation and subsequent economicflows, except that market valuation takes account ofany changes in the market price of the instrument,whereas nominal value does not.

2.43 For debt securities that are usually tradable butfor which the market price is not readily observable,by using a market rate of interest the present value ofthe expected stream of future payments associatedwith the security can be used to estimate marketvalue. This and other methods of estimating marketvalue are explained in Box 2.2. For unlisted securi-ties, the price reported for accounting or regulatory

15

15What constitutes an unusually long time in this context willdepend on the circumstances. For instance, for any given time pe-riod, the higher the level of interest rates, the greater is the oppor-tunity cost of delayed payment.

16In a defined-benefit scheme, the level of pension benefitspromised by the employer to participating employees is guaran-teed and usually determined by a formula based on participants’length of service and salary. In a defined-contribution scheme, thelevel of contributions to the fund by the employer is guaranteed,but the benefits that will be paid depend on the assets of the fund.

17This includes debt securities acquired under reverse transac-tions (see Table 4.5 in Chapter 4).


purposes might be used, although this method is lesspreferable than those mentioned above. Similarly,for deep-discount or zero-coupon bonds, the issueprice plus amortization of the discount could be usedin the absence of a market price.

2.44 If arrears are traded on secondary markets, assometimes occurs, then a separate market valuecould be established.

Nondebt instruments

2.45 Positions in financial derivatives, equity secu-rities, and equity capital and reinvested earnings onforeign direct investment are not included in thegross external debt position because they are notdebt instruments, but they are recognized by theGuide as memorandum items to the position. Theseinstruments are to be valued at market value.

2.46 The market value of a forward financial deriv-atives contract is derived from the difference be-tween the agreed-upon contract price of an underly-ing item and the prevailing market price (or marketprice expected to prevail) of that item, times thenotional amount, appropriately discounted. Thenotional amount—sometimes described as the nom-inal amount—is the amount underlying a financialderivatives contract that is necessary for calculatingpayments or receipts on the contract. This amountmay or may not be exchanged. In the specific caseof a swap contract, the market value is derived fromthe difference between the expected gross receiptsand gross payments, appropriately discounted; thatis, its net present value. The market value for a for-ward contract can therefore be calculated usingavailable information—market and contract pricesfor the underlying item, time to maturity of the con-tract, the notional value, and market interest rates.From the viewpoint of the counterparties, the valueof a forward contract may become negative (liabil-ity) or positive (asset) and may change both in mag-nitude and direction over time, depending on themovement in the market price for the underlyingitem. Forward contracts settled on a daily basis,such as those traded on organized exchanges—andknown as futures—have a market value, but becauseof daily settlement it is likely to be zero value ateach end-period.

2.47 The price of an option depends on the poten-tial price volatility of the price of the underlyingitem, the time to maturity, interest rates, and the dif-ference between the contract price and the marketprice of the underlying item. For traded options,whether they are traded on an exchange or not, thevaluation should be based on the observable price.At inception the market value of a nontraded optionis the amount of the premium paid or received. Sub-sequently nontraded options can be valued with theuse of mathematical models, such as the Black-Scholes formulas, that take account of the factorsmentioned above that determine option prices. In

16

When market-price data are unavailable for tradable instruments,there are two general methods for estimating market value or, as it issometimes called, fair value:• Discounting future cash flows to the present value using a market

rate of interest; and• Using market prices of financial assets and liabilities that are similar.

The first general method is to value financial assets and liabilities bybasing market value on the present, or time-discounted, value of future cashflows. This is a well-established approach to valuation in both theoryand practice. It calculates the market value of a financial asset or liabil-ity as the sum of the present values of all future cash flows. Marketvalue is given by the following equation:

(Cash flow)tDiscounted present value = ∑n

t=1–––––––––

(1 + i)t

where (Cash flow)t denotes the cash flow in a future period (t), n de-notes the number of future periods for which cash flows are expected,and i denotes the interest rate that is applied to discount the futurecash flow in period t.

The method is relatively easy to apply in valuing any financial asset orliability if the future cash flows are known with certainty or can be es-timated, and if a market interest rate (or series of market interestrates) is observable.

Directly basing market value on the market price of a similar financialinstrument is a well-used technique when a market price is not directlyobservable. For example, the market price of a bond with five-year re-maining maturity might be given by the market price of a publiclytraded five-year bond having comparable default risk. In other cases, itmay be appropriate to use the market price of a similar financial instru-ment, but with some adjustment in the market value to account for dif-ferences in liquidity and/or risk level between the instruments.

In some cases, the financial asset or liability may possess some charac-teristics of each of several other financial instruments, even though itscharacteristics are not generally similar to any one of these instru-ments. In such cases, information on the market prices and other char-acteristics (for example, type of instrument, issuing sector, maturity,credit rating, etc.) of the traded instruments can be used in estimatingthe market value of the instrument.

Box 2.2. General Methods for EstimatingMarket Value


the absence of a pricing model, the price reportedfor accounting or regulatory purposes might beused. Unlike forwards, options cannot switch fromnegative to positive value, or vice versa, but they re-main an asset for the owner and a liability for thewriter of the option.

2.48 For equity securities that are listed in orga-nized markets or are readily tradable, the value ofoutstanding stocks should be based on marketprices. The value of equity securities not quoted onstock exchanges or not traded regularly should beestimated by using prices of comparable quotedshares as regards past, current, and prospectiveattributes such as earnings and dividends. Alter-natively, the net asset values of enterprises to whichthe equities relate could be used to estimate marketvalues if the balance sheets of the enterprisesare available on a current-value basis, but this isnot a preferred method given the possibly large dif-ference between balance sheet and equity marketvaluations.

2.49 For equity capital and reinvested earnings re-lated to foreign direct investment, it is recognizedthat, in practice, balance sheet values of direct in-vestment enterprises or direct investors are generallyutilized to determine their value. If these balancesheet values are on a current market value basis, thisvaluation would be in accordance with the marketvalue principle, but if these values are based onhistorical cost and not current revaluation, theywould not conform to the principle. If historical costfrom the balance sheets of direct investment enter-prises (or investors) is used to determine the value ofequity capital and reinvested earnings, compilersare also encouraged to collect data from enterpriseson a current market value basis. In instances wherethe shares of direct investment enterprises are listedon stock exchanges, the listed prices should be usedto calculate the market value of shares in thoseenterprises.

Unit of Account and Exchange RateConversion

2.50 The compilation of the gross external debt po-sition statement is complicated by the fact that the li-abilities may be expressed initially in a variety ofcurrencies or in other standards of value, such asSDRs. The conversion of these liabilities into a ref-erence unit of account is a requisite for the construc-

tion of consistent and analytically meaningful grossexternal debt statistics.

2.51 From the perspective of the national compiler,the domestic currency unit is the obvious choice formeasuring the gross external debt position. Such aposition so denominated is compatible with thenational accounts and most of the economy’s othereconomic and monetary statistics expressed in thatunit. However, if the currency is subject to signifi-cant fluctuation relative to other currencies, a state-ment denominated in domestic currency could be ofdiminished analytical value because valuationchanges could dominate interperiod comparisons.

2.52 The most appropriate exchange rate to be usedfor conversion of external debt (and assets) denomi-nated in foreign currencies into the unit of account isthe market (spot) rate prevailing on the referencedate to which the position relates. The midpoint be-tween buying and selling rates should be used. Forconversion of debt in a multiple rate system,18 therate on the reference date for the actual exchangerate applicable to specific liabilities (and assets)should be used.

Maturity

2.53 For debt liabilities, it is recommended that thetraditional distinction between long- and short-termmaturity, based on the formal criterion of originalmaturity, be retained. Long-term debt is defined asdebt with an original maturity of more than one yearor with no stated maturity. Short-term debt, whichincludes currency, is defined as debt repayable ondemand or with an original maturity of one year orless. If an instrument has an original maturity of oneyear or less it should be classified as short-term,even if the instrument is issued under an arrange-ment that is long-term in nature.

Appendix: Accrual of Interest Costs—How Should This Be Implemented?

2.54 The Guide introduces the idea of includinginterest costs that have accrued and are not yet

17

18A multiple exchange rate system is a scheme for which thereare schedules of exchange rates, set by the authorities, used toapply separate exchange rates to various categories of transactionsor transactors.


payable in the gross external debt position. Thisannex presents the theoretical framework for the ac-crual of interest costs, and a more detailed discus-sion on how to apply the accrual principle, by typeof instrument.

2.55 Because the focus of the Guide is on positionstatistics, the debate about whether the rate at whichinterest should accrue on market-traded instrumentsshould be based on the current market value of thedebt (the so-called creditor approach) or as stipu-lated in the original contract (the so-called debtorapproach) is not relevant. This is because the marketvalue position to be reported is based on the marketprice of the instrument, and that value shouldinclude any interest costs that have accrued and arenot yet payable.19 Given this, unless otherwisestated, this annex focuses on nominal value.

2.56 At the outset, it is worth noting some key prin-ciples for applying the accrual of interest costs prin-ciple in both the nominal and market value presenta-tions of external debt:• All financial instruments bearing interest are in-

cluded;• The accrual of interest costs can be calculated by

the straightline or compound interest method;• All instruments issued at a discount are treated in a

similar manner; and• The accrual of interest costs also applies to variable-

rate and index-linked instruments.

Theoretical Framework for the Accrual of Interest Costs

2.57 Three examples, drawn from work undertakenby Statistics Canada (see Laliberté and Tremblay,1996), are provided to illustrate the theoreticalframework for the accrual of interest costs. Theseexamples, and the discussion on accruing interestcosts on a straightline or compound basis that imme-diately follows, provide an explanation of the basicprinciples.

2.58 The first example is that of a simple instru-ment that is issued and redeemed at the same price

and pays fixed annual interest at the end of eachyear; the second example is of an instrument issuedat a price that is at a discount to the redemptionprice, and that also makes annual interest payments;and the third example is of an instrument issued ata discount that has no interest payments. These ex-amples have general applicability throughout theGuide, in that they explain how future payments canbe discounted to produce the stock of external debtat any moment in time.

Example 1: Present Value and the Accrual of Interest Costs—Simple Case

2.59 In this simple example, a debt instrument isissued with a five-year maturity, a principal amountof $100, and annual payments of $10 each year asinterest. That is, the interest rate on the instrumentis fixed at 10 percent a year. Given this, as seen inTable 2.1, in present value terms the payment of$10 in a year’s time is worth 10/(1+ 0.1), or 9.09;the payment of $10 in two years’ time is worth10/(1 + 0.1)2, or 8.26; and so on. In present valueterms, the principal amount advanced to be repaid atmaturity is worth 100/(1 + 0.1)5, or 62.09. The pres-ent value for each payment is provided in the left-hand column, and it can be seen that the presentvalue of all future payments equals the issue priceof $100.

2.60 Because interest costs accrue at 10 percent ayear on a continuous basis, and are added to the prin-cipal amount, after six months of the first year theprincipal amount has increased. It equals the $100principal amount due to be paid at maturity, plus halfof the year’s interest payment, $5 (calculated on astraightline basis), or plus just under half, $4.88(calculated on a compound basis). Any payments ofinterest, or principal, would reduce the amountoutstanding.

2.61 Alternatively, the principal amount outstand-ing after six months could be calculated by dis-counting all future payments. The present value ofeach payment after six months is presented inparentheses in the left-hand column. After sixmonths, each of the values in the left-hand columnhas increased because the payments are closer tobeing made, and time is being discounted at a rateof 10 percent a year. The discounted value of eachpayment after six months can be seen to sum to$104.88, the same amount outstanding as with

18

19If an economy was disseminating a debt-service ratio withfuture interest and principal payments calculated using thecurrent yield on debt, then if the market value of external debtrises, part of the future interest payments could become principalpayments.


the compound approach to accruing interest costs.One practical advantage of maintaining a systemthat discounts each payment to its present valueis that if the instrument is stripped (see below)—that is, all payments traded separately—the compi-lation system will already be prepared for such asituation.

2.62 Unless there are early repayments that reducethe amount of principal outstanding—for instance,with certain types of asset-backed securities, partialrepayments of principal could occur at any time—the amounts described above would be recorded inthe gross external debt position; that is, after sixmonths with a contractual interest rate of ten per-cent per annum, the amount outstanding would be$104.88 (or $105 on a straightline basis).

2.63 The rate relevant for discounting all the pay-ments to a market value would be implicit in themarket price, or to put it another way, the marketvalue amount would equal future payments dis-counted at the current market rate of interest for thatdebt instrument. The market value of external debtshould include any interest costs that have accruedand are not yet payable.

Example 2: Present Value and the Accrualof Interest Costs—Discounted Principal

2.64 The second example concerns the more com-plex case of instruments issued at a discount tothe redemption value. These instruments willinclude securities, and any other instrumentswhere the issue price is less than the redemption

price.20 In this instance, both the coupon paymentsand the difference between the issue price and theredemption price determine the rate at which inter-est costs accrue. Table 2.2 presents the calculationsinvolving an instrument similar to that in the firstexample above—that is, issued with the same 10percent yield, but “only” having annual interest pay-ments of $8. The difference between the 10 percentyield and the yield implied by coupon payments isreflected in the discount between the issue price andredemption price. Once again, from the left-handcolumn of the table it can be seen that discountingall the future payments by 10 percent, including theprincipal amount, provides the issue price of$92.40.

2.65 How is the accrual of interest costs calcu-lated? Simply, interest costs accrue at a yield of 10percent each year, of which $8 is paid out in interestpayments and the rest is reinvested (or capitalized)into the original principal amount. The principalamount grows from year to year, due to the contin-ued reinvestment of interest costs that have accrued,and as a consequence, so does the absolute amountof interest costs that accrue each year. As with thefirst example, the present value of each payment

19

Table 2.1. Present Value and the Accrual of Interest Costs: Example 1 (Simple Case)

Present Value in 2001 2002 2003 2004 2005 2006

9.09 (9.54)* 10/(1+0.1)8.26 (8.66) 10/(1+0.1)2

7.52 (7.89) 10/(1+0.1)3

6.83 (7.16) 10/(1+0.1)4

6.21 (6.51) 10/(1+0.1)5_______ ________ _________ _________ __________ __________ ___________37.91 (39.76) 10/(1+0.1) 10/(1+0.1)2 10/(1+0.1)3 10/(1+0.1)4 10/(1+0.1)5

+62.09 (65.12) 100/(1+0.1)5_______ ________=100.00 (104.88)

*(9.54) = The present value of the payment six months after issuance of the debt instrument.

20For instruments issued at a discount, issue price is a genericterm that means the value of principal at inception of the debt; re-demption price is similarly a generic term that means the amountof principal to be paid at maturity. This is because some instru-ments are “issued” without a price as such (for instance, tradecredit). In such instances, the issue price equals the economicvalue provided (that is, of goods or services provided) and the re-demption price equals the amount owed when the debt liability isdue to be paid.


after six months is presented in parentheses in theleft-hand column. In the position data, the amountoutstanding can be seen to be $96.91 after sixmonths.

Example 3: Present Value and the Accrualof Interest—Zero-Coupon Instrument

2.66 The third example covers zero-coupon instru-ments. If the instrument is issued at discount andhas no coupon, then the principal amount increasesin value over time by the implicit yield on the secu-rity at issuance, derived from the difference be-tween the issue price and the redemption price. Inthe example below, the zero-coupon instrument isissued at $62.09 and is to be redeemed at $100; thedifference implies a 10 percent yield. As can beseen in Table 2.3, the principal amount grows eachyear because of the continued reinvestment of inter-est costs that accrue, and so after the first year theamount outstanding has increased by 10 percent to$68.30, by a further 10 percent in year two to$75.13, and so on until redemption at $100 at theend of year five.21

Straightline or compound interest

2.67 In calculating the accrual of interest costs by astraightline approach, an equal amount of the inter-est costs to be paid is attributed to each period—forexample, $5 for the first six months in the first

example above. For bonds with interest payments(that is, annual or more frequent), on secondarymarkets the buyer of the bond pays to the seller theamount accrued since the last payment, accordingto a very simple arithmetic proportionality. Formany international loans, debt-monitoring systemsrecord the accrual of interest costs on a straightlinebasis.

2.68 However, the accrual of interest costs can alsobe calculated on a compound basis—that is, con-tinuously adding the accrued interest costs not yetpayable to the principal amount each period,and applying to that amount the interest yield onthe debt in order to calculate the interest costsfor the next period. This method is the theo-retically preferred approach because it relatesthe cost to the provision of capital and allowsreconciliation between amounts accrued and thediscounted value of future payments. Such anapproach is commonly used when informationon individual instruments owned by nonresidentsis unknown, and so to calculate the accrual ofinterest costs an average yield is applied to posi-tions. Of course, in such instances the theoreticalbenefit of using a yield is offset by the approxi-mation of applying an average yield to a range ofinstruments.

2.69 Differences in methods may well have a smalleffect on the gross external debt position. However,as is evident from the first example, for each instru-ment the straightline approach will overestimate theposition in the short term. For fixed-rate instruments,this will be gradually “unwound” as the time of theinterest payment approaches.

20

Table 2.2. Present Value and the Accrual of Interest Costs: Example 2 (Discounted Principal)

Present Value in2001 2002 2003 2004 2005 2006

7.27 (7.62)* 8/(1+0.1)6.61 (6.93) 8/(1+0.1)2

6.01 (6.30) 8/(1+0.1)3

5.46 (5.73) 8/(1+0.1)4

4.97 (5.21) 8/(1+0.1)5______ ______ ________ ________ _________ _________ ___________30.31 (31.79) 8/(1+0.1) 8/(1+0.1)2 8/(1+0.1)3 8/(1+0.1)4 8/(1+0.1)5

+62.09 (65.12) 100/(1+0.1)5______ ______=92.40 (96.91)

*(7.62) = The present value of the payment six months after issuance of the debt instrument.

21A worked example of accruing interest on a zero-coupon bondin the balance of payments is given in the IMF’s Balance of Pay-ments Textbook (1996), paragraphs 400 and 401, p. 83.


Specific Instruments22

Fixed-rate instruments

Loans

2.70 For loans (except interest-free loans) interestcosts are recorded as accruing continuously, increas-ing the value of the loan outstanding, until paid.When loans have been rescheduled and a new(moratorium) interest rate agreed between the debtorand creditor, interest costs should accrue on therescheduled debt at the new moratorium interestrate. It is recognized that interest costs that accrue onloans may have to follow national practices and beclassified under other debt liabilities.

Deposits

2.71 For deposits, interest may be credited to theaccount (reinvested) at certain times, such as theend of a given period. In the Guide, interest costsaccrue continuously and become part of principalon a continuous basis. It is recognized that interestcosts that accrue on deposits may have to follow na-tional practices and be classified under other debtliabilities.

2.72 For some deposits, such as time or savingsdeposits, a given rate of interest may be paid onlyunder the condition of a minimum holding period.An early liquidation, if contractually allowed, isbalanced by a reduction in the rate of interest paidto the holder. For recording the accrual of interestcosts, the rate of interest to use is the maximum ratethat the depositor could receive in the normal courseof the contract (that is, respecting the arrangementsabout maturity or notice). In the event, if the

arrangements are not fully respected, the amount ofinterest costs that accrued previously are correctedin line with the rate the depositor actually received.As the revised amount is in all likelihood globallyvery small compared with the total interest costs fordeposits, for practical reasons the correction couldbe included in the last period of compilation (as op-posed to revising back data).

Securities

2.73 For securities for which the issue and redemp-tion prices are the same, interest costs accrue in thesame manner as for loans.

Instruments issued at a discount

2.74 Instruments for which the issue price is lessthan the redemption price are all treated in the sameway. This includes nontraded instruments where theamount to be paid is greater than the economic valueprovided at inception of the debt. The method of ac-crual for instruments issued at a discount or pre-mium was described in paragraph 2.28 above.

2.75 For short-term negotiable instruments,23

issuance at a discount is very frequent. Generallythese instruments are akin to zero-coupon bonds(example 3 above), and so the treatment of suchinstruments is the same. Without information onindividual securities, one practical approach is tobase estimates of the accrual of interest costs onaverage maturities and average rates of interest atissuance.

2.76 External debt, particularly general govern-ment debt, could be issued in the form of fungiblebonds (also named linear bonds). In this case, secu-

21

Table 2.3. Present Value and the Accrual of Interest Costs: Example 3 (Zero-Coupon Instrument)

Present Value in 2001 2002 2003 2004 2005 2006

100/(1 + 0.1) 62.09 (1 + 0.1) 62.09 (1 + 0.1)2 62.09 (1 + 0.1)3 62.09 (1 + 0.1)4 62.09 (1 + 0.1)5

= 62.09 = 68.30 = 75.13 = 82.64 = 90.90 = 100

22This text has drawn upon that in Eurostat (2000), the ESA95Manual on Government Deficit and Debt.

23A negotiable financial instrument is one whose legal owner-ship is capable of being transferred from one unit to another unitby delivery or endorsement.


rities are issued under one similar “line” (in termsof coupon amounts and payment dates, and finalredemption price and maturity date) in tranches,generally issued during a rather short period butsometimes over a longer one. Each tranche is issuedat a specific issue price according to the prevailingmarket conditions. Fungible bonds may be seen as agood example of instruments with two interestcomponents: the coupon (representing the interestpayment), and the difference between the issueprice and redemption price. Thus, in principle eachtranche should be identified separately because thenominal interest rate might well differ from trancheto tranche given the different market conditionsthat existed when they were issued. Once issued,however, the tranches may mix and so may nottrade separately on secondary markets, nor be iden-tified separately in portfolios. If so, it is necessaryto estimate a weighted-average interest rate result-ing from issuing different tranches, updated at eachnew issue, and apply this to the amount owed tononresidents.24

Stripped securities

2.77 Stripped securities are securities that have beentransformed from a principal amount with interestpayments into a series of zero-coupon bonds, with arange of maturities matching the interest paymentdates and the redemption date of the principalamount. The essence of stripping was describedin the first example above: the coupon paymentamounts are separately traded. In itself, the act ofstripping does not affect the nominal value of thedebt outstanding for the issuer of the securities thathave been stripped.

2.78 There are two types of stripping. First, if thestripped securities are issued by a third party, whohas acquired the original securities and is usingthem to “back” the issue of the stripped securities,then new funds have been raised by the third party,with the interest rate determined at the time ofissuance.

2.79 On the other hand, if the owner of the originalsecurity has asked the settlement house or clearing

house in which the security is registered to “issue”strips from the original security, the strips replacethe original security and remain the direct obligationof the issuer of the original security. In the gross ex-ternal debt position on a nominal value basis, it isunrealistic from a practical point of view to take intoaccount the rate prevailing at the issuance of eachstrip. Rather, since stripping provides no additionalfunding to the issuer and there is no impact on theoriginal cost of borrowing, fully determined at theissuance time (in the case of fixed-rate) or followingrules that cannot be changed (in the case of variable-rate), it is assumed that stripping does not changethe cost of borrowing. So, unlike other zero-couponbonds, the interest rate used for calculating theaccrual of interest costs for strips is not the rate pre-vailing at the time of stripping, but rather the origi-nal cost of borrowing—that is, on the underlyingsecurity.

2.80 In some countries, strips of interest paymentsmay refer to coupons of several bonds, with differentnominal amounts but paid at the same date. In thiscase, best efforts should be made to use theweighted-average nominal interest rate of the differ-ent underlying bonds to calculate the accrual ofinterest costs on the stripped securities.

Arrears

2.81 Interest that accrues on arrears (both principaland interest arrears) is known as late interest. Forarrears arising from a debt contract, interest costsshould accrue at the same interest rate as on the orig-inal debt, unless the interest rate for arrears wasstipulated in the original debt contract, in which casethis stipulated interest rate should be used. The stip-ulated rate may include a penalty rate in addition tothe interest rate on the original debt. For other ar-rears, in the absence of other information, interestcosts accrue on these arrears at the market rate ofinterest for overnight borrowing. Also, any addi-tional charges relating to past arrears, agreed by thedebtor and creditor at the time the arrears arerescheduled, and to be paid by the debtor to the cred-itor, should be regarded as an interest cost of thedebtor at the time the agreement is implemented. Ifan item is purchased on credit and the debtor fails topay within the period stated at the time the purchasewas made, any extra charges incurred should be re-garded as an interest cost and accrue until the debt isextinguished.

22

24A creditor might focus on the prevailing market interest rate,or the rate prevailing when they purchased the security, and hencemight record the claim at a value different from that recorded bythe debtor.


Variable-rate instruments

Interest-rate-linked instruments

2.82 For loans, deposits, and securities, the sameprinciples as with fixed-rate instruments apply, ex-cept that in the absence of firm information, the ac-crual of interest costs should be estimated and addedto the gross external debt position, using the most re-cent relevant observation(s) of the reference index.Revisions to back data should be undertaken whenthe amount of interest costs that have accrued isknown with certainty.

2.83 In addition, if the interest rate can vary onlyunder the condition of a minimum change in theindex and/or within specific upward limits, any esti-mate of the accrual of interest costs should take ac-count of any such conditions. If there is a link be-tween the nature of the rate index and the frequencyof interest payments—for example, interest is in-dexed on a quarterly basis and is normally paidevery quarter with a delay of one quarter—then theexact amount paid to the owners of the securitiesmay well be known in advance, and so can be ac-crued with certainty. This is known as interest being“predetermined.”

Index-linked instruments

2.84 External debt might be indexed to indices otherthan interest rate indices. Examples include indexingto the price of a commodity, an exchange rate index,a stock exchange index, or the price of a specific se-curity, and so on. Principal as well as interest pay-ments may be indexed. The index can apply continu-ously over all or part of the life of the instrument.Any change in value related to indexation is recordedas an interest cost, and so affects the principalamount outstanding until paid. The impact of the in-dexation on the principal amount is recorded on acontinuous basis for the period during which the in-dexing is operative.

2.85 The method of calculation is the same asthat for variable-rate interest discussed above; thatis, the accrued amount should be estimated usingthe most recent relevant observation(s) of the refer-ence index and added to the gross external debtposition. For instance, if in the first example aboveinterest payments were indexed, and movement inthe index after six months suggested that interestpayments would increase to $12 a year, then theinterest costs accrued to date would be $6 on a

straightline basis (or $5.80 on a compound basis),and the amount outstanding $106 ($105.80). Revi-sions to back data are undertaken when the amountof interest costs that have accrued is known withcertainty.

2.86 As mentioned above, a loan that is repayable incommodities or other goods in installments over aperiod of time (see paragraph 2.37) is conceptuallyequivalent to an indexed loan. At inception the prin-cipal amount outstanding is the value of principaladvanced; as with other debt instruments, interestcosts will accrue on this amount, increasing itsvalue. At any moment in time, the interest rate thataccrues is that which equates the market value of thecommodities or other goods to be paid with the prin-cipal amount then outstanding; as the market priceof the commodity or other good changes, so will theimplicit interest rate.

2.87 Index-linked instruments may include a clausefor a minimum guaranteed redemption value. Anyestimate of the accrual of interest costs should takeaccount of such conditions. For instance, if strict ap-plication of the index had the effect of reducing theamount outstanding to less than the minimum, itwould not be relevant to record any reduction belowthe minimum guaranteed redemption value. Nor-mally, the current market price of debt instrumentstakes into account such a clause.

Instruments with grace periods

2.88 Some debt instruments may have a grace pe-riod during which no interest payments are to bemade. Provided that the debtor can repay, withoutpenalty, the same amount of principal at the end ofthe grace period as at the beginning, no interest costsaccrue during the grace period. This remains trueeven if the rate of interest applied in a second and/orsubsequent time period is adjusted (for example,there is a step up), so that the final yield is roughlysimilar to normal conditions over the total life of theinstrument.

Instruments with embedded derivatives

2.89 Some instruments may have embedded deriva-tives that could, if exercised, affect the rate of inter-est. For such instruments, interest costs should ac-crue, and be included in the gross external debtposition, as “normal.” If the financial derivative is

23


exercised and so affects the interest rate, this shouldbe reflected in the rate at which interest accrues—for example, in a structured note with a maximuminterest rate, when, and as long as, the maximum isreached and so the financial derivative is “exer-cised,” interest costs should accrue at the maximumrate and no more. The market price of debt instru-ments should reflect the likelihood of the financialderivative being exercised.

Foreign currency instruments

2.90 Interest costs should accrue (or not) in foreigncurrency on an instrument denominated in foreigncurrency, adding to the outstanding principal amount,until paid or in arrears. The principal amount in for-eign currency should be converted into the unit of ac-count at the midpoint between the buying and sellingmarket (spot) rates on the reference date to which theposition relates.

24

Introduction

3.1 In the Guide, as in the 1993 SNA and BPM5, in-stitutional units, and the instruments in which theytransact, are grouped into categories so as to enhancethe analytical usefulness of the data. Institutionalunits are grouped into institutional sectors, and fi-nancial instruments are classified by their nature intoinstrument categories. However, the classificationsof institutional sectors and financial instruments aredetermined by the analytical needs of external debtstatistics and so can differ from other macroeco-nomic datasets. For instance, the central bank, an in-stitutional unit, is an institutional subsector in the1993 SNA but may not necessarily undertake allmonetary authority activities (such as currency is-suance or international reserve management) in aneconomy. In the Guide, all the monetary authority-type activities are included together in the monetaryauthorities sector regardless of whether they are ac-tually undertaken in the central bank or not. Giventhe importance of ensuring compatibility and consis-tency across related macroeconomic datasets, the in-stitutional sectors defined in the Guide can be recon-ciled with those in the BPM5.

3.2 The institutional sector breakdown groups insti-tutional units with common economic objectives andfunctions: general government, monetary authori-ties, banks, and other sectors. These sectors are de-fined in this chapter, as are the subsectors of othersectors: nonbank financial corporations, nonfinan-cial corporations, and households and nonprofit in-stitutions serving households. BPM5 does not pro-vide definitions of the subsectors of other sectors.

3.3 On the classification of financial instruments,the Guide gives prominence to four categories of in-struments in particular: debt securities, trade credit,loans, and currency and deposits. There is also another debt liabilities category; this would includeitems such as accounts payable. This chapter ex-

plains the nature of these types of financial instru-ments in the context of the BPM5 functional cate-gories from which they are drawn. Further, Appen-dix I defines specific financial instruments andtransactions and provides classification guidance; ittherefore should be consulted in conjunction withthis chapter.

Institutional Sectors

3.4 The institutional sector presentations below areconsistent with the 1993 SNA except that, in linewith BPM5, the Guide has a slightly different defini-tion for the general government and central banksectors.1

3.5 The monetary authorities sector is a functionalconcept used in the balance of payments that coversthe central bank (or currency board, monetaryagency, etc.) and any other operations that are usu-ally attributable to the central bank but are carriedout by other government institutions or commercialbanks. Such operations include the issuance of cur-rency; maintenance and management of interna-tional reserves, including those resulting from trans-actions with the IMF; and the operation of exchangestabilization funds.

3.6 The general government sector, with the excep-tion noted in the previous paragraph, is defined con-sistently with the definition of that sector in the 1993SNA. The government of a country consists of thepublic authorities and their agencies, which are enti-ties established through political processes that exer-cise legislative, judicial, and executive authoritywithin a territorial area. The principal economicfunctions of a government are (1) to assume respon-

3. Identification of Institutional Sectorsand Financial Instruments

25

1Institutional sectors are also described in detail in Chapter IVof the 1993 SNA.


sibility for the provision of goods and services to thecommunity on a nonmarket basis, either for collec-tive or individual consumption, and (2) to redistrib-ute income and wealth by means of transfer pay-ments. An additional characteristic of government isthat these activities must be financed primarily bytaxation or other compulsory transfers. General gov-ernment consists of (i) government units that exist ateach level—central, state, or local—of governmentwithin the national economy; (ii) all social securityfunds operated at each level of government; and(iii) all nonmarket nonprofit institutions that are con-trolled and mainly financed by government units.Public corporations, and unincorporated enterprisesthat function as if they were corporations (so-calledquasi-corporations) are explicitly excluded from thegeneral government sector and are allocated to thefinancial or nonfinancial corporate sectors, as appro-priate. A quasi-corporation can be owned by a resi-dent or nonresident entity but typically will keep aseparate set of accounts from its parent and/or, ifowned by a nonresident, be engaged in a significantamount of production in the resident economy over along or indefinite period of time.

3.7 The banking sector is identical with the “other(than the central bank) depository corporations”subsector of the financial corporate sector in the1993 SNA.2 Included are all resident units engagingin financial intermediation as a principal activityand having liabilities in the form of depositspayable on demand, transferable by check, or other-wise used for making payments, or having liabilitiesin the form of deposits that may not be readilytransferable, such as short-term certificates of de-posit, but that are close substitutes for deposits andare included in measures of money broadly defined.Thus, in addition to commercial banks, the bankingsector encompasses institutions such as savingsbanks, savings and loan associations, credit unions

or cooperatives, and building societies. Post officesavings banks or other government-controlled sav-ings banks are also included if they are institutionalunits separate from the government.

3.8 The other sectors category comprises nonbankfinancial corporations, nonfinancial corporations,and households and nonprofit institutions servinghouseholds subsectors.

3.9 The nonbank financial corporations subsectorcomprises insurance corporations and pension funds,other nonbank financial intermediaries, and financialauxiliaries. These types of institutions are all resi-dent subsectors in the 1993 SNA. Insurance corpora-tions consist of incorporated, mutual, and other enti-ties whose principal function is to provide life,accident, sickness, fire, and other types of insuranceto individual units or groups of units through thepooling of risk. Pension funds are those that are con-stituted in such a way that they are separate institu-tional units from the units that create them and areestablished for purposes of providing benefits on re-tirement for specific groups of employees (and, per-haps, their dependents). These funds have their ownassets and liabilities and engage in financial transac-tions on the market on their own account. Other fi-nancial intermediaries consist of all resident corpo-rations or quasi-corporations primarily engaged infinancial intermediation, except for banks, insurancecorporations, and pension funds. The types of corpo-rations included under this heading are security deal-ers, investment corporations, and corporations en-gaged in personal finance and/or consumer credit.Financial auxiliaries consist of those resident corpo-rations and quasi-corporations that engage primarilyin activities closely related to financial intermedia-tion but that do not themselves perform an interme-diation role, such as security brokers, loan brokers,and insurance brokers.

3.10 The nonfinancial corporations subsector con-sists of resident entities whose principal activity isthe production of market goods or nonfinancialservices. This sector is defined consistently withthe definition in the 1993 SNA. The sector includesall resident nonfinancial corporations; all residentnonfinancial quasi-corporations, including thebranches or agencies of foreign-owned nonfinancialenterprises that are engaged in significant amountsof production on the economic territory on a long-term basis; and all resident nonprofit institutions

26

2Covering both the deposit money corporations (S.1221) andother (S.1222) subsectors of the 1993 SNA. In the IMF’s Monetaryand Financial Statistics Manual (2000d), other depository corpo-rations are defined to include only those financial intermediariesissuing deposits and close substitutes that are included in the na-tional definition of broad money, which may exclude (include) in-stitutional units that are included (excluded) within the 1993 SNAdefinition. Rather than as banks, these excluded institutional unitswould be classified as nonbank financial corporations (or viceversa). While it is recommended in the Guide that the definition ofbanks be consistent with the 1993 SNA and BPM5, it is recognizedthat countries may rely on data from monetary surveys to compileexternal debt statistics for the banking sector.

3 • Identification of Institutional Sectors and Financial Instruments

that are market producers of goods or nonfinancialservices.

3.11 The households and nonprofit institutions serv-ing households (households and NPISH) subsectorcomprises the household sector, consisting of resi-dent households, and the nonprofit institutions serv-ing households sector, consisting of such entities asprofessional societies, political parties, trade unions,charities, etc.

3.12 In the presentation of the gross external debtposition (see below), intercompany lending liabili-ties under a direct investment relationship are sepa-rately identified. Equity liabilities arising from a di-rect investment, like all equity liabilities, areexcluded from external debt. These instruments aredescribed in more detail in paragraph 3.16.

Instrument Classification

3.13 This section defines the types of financial in-struments to be included in the presentation of thegross external debt position. They are defined in thecontext of the BPM5 functional categories—directinvestment, portfolio investment, financial deriva-tives, other investment, and reserve assets—fromwhich they are drawn. This allows the compiler, ifnecessary, to derive the gross external debt positiondata from the IIP statement.

3.14 Direct investment (Table 3.1) refers to a lastinginterest of an entity resident in one economy (the di-rect investor) in an entity resident in another econ-omy (the direct investment enterprise), defined inBPM5 as ownership of 10 percent or more of the or-

dinary shares or voting power (for an incorporatedenterprise) or the equivalent (for an unincorporatedenterprise).3 Once established, all financial claims ofthe investor on the enterprise, and vice and versa, andall financial claims on, or liabilities to, related (affili-ated) enterprises, are included under direct invest-ment (with two exceptions: financial derivatives andcertain intercompany assets and liabilities betweentwo affiliated financial intermediaries—see para-graph 3.18). Of the direct investment components,other capital, when owed to nonresident direct in-vestors or affiliates, is included in the gross externaldebt position; but the other components are not.

3.15 Other capital covers borrowing and lending offunds—including debt securities and suppliers’ cred-its (for example, trade credits)—among direct in-vestors and related subsidiaries, branches, and asso-ciates. In the gross external debt position tables,other capital is presented as direct investment: inter-company lending.

3.16 Equity capital and reinvested earnings (com-prising equity in branches, subsidiaries, and associ-ates—except nonparticipating, preferred shares,which are classified as debt instruments—and othercapital contributions, such as the provision of ma-chinery) is not a debt instrument.

3.17 In practice, it is sometimes difficult to distin-guish whether the claims of a direct investor on a di-

27

Table 3.1. Standard Components of the IIP: Direct Investment

Assets Liabilities

Direct investment abroad Direct investment in reporting economyEquity capital and reinvested earnings Equity capital and reinvested earnings

Claims on affiliated enterprises Claims on direct investorsLiabilities to affiliated enterprises Liabilities to direct investors

Other capital Other capitalClaims on affiliated enterprises Claims on direct investorsLiabilities to affiliated enterprises1 Liabilities to direct investors1

1Instruments in these categories are debt liabilities to be included in external debt.

3Further information on the methodology for measuring directinvestment is available in BPM5, Chapter XVIII, and its relatedpublications, and in the OECD Benchmark Definition of ForeignDirect Investment, Third Edition (OECD, 1996).


rect investment enterprise are other capital, which isclassified as external debt, or equity capital, which isnot. Differentiation is particularly difficult when anenterprise is 100 percent owned by a direct investor,such as when the direct investment enterprise is abranch or unincorporated enterprise. In these situa-tions, the classification of capital could be the sameas used in the direct investment enterprise’s account-ing records. That is, when a claim of the direct in-vestor on the direct investment enterprise is consid-ered to be equity capital or shareholder funds in theaccounting records of the direct investment enter-prise, this claim is also considered equity capital forexternal debt purposes. Subject to this condition: ifliabilities are only to be repaid in the event that aprofit is made by the direct investment enterprise,then the liabilities are classified as equity capital.Similarly, in some instances the direct investor mightfund local expenses directly and also receive directlythe income arising from the output of the direct in-vestment enterprise. The Guide regards such pay-ments and receipts as the provision and withdrawalof equity capital, respectively, in the direct invest-ment enterprise by the direct investor.

3.18 The stocks of intercompany assets and lia-bilities between two affiliated financial interme-diaries, including special purpose entities (SPEs)principally engaged in financial intermediation, that

are recorded under direct investment are limited topermanent debt (loan capital representing a perma-nent interest)—classified as direct investment: inter-company lending—and equity capital and reinvestedearnings. Other intercompany debt liabilities be-tween affiliated financial intermediaries are classi-fied by type of instrument, such as loans, debt secu-rity, etc., and are attributed to the institutional sectorof the debtor entity. For this purpose, financial inter-mediaries are defined as enterprises principallyengaged in providing financial intermediation ser-vices or services auxiliary to financial intermedia-tion and comprise those corporations and quasi-corporations that are grouped, in the 1993 SNA, intothe following subsectors: (1) other depository corpo-rations (other than the central bank); (2) other finan-cial intermediaries, except insurance corporationsand pension funds; and (3) financial auxiliaries.

3.19 Portfolio investment (Table 3.2) includestraded securities (other than those included in directinvestment and reserve assets). These instrumentsare usually traded (or tradable) in organized andother financial markets, including over-the-counter(OTC) markets. When they are owed to nonresi-dents, of the portfolio investment components, debtsecurities—that is, bonds and notes, and money mar-ket instruments—are included in the gross externaldebt position. Equity securities, including share in-vestments in mutual funds and investment trusts,4

are not included in the gross external debt position.

3.20 Debt securities issued with an original maturityof more than one year are classified as bonds andnotes, even though their remaining maturity at thetime of the investment may be less than one year.Bonds and notes usually give the holder the uncondi-tional right to a fixed money income or contractuallydetermined variable money income (payment of in-terest being independent of the earnings of thedebtor). With the exception of perpetual bonds,bonds and notes also provide the unconditional rightto a fixed sum in repayment of principal on a speci-fied date or dates. Included among bonds and notes

28

Table 3.2. Standard Components of the IIP:Portfolio Investment

Assets Liabilities

Equity securities Equity securitiesMonetary authorities BanksGeneral government Other sectorsBanks Debt securitiesOther sectors Bonds and notes1

Debt securities Monetary authoritiesBonds and notes General government

Monetary authorities BanksGeneral government Other sectorsBanks Money market instruments1

Other sectors Monetary authoritiesMoney market instruments General government

Monetary authorities BanksGeneral government Other sectorsBanksOther sectors

1Instruments in these categories are debt liabilities to be included in externaldebt.

4A mutual fund or investment trust liability that requires pay-ment(s) of principal and/or interest by the mutual fund or invest-ment trust to the creditor at some point(s) in the future is to berecorded as a debt instrument and, if owed to nonresidents,included in the gross external debt position. The instrument classi-fication would be dependent on the characteristics of the liabil-ity—for example, as a deposit (see paragraph 3.34).


are so-called asset-backed securities and collateral-ized debt obligations; that is, securities on whichpayments to creditors are explicitly dependent on aspecific stream of income—for example, future lot-tery receipts or a pool of nontraded instruments (say,loans or export receivables); see Appendix I formore details.

3.21 Debt securities issued with an original maturityof one year or less are classified as money market in-struments. These instruments generally give theholder the unconditional right to receive a stated,fixed sum of money on a specified date. These short-term instruments are usually traded, at a discount, inorganized markets; the discount is dependent on theinterest rate and the time remaining to maturity. Ex-amples of money market instruments include trea-sury bills, commercial and financial paper, andbanker’s acceptances. Like bonds and notes, moneymarket instruments can be “backed” by a specificstream of income or pool of nontraded instruments.

3.22 Further, where an instrument is provided by animporter to an exporter with such characteristics thatit is tradable in organized and other financial mar-kets, such as a promissory note, it should be classi-fied as a debt security—either bonds and notes, ormoney market instruments depending on its originalmaturity—in the gross external debt position. Sepa-rate identification of the outstanding value of suchinstruments is also encouraged because of their rolein financing trade. (See also the description of trade-related credit in Chapter 6.)

3.23 Equity securities cover all instruments andrecords acknowledging, after the claims of all credi-tors have been met, claims to the residual value of in-corporated enterprises. These securities are not debtinstruments and so are not external debt liabilities.Shares, stocks, preferred stock or shares, participa-tion, or similar documents—such as American Depos-itory Receipts—usually denote ownership of equity.Shares of collective investment institutions, e.g., mu-tual funds and investment trusts, are also included.

3.24 Financial derivatives5 (Table 3.3) are financialinstruments that are linked to a specific financial in-

strument, indicator, or commodity and throughwhich specific financial risks can be traded in finan-cial markets in their own right. As explained inChapter 2 (see paragraph 2.11), financial derivativesare not debt instruments, but information on themcan be relevant for external debt analysis.

3.25 Under a forward-type contract, the two coun-terparties agree to exchange an underlying item—real or financial—in a specified quantity, on a speci-fied date, at an agreed contract (strike) price or, inthe specific instance of a swap contract, the twocounterparties agree to exchange cash flows, deter-mined with reference to the price(s) of, say, curren-cies or interest rates, according to prearranged rules.The typical requirement under a foreign exchangeforward contract to deliver or receive foreign cur-rency in the future can have important implicationsfor foreign currency liquidity analysis and is cap-tured in the table in Table 7.7 in Chapter 7. Under anoption contract, the purchaser of the option, in re-turn for an option premium, acquires from the writerof the option the right but not the obligation to buy(call option) or sell (put option) a specified underly-ing item—real or financial—at an agreed contract(strike) price on or before a specified date. Through-out the life of the contract the writer of the optionhas a liability and the buyer an asset, although theoption can expire worthless; the option will be exer-cised only if settling the contract is advantageousfor the purchaser. Typical derivatives instrumentsinclude futures (exchange traded forward contract),interest and cross-currency swaps, forward rateagreements, forward foreign exchange contracts,credit derivatives, and various types of options.

3.26 Other investment (Table 3.4) covers all finan-cial instruments other than those classified as direct

29

Table 3.3. Standard Components of the IIP:Financial Derivatives

Assets Liabilities

Financial derivatives Financial derivativesMonetary authorities Monetary authoritiesGeneral government General governmentBanks BanksOther sectors Other sectors

5The treatment of financial derivatives in the balance of pay-ments and IIP is described in Financial Derivatives: A Supplementto the Fifth Edition (1993) of the Balance of Payments Manual(IMF, 2000c).


investment, portfolio investment, financial deriva-tives, or reserve assets. When owed to nonresidents,all the components of other investment—tradecredit, loans, currency and deposits, and other debtliabilities—are included in the gross external debtposition.

3.27 Trade credits consist of claims or liabilitiesarising from the direct extension of credit by suppli-ers for transactions in goods and services, and ad-vance payments by buyers for goods and services

and for work in progress (or to be undertaken).Long- and short–term trade credits are shown sepa-rately. Trade-related loans provided by a third party,such as a bank, to an exporter or importer are notincluded in this category but under loans, below(see also the description of trade-related credit inChapter 6).

3.28 Loans include those financial assets createdthrough the direct lending of funds by a creditor(lender) to a debtor (borrower) through an arrange-ment in which the lender either receives no securityevidencing the transactions or receives a nonnego-tiable document or instrument. Collateral, in theform of either a financial asset (such as a security) ornonfinancial asset (such as land or a building) maybe provided under a loan transaction, although it isnot an essential feature. In the gross external debtposition, loans include use of IMF credit and loansfrom the IMF.

3.29 If a loan becomes tradable and is, or has been,traded in the secondary market, the loan should bereclassified as a debt security. Given the significanceof reclassification, there needs to be evidence of sec-ondary market trading before a debt instrument is re-classified from a loan to a security. Evidence of trad-ing on secondary markets would include theexistence of market makers and bid-offer spreads forthe debt instrument. The Guide encourages the sepa-rate identification of the outstanding value of anysuch loans reclassified.

3.30 Reverse security transactions and financialleases are two types of arrangements for which thechange of ownership principle is not strictly adheredto.

3.31 A reverse securities transaction is defined toinclude all arrangements whereby one party legallyacquires securities and agrees, under a legal agree-ment at inception, to return the same or equivalentsecurities on or by an agreed date to the same partyfrom whom they acquired the securities initially. Ifthe security taker under such a transaction providescash funds, and there is agreement to reacquire thesame or equivalent securities at a predeterminedprice at the contract’s maturity, a loan transaction isrecorded. This is the so-called collateralized loanapproach to a reverse securities transaction, with thesecurities representing the collateral. These transac-tions include security repurchase agreements (repos),

30

Table 3.4. Standard Components of the IIP:Other Investment

Assets Liabilities

Trade credits Trade credits1

General government General governmentLong-term Long-termShort-term Short-term

Other sectors Other sectorsLong-term Long-termShort-term Short-term

Loans Loans1

Monetary authorities Monetary authoritiesLong-term Use of IMF credit and loansShort-term from the IMF

General government Other long-termLong-term Short-termShort-term General government

Banks Long-termLong-term Short-termShort-term Banks

Other sectors Long-termLong-term Short-termShort-term Other sectors

Currency and depositsLong-term

Monetary authoritiesShort-term

General government Currency and deposits1

Banks Monetary authoritiesOther sectors Banks

Other assets Other liabilities1

Monetary authorities Monetary authoritiesLong-term Long-termShort-term Short-term

General government General governmentLong-term Long-termShort-term Short-term

Banks BanksLong-term Long-termShort-term Short-term

Other sectors Other sectorsLong-term Long-termShort-term Short-term

1Instruments in these categories are debt liabilities to be included in externaldebt.


securities lending involving cash, and sale/buybacks. The security provider under a reverse securitytransaction acquires a repo loan liability and the se-curity taker a repo loan asset. If no cash is provided,no loan transaction is reported. Under the collateral-ized loan approach, the security is assumed not tohave changed ownership and remains on the balancesheet of the security provider. A similar recordingprocedure is adopted for transactions where goldrather than securities is provided as collateral forcash (so-called gold swaps).

3.32 If the security taker sells the security acquiredunder a reverse security transaction, they record anegative position in that security. This treatment re-flects economic reality in that the holder of the nega-tive position is exposed to the risks and benefits ofownership in an equal and opposite way to the partywho now owns the security (see also Appendix II).On-selling of gold by the gold taker, similarly re-ported as a negative holding, does not affect thegross external debt position because gold is an assetwithout any corresponding liability.

3.33 A financial lease is a contract under which alessee contracts to pay rentals for the use of a goodfor most or all of its expected economic life. Therentals enable the lessor over the period of the con-tract to recover most or all of the costs of goods andthe carrying charges. While there is not a legalchange of ownership of the good, under a financiallease the risks and rewards of ownership are, defacto, transferred from the legal owner of the good,the lessor, to the user of the good, the lessee. For thisreason, under statistical convention, the total valueof the good is imputed to have changed ownership.So, the debt liability at the inception of the lease isdefined as the value of the good and is financed by aloan of the same value, a liability of the lessee. Theloan is repaid through the payment of rentals (whichcomprise both interest and principal payment ele-ments) and any residual payment at the end of thecontract (or alternatively, by the return of the good tothe lessor).

3.34 Currency and deposits consists of notes andcoin and both transferable and other deposits.6 Notes

and coin represent claims of a fixed nominal valueusually on a central bank or government; commemo-rative coins are excluded. Transferable deposits con-sist of deposits that are (1) exchangeable on demandat par and without penalty or restriction, and (2) di-rectly usable for making payments by check, giroorder, direct debit/credit, or other direct payment fa-cility. Other deposits comprise all claims representedby evidence of deposit—for example, savings andfixed-term deposits; sight deposits that permit imme-diate cash withdrawals but not direct third-partytransfers; and shares that are legally (or practically)redeemable on demand or on short notice in savingsand loan associations, credit unions, building soci-eties, etc. Depending on national practice, gold thatis borrowed (without cash being provided in ex-change) from a nonresident could be classified bythe borrower as a foreign currency deposit.

3.35 Other assets/other liabilities covers items otherthan trade credit, loans, and currency and deposits.Such assets and liabilities include liabilities of pen-sion funds and life insurance companies to their non-resident participants and policyholders, claims onnonlife companies; capital subscriptions to interna-tional nonmonetary organizations; arrears (seebelow); and accounts receivable and payable, such asin respect of taxes, dividends declared payable butnot yet paid, purchases and sales of securities, andwages and salaries. Short- and long-term other liabil-ities are shown separately as other debt liabilities inthe gross external debt presentation.

3.36 Arrears are defined as amounts that are pastdue-for-payment and unpaid. Arrears can arise boththrough the late payment of principal and interest ondebt instruments as well as through late paymentsfor other instruments and transactions. For instance,a financial derivatives contract is not a debt instru-ment for reasons explained above, but if a financialderivatives contract comes to maturity and a pay-ment is required but not made, arrears are created.Similarly, if goods are supplied and not paid for onthe contract payment date or a payment for goods ismade but the goods are not delivered on time, thenarrears are created. These new debt liabilities shouldbe recorded in the gross external debt position asarrears.

3.37 Payments may be missed for a variety of rea-sons beyond simply the inability or unwillingness ofthe debtor to meet its payment obligations. Some-

31

6Because the IIP does not provide a short-term/long-term attri-bution, it is recommended that all currency and deposits are in-cluded in the short-term category unless detailed information isavailable to make the short-term/long-term attribution.


times arrears arise not from the ability of the originaldebtor to provide national currency but from the in-ability of the monetary authorities to provide foreignexchange to a domestic entity, so preventing that en-tity from servicing its foreign currency debt. Theseso-called transfer arrears remain those of the origi-nal debtor sector. Another circumstance may bewhen the creditor has agreed in principle to resched-ule debt—that is, reorganize payments that are

falling due—but the agreement has yet to be signedand implemented. In the meantime, payments dueunder the existing agreement are not made, and ar-rears arise—so-called technical arrears.7 Such ar-rears might typically arise in the context of ParisClub agreements between the time of the Paris Clubrescheduling session and the time when the bilateralagreements are signed and implemented. If theagreement in principle lapses before the agreementis signed, then any accumulated arrears are no longertechnical arrears.

3.38 Reserve assets (Table 3.5) consist of those ex-ternal assets that are readily available to and con-trolled by the monetary authorities for direct financ-ing of payments imbalances, for indirectlyregulating the magnitude of such balances throughintervention in exchange markets to affect the cur-rency exchange rate, and/or for other purposes.8 Bydefinition, reserve assets are not included in thegross external debt position.

32

Table 3.5. Standard Components of the IIP:Reserve Assets

Assets

GoldSpecial drawing rightsReserve position in the IMFForeign exchange

Currency and depositsWith monetary authoritiesWith banks

SecuritiesEquitiesBonds and notesMoney market instruments

Financial derivatives (net)Other claims

7If the creditor bills and the debtor pays on the basis of the newagreement, even though it is not signed, no arrears arise.

8In addition to BPM5, Chapter XXI, see International Reservesand Foreign Currency Liquidity: Guidelines for a Data Template(Kester, 2001), which also provides guidance on the measurementof official reserve assets.

Introduction

4.1 This chapter provides a table for the presenta-tion of the gross external debt position and relatedmemorandum tables. Data compiled using the con-cepts outlined in the previous chapters and presentedin the format of this table are essential to providing acomprehensive and informed picture of the grossexternal debt position for the whole economy, and so

their dissemination on a frequent basis is encouraged(see also Box 4.1).

4.2 In disseminating data on the gross external debtposition, compilers are encouraged to providemethodological notes explaining the concepts andmethods used in compiling the data. For any presen-tation of gross external debt position it is particularlyimportant for the compiler to indicate whether

4. Presentation of the Gross ExternalDebt Position

33

In the aftermath of the 1994–95 international financial crisis, theInterim Committee (now called the International Monetary andFinancial Committee) of the IMF’s Board of Governorsendorsed the establishment of a two-tier standard to guidemember countries in the provision of economic and financialdata to the public.The first tier, named the Special Data Dissem-ination Standard (SDDS), was approved by the IMF’s ExecutiveBoard on March 29, 1996. The other tier, named the GeneralData Dissemination System (GDDS), was approved on Decem-ber 19, 1997.1

The purpose of the SDDS is to guide IMF member countries inthe provision to the public of comprehensive, timely, accessible,and reliable economic and financial statistics in a world ofincreasing economic and financial integration. The SDDS isgeared to those countries that have, or might seek, access tointernational capital markets. Subscription to the SDDS is volun-tary. By subscribing to the SDDS, members undertake to pro-vide the supporting information to the IMF and to observe thevarious elements of the SDDS.

With respect to the external debt data category, the SDDS pre-scribes the dissemination of quarterly data with a one-quarterlag, covering four sectors (general government, monetary author-ities, the banking sector, and other). Furthermore, the data are to

be disaggregated by maturity—short- and long-term—and pro-vided on an original maturity basis and by instrument, as set outin BPM5. The SDDS encourages countries to disseminate sup-plementary information on future debt-service payments, inwhich the principal and interest components are separatelyidentified, twice yearly for the first four quarters and the follow-ing two semesters ahead, with a lag of one quarter. The datashould also be broken down into sector—general government,monetary authorities, the banking sector, and other sectors.Thedissemination of a domestic/foreign currency breakdown ofexternal debt with quarterly periodicity and timeliness is alsoencouraged.

The GDDS is a structured process focused on data quality thatassists countries in adapting their statistical systems to meet theevolving requirements of the user community in the areas ofeconomic management and development. Participating countriesvoluntarily commit to adhering to sound statistical practices indeveloping their statistical systems.

The core data category for external debt in the GDDS includespublic and publicly guaranteed debt, and the associated debt-service schedule. Recommended good practice would be thatthe stock data, broken down by maturity, be disseminated withquarterly periodicity and timeliness of one or two quarters afterthe reference date. In addition, the associated debt-serviceschedules should be disseminated twice yearly, within three tosix months after the reference period, and with data for fourquarters and two semesters ahead. Data on nonguaranteed pri-vate debt and debt-servicing schedules, with annual periodicity,are encouraged data categories to be disseminated within six tonine months after the reference period.

Box 4.1 SDDS and GDDS Specifications Regarding Dissemination of External Debt Statistics

1On March 29, 2000, the IMF’s Executive Board made a number ofamendments to the SDDS, which included the introduction of a sep-arate data category for external debt. At the same time, the Boardamended the GDDS to include public and publicly guaranteed exter-nal debt and a debt-service schedule as a core data category.


traded instruments are valued at nominal or marketvalue,1 and whether interest costs that have accruedbut are not yet payable are included, or not.

Presentation Table

4.3 The presentation of the gross external debt posi-tion is set out in Table 4.1.• The first level of disaggregation is by institutional

sector. The primary disaggregation is by the foursectors of the compiling economy described in theprevious chapter—general government, monetaryauthorities, banks, and other sectors. A disaggre-gation of the other sectors into nonbank finan-cial corporations, nonfinancial corporations, andother sectors (households and nonprofit institu-tions serving households) is provided.

Intercompany lending between entities in adirect investment relationship is separately pre-sented because the nature of the relationshipbetween debtor and creditor is different from thatfor other debt, and this affects economic behavior.Whereas a creditor principally assesses claims onan unrelated entity in terms of the latter’s ability torepay, claims on a related entity may be addition-ally assessed in terms of the overall profitabilityand economic objectives of the multinationaloperation.

• The second level of disaggregation is by the matu-rity of external debt—short-term and long-term onan original maturity basis. A maturity attribution isnot provided for intercompany lending, but in sep-arately identifying arrears (see below), which bydefinition are short-term liabilities, a partial short-term attribution is provided.2

• The third level of disaggregation is by type of debtinstrument. The debt instruments are described inChapter 3.

4.4 Other debt liabilities (other liabilities in theIIP), and intercompany lending are explicitly subdi-vided between arrears and other. Arrears are sepa-rately identified because such information is of par-ticular analytical interest to those involved inexternal debt analysis, since the existence of arrears

34

Table 4.1. Gross External Debt Position:By Sector

End-Period

General GovernmentShort-termMoney market instrumentsLoansTrade creditsOther debt liabilities1

ArrearsOther

Long-termBonds and notesLoansTrade creditsOther debt liabilities1

Monetary AuthoritiesShort-termMoney market instrumentsLoansCurrency and deposits2

Other debt liabilities1

ArrearsOther

Long-termBonds and notesLoansCurrency and deposits2


BanksShort-termMoney market instrumentsLoansCurrency and deposits2


ArrearsOther



Other SectorsShort-termMoney market instrumentsLoansCurrency and deposits2

Trade credits Other debt liabilities1

ArrearsOther


Trade creditsOther debt liabilities1

1A table reconciling nominal and market valuation of tradeddebt instruments is provided in Chapter 7 (Table 7.13).

2If a short-/long-term maturity attribution of intercompanylending data is available to the compiler on an original maturitybasis, the Guide encourages dissemination of these data.

4 • Presentation of the Gross External Debt Position

indicates the extent to which an economy has beenunable to meet its external obligations. All otherdebt liabilities and intercompany lending that are notarrears are classified as other.

4.5 For some economies arrears are very significant.For such economies, a further disaggregation ofarrears into arrears of principal, arrears of interest,interest on arrears of principal, and interest by insti-tutional sector is encouraged. Also, if the amounts oftechnical and/or transfer arrears are significant, itis encouraged that data on these amounts be sepa-rately identified and disseminated by the compilingeconomy.

4.6 The chapter also presents tables for memoran-dum items, data on which, depending on an econ-omy’s circumstances, can enhance the analyticalusefulness of the data presented in the gross externaldebt position.

Memorandum Items

4.7 To enhance analytical usefulness, various mem-oranda data series might be presented along with thepresentation of the gross external debt position. Thefirst memorandum item discussed below covers out-standing liabilities arising from periodic interestcosts that have accrued and are not yet payable. Theother three memorandum items—financial deriva-tives, equity liabilities, and debt securities issuedby residents that are involved in reverse securitytransactions between residents and nonresidents—provide information on instruments that are not cap-tured in the gross external debt position but thatpotentially could render an economy vulnerable tosolvency and, particularly, liquidity risks.

Periodic Interest Costs That Have Accrued and Are Not Yet Payable:Outstanding Liabilities

4.8 A memorandum table is set out in Table 4.2 forthe presentation of data on outstanding liabilitiesarising from periodic interest costs that have accruedand are not yet payable. Periodic interest costs arethose interest costs that result in an interest payment,as defined in Chapter 2. In attributing these liabili-ties by sector and maturity in this table, compilersshould be consistent with their approach in compil-ing gross external debt position data. For example,

35

Other Sectors (continued)Nonbank financial corporations

Short-termMoney market instrumentsLoansCurrency and deposits2


ArrearsOther



Nonfinancial corporationsShort-termMoney market instrumentsLoansTrade creditsOther debt liabilities1

ArrearsOther


Households and nonprofit institutions serving households (NPISH)

Short-termMoney market instrumentsLoansTrade creditsOther debt liabilities1

ArrearsOther


Direct Investment: Intercompany Lending Debt liabilities to affiliated enterprises

ArrearsOther

Debt liabilities to direct investorsArrearsOther

Gross External Debt

1Other debt liabilities are other liabilities in the IIP statement.2It is recommended that all currency and deposits be included in

the short-term category unless detailed information is available tomake the short-term/long-term attribution.

Table 4.1(concluded)

End-Period


interest costs attributed to short-term governmentdebt in the gross external debt position should beattributed to general government, short-term in thistable. A more detailed disaggregation of these inter-est cost liabilities by type of instrument could beprovided, if necessary.

4.9 Separate data on outstanding liabilities arisingfrom periodic interest costs that have accrued andare not yet payable allow for the calculation of thegross external debt position excluding these liabili-ties, which in turn facilitates comparisons bothacross countries and across time—that is, allowscomparisons with gross external debt position datathat might exclude such liabilities produced eitherby other countries, or by the same country in earliertime periods. Information on such liabilities alsoprovides a broad indication of the scale of short-terminterest payments to be made (the more frequentthese data are disseminated, the more relevant thisinformation), and can help clarify national practiceon the treatment of accrual of interest costs.

Financial Derivatives

4.10 A memorandum table for the presentation ofposition data on financial derivatives is provided in

Table 4.3. Because of the use of financial derivativesto hedge financial positions as well as to take openpositions, these contracts can add to an economy’sliabilities and, if used inappropriately, cause signifi-cant losses. However, in comparing financial deriva-tives data with external debt, the user should beaware that financial derivatives might be hedgingasset positions, or a whole portfolio of assets and lia-bilities. In this regard, the net external debt positionpresentation in Chapter 7 is also relevant.

4.11 The table includes gross assets as well asgross liabilities because of the market practice ofcreating offsetting contracts, and the possibility offorward-type instruments to switch from asset toliability positions, and vice versa, from one periodto the next. For instance, a borrower hedging a for-eign currency borrowing with a forward contractmight find that the value of the hedge switches fromasset to liability position from period to perioddepending on the movement in exchange rates. Topresent only the liability position in financial deriv-atives along with gross external debt would implythat the foreign currency borrowing was only

36

Table 4.2. Periodic Interest Costs ThatHave Accrued and Are Not Yet Payable:Outstanding Liabilities

End-Period

General GovernmentShort-termLong-term

Monetary AuthoritiesShort-termLong-term

BanksShort-termLong-term

Other SectorsShort-termLong-term

Direct Investment: Intercompany LendingDebt liabilities to affiliated enterprisesDebt liabilities to direct investors

Total Economy

Table 4.3. Financial Derivatives Position

End-Period

LiabilitiesGeneral governmentMonetary authoritiesBanksOther sectors

Nonbank financial corporationsNonfinancial corporationsHouseholds and nonprofit institutions

serving households (NPISH)

Total

Assets1

General governmentMonetary authoritiesBanksOther sectors

Nonbank financial corporationsNonfinancial corporationsHouseholds and nonprofit institutions

serving households (NPISH)

Total

Total Economy

1Excludes financial derivatives that pertain to reserve asset man-agement and are included in reserve assets data.

4 • Presentation of the Gross External Debt Position

hedged when the forward contract was in a liabilityposition, so creating a misleading impression. Thus,financial derivatives liability positions should beconsidered alongside financial derivatives assetpositions. If an economy includes financial deriva-tives in its reserve assets data, because they pertainto reserve asset management, these financial deriva-tives should be excluded from this memorandumitem.

Equity Liabilities

4.12 Table 4.4 shows a memorandum table for thepresentation of position data on equity liabilities—that is, both equity securities, and equity capital andreinvested earnings of direct investment enterprises.Similar to financial derivatives positions, equitysecurities can add to an economy’s liabilities and socould potentially be a source of vulnerability. Also,equity capital in direct investment enterprises, par-ticularly branches/unincorporated enterprises, couldbe withdrawn.

4.13 In some instances, resident mutual funds areused as a vehicle by nonresident investors to acquirepositions in domestic debt securities. If the nonresi-dents decide to sell these investments, the sales canhave a direct impact on the domestic debt securitiesmarket. As explained in Chapter 3, such investmentsby nonresidents are classified as equity liabilities ofthe resident economy. Nonetheless, identifyingequity investment in mutual funds, under nonbankfinancial corporations in the table, might be consid-ered. Further, if the amounts are significant and con-centrated in mutual funds that are entirely or almostentirely owned by nonresidents, memoranda data on

the investments of these mutual funds might also bedisseminated.

Resident-Issued Debt Securities Involvedin Reverse Security Transactions

4.14 In financial markets, activity in reverse securitytransactions is commonplace. It is one method ofproviding an investor with financial leverage in thedebt markets—that is, greater exposure to marketprice movements than the value of own fundsinvested. To understand the dynamics of this leverageactivity, and to track developments and hence poten-tial vulnerability, a memorandum table is provided inTable 4.5 for the presentation of position data on debtsecurities issued by residents that are acquired fromor provided to nonresidents under reverse securitytransactions. Such data would also help to interpretexternal debt, in particular security debt data whenreverse security activity is significant, and could beaffecting the recorded position. For debt securities tobe included in this memorandum table, the acquiringparty must have full title to the securities such thatthey can be sold to a third party.

4.15 In the table, the total value of debt securitiesissued by residents that have been acquired bynonresidents from residents under outstandingreverse security transactions, even if subsequentlyon-sold, are included with a positive sign. The totalvalue of debt securities issued by residents that havebeen acquired by residents from nonresidents underoutstanding reverse security transactions, even if

37

Table 4.4. Equity Liability Position

End-Period

Banks Other sectors

Nonbank financial corporations Nonfinancial corporations

Total

Direct investment in reporting economy: Equity capital and reinvested earnings

Total Economy

Table 4.5. Debt Securities Acquired UnderReverse Security Transactions:1 Positions

End-Period

Debt securities issued by residents and acquired by nonresidents from residents (+)

Debt securities issued by residents and acquired by residents from nonresidents (–)

1Reverse security transactions include all arrangements wherebyone party acquires securities and agrees, under a legal agreement atinception, to return the same or similar securities on or by anagreed date to the same party from whom they acquired the securi-ties initially.The acquiring party must have full title to the securitiessuch that they can be sold to a third party.These arrangements caninclude those known as repurchase agreements (repos), securityloans, and sell/buy backs.


subsequently on-sold, are included with a negativesign. This sign convention tracks the change ofownership of debt securities. Other things beingequal, if nonresidents acquire these securities underreverse security transactions, the security claims onthe resident economy are greater than recorded inthe gross external debt position, whereas if residentsacquire these securities from nonresidents under

reverse security transactions, the debt securityclaims on the resident economy are less thanrecorded in the gross external debt position. Appen-dix II provides more information on reverse securitytransactions and explains how different types ofreverse security transactions should be recorded inthe gross external debt position and in this memo-randum table.

38

Introduction

5.1 For countries in which there is a particular inter-est in public sector debt, this chapter provides a tablefor the presentation of the gross external debt posi-tion in which the role of the public sector is high-lighted. The data for this table should be compiledusing the concepts outlined in Chapters 2 and 3,except the debt of resident entities should be attrib-uted according to whether the debtor is publiclyowned or not, and if not, by whether the debt instru-ment is guaranteed or not by a public sector entity.For convenience, this presentation is described asbeing a “public-sector-based approach” and is con-sistent with the framework of the World Bank’sDebtor Reporting System.

5.2 In economies where public sector external debtis dominant, the presentation table provided in thischapter could be the primary one used for dissemi-nating data. Indeed, in circumstances where the pub-lic sector is centrally involved in external debtborrowing activity, both as a borrower or guarantor,it is essential. As private sector debt becomes moreimportant in the economy, more detailed break-downs of private sector debt are required, such asprovided in the previous chapter, but the presenta-tion set out in this chapter would remain relevant formonitoring external debt liabilities of the publicsector.

5.3 Because the concepts for its measurementremain consistent throughout the Guide, the grossexternal debt position for the whole economy—depending on whether traded debt instruments arevalued at nominal or market value—should be thesame regardless of whether the presentation table inthis or the previous chapter is used to disseminatesuch data.

5.4 In disseminating data, compilers are encour-aged to provide methodological notes explaining

the concepts and methods used in compiling thedata. For any presentation of gross external debtposition, it is particularly important for the compilerto indicate whether traded instruments are valued atnominal or market value, and whether interest coststhat have accrued but are not yet payable areincluded, or not.

Definitions

5.5 For the presentation of the external debt posi-tion in a public-sector-based approach, the firstdetermination is whether or not a resident entity isin the public sector.1 In comparison with the institu-tional sector approach outlined in Chapter 3, thepublic sector includes the general government,monetary authorities, and those entities in the bank-ing and other sectors that are public corporations. Apublic corporation is defined as a nonfinancial orfinancial corporation that is subject to control bygovernment units, with control over a corporationdefined as the ability to determine general corporatepolicy by choosing appropriate directors, if neces-sary. Control can be established through govern-ment ownership of more than half of the votingshares or otherwise controlling more than half ofthe shareholder voting power (including throughownership of a second public corporation that inturn has a majority of the voting shares).2 In addi-tion, it may be possible to exercise control throughspecial legislation, decree, or regulation thatempowers the government to determine corporate

5. Public and Publicly GuaranteedExternal Debt

39

1For more details, please refer to the World Bank’s DebtorReporting System Manual (World Bank, 2000), available onthe Internet at http://www.worldbank.org/data/working/DRS/drs_manual.doc.

2This definition is derived from the 1993 SNA and the IMF’sGovernment Finance Statistics Manual (IMF, 2001). It is consis-tent with ESA95 (Eurostat, 1996) and ESA95 Manual on Govern-ment Deficit and Debt (Eurostat, 2000), which also provideadditional guidance on recognizing such corporations.


policy or to appoint directors. Any domestic institu-tional unit not meeting the definition of public sec-tor is to be classified as private sector. In terms ofinstitutional sector attribution, the classification of apublic corporation as a monetary authority (centralbank), bank, nonbank financial corporation, or non-financial corporation depends on the nature of theactivity it undertakes.

5.6 Publicly guaranteed private sector externaldebt is defined as the external debt liabilities of theprivate sector, the servicing of which is contrac-tually guaranteed by a public entity resident in thesame economy as the debtor.3 The private sectorcan include resident entities in the banks and othersectors. External debt of the private sector that isnot contractually guaranteed by the public sectorresident in the same economy is classified asnonguaranteed private sector external debt. Ifexternal debt of the private sector is partially guar-anteed by the public sector resident in the sameeconomy, such as if principal payments or interestpayments alone are guaranteed, then only the pres-ent value of the payments guaranteed should beincluded within publicly guaranteed private sectorexternal debt, with the nonguaranteed amountincluded within nonguaranteed private sector exter-nal debt.

Presentation of Public and PubliclyGuaranteed External Debt Position

5.7 The presentation of the gross external debt posi-tion on the basis of a public-sector-based approach isset out in Table 5.1.• The first level of disaggregation is by sector. The

primary disaggregation is between public andpublicly guaranteed debt, and nonguaranteedprivate sector external debt. Because of the natureof the relationship between debtor and creditor,intercompany lending between entities in a directinvestment relationship is separately identifiedunder each category, but when combined equals

40

Table 5.1. Gross External Debt Position:Public and Publicly Guaranteed Debt andNonguaranteed Private Sector Debt

End-Period

Public and Publicly Guaranteed DebtShort-termMoney market instrumentsLoansCurrency and deposits1


ArrearsOther



Direct investment: Intercompany lendingDebt liabilities to affiliated enterprises

ArrearsOther


Nonguaranteed Private Sector External Debt



ArrearsOther




ArrearsOther


Gross External Debt

1It is recommended that all currency and deposits be included inthe short-term category unless detailed information is available tomake the short-term/long-term attribution.

2Other debt liabilities are other liabilities in the IIP statement.3External debt for which guarantees are provided to the creditorby a public sector entity resident in a different economy from thatof the debtor is not covered under this definition.

5 • Public and Publicly Guaranteed External Debt

direct investment: intercompany lending forthe total economy as presented in the previouschapter.

• The second level of disaggregation is by thematurity of external debt—short-term and long-term on the basis of original maturity. A matu-rity attribution is not provided for intercompanylending, but in separately identifying arrears(see below), which by definition are short-termliabilities, a partial short-term attribution isprovided.4

• The third level of disaggregation is by type ofdebt instrument, as described in Chapter 3.Arrears are separately identified, because suchinformation is of particular analytical interest.

5.8 Memoranda data, on a public sector basis, onoutstanding liabilities arising from periodic interestcosts that have accrued and are not yet payable,financial derivatives, equity liabilities, and reversesecurity transactions could be provided along withTable 5.1. These memorandum items are describedin Chapter 4.

5.9 Table 5.2 separates public sector external debtand publicly guaranteed private sector external debt.Such a separation allows identification of externaldebt owed by the public sector and, combined withthe information in Table 5.1, external debt of the pri-vate sector.

5.10 Further, as defined in paragraphs 5.5 and 5.6above, public sector data can be attributed to generalgovernment, monetary authorities, banks, and othersectors, while private sector information can beattributed to banks and other sectors. In this regard,it is recommended that if detailed records are kept,the institutional sector of the debtor be identified, soas to allow an economy that is presenting data on apublic sector basis to also compile data on an institu-tional sector basis.

41

Table 5.2. Gross External Debt Position:Public Sector Debt and PubliclyGuaranteed Private Sector Debt

End-Period

Public Sector External DebtShort-termMoney market instrumentsLoansCurrency and deposits1


ArrearsOther




ArrearsOther


Total

Publicly Guaranteed Private Sector External Debt



ArrearsOther




ArrearsOther


Total

1It is recommended that all currency and deposits be included inthe short-term category unless detailed information is available tomake the short-term/long-term attribution.

2Other debt liabilities are other liabilities in the IIP statement. 4If a short-/long-term maturity attribution of intercompanylending data is available to the compiler on an original maturitybasis, the Guide encourages dissemination of these data.

Introduction

6.1 Data compiled and presented using the conceptsdescribed in the previous chapters provide compre-hensive coverage and an informed picture of thegross external debt position for the whole economyand/or the public sector. However, such data do notprovide a complete picture of emerging vulnerabili-ties to solvency and liquidity risk. For instance, thecurrency and interest rate composition of externaldebt liabilities, and the pattern of future payments,might all be potential sources of vulnerability. Toassist in compiling additional data series of analyticaluse in understanding the gross external debt position,this chapter provides further accounting principles.These principles, as well as those described in earlierchapters, are drawn upon to provide illustrative pre-sentation tables in the next chapter.

6.2 This chapter discusses further accounting prin-ciples under three broad headings:• Sectors, maturity, and instruments;• Specific characteristics of external debt; and• Principles for the compilation of debt-service and

other payment schedules.

Sectors, Maturity, and Instruments

Creditor Sectors

6.3 Information on the nonresident creditor sectorthat owns external debt is disseminated by manyeconomies. The sectors defined in Chapter 3—generalgovernment, monetary authorities, banks, andother sectors—and in Chapter 5—public and privatesectors—are creditor as well as debtor sectors. Othercommonly identified creditor sectors are multilateral(international) organizations and official creditors.

6.4 Multilateral organizations are established bypolitical agreements among member countries thathave the status of international treaties. Multilateral

organizations are accorded appropriate privilegesand immunities and are not subject to the laws andregulations of the economies in which the organiza-tions are located. Typically these organizations pro-vide nonmarket services of a collective nature for thebenefit of members and/or financial intermediation,or the channeling of funds between lenders and bor-rowers in different economies. As creditors, multilat-eral organizations are sometimes also referred to asofficial multilateral creditors.

6.5 Official creditors are public sector creditors,including multilateral organizations. External debtowed to official creditors might also include debt thatwas originally owed to private creditors but that wasguaranteed by a public entity in the same economy asthe creditor (for example, an export credit agency).Official bilateral creditors are official creditors inindividual countries. This category of creditor is par-ticularly relevant in the context of Paris Club discus-sions. The Paris Club is an umbrella arrangementunder which creditors and debtors meet, discuss, andarrange debt-relief packages and is not an institutionalunit in its own right (see Box 8.2 in Chapter 8).

Remaining Maturity

6.6 While it is recommended that in the gross exter-nal debt position the short-term/long-term maturityattribution be made on the basis of original maturity,there is also analytical interest in attribution on thebasis of remaining maturity. Remaining-maturitymeasures (sometimes referred to as residual maturitymeasures) provide an indication of when paymentswill fall due, and so of potential liquidity risks facingthe economy. Particularly important is informationon payments coming due in the near term.

6.7 The Guide recommends that short-term remain-ing maturity be measured by adding the value of out-standing short-term external debt (original maturity)to the value of outstanding long-term external debt

6. Further External Debt AccountingPrinciples

42

6 • Further External Debt Accounting Principles

(original maturity) due to be paid in one year or less.Conceptually, at the reference date the value of out-standing long-term external debt (original maturity)due to be paid in one year or less is the discountedvalue of payments to be made in the coming year,both interest and principal.1 The value of outstand-ing long-term (original maturity) debt due to be paidover one-year ahead is classified as long-term debton a remaining-maturity basis.

6.8 The information content provided is one reasonfor recommending such an approach. Short-termdebt on an original maturity basis is identifiablefrom the gross external debt position. Measuring thevalue of outstanding long-term external debt (origi-nal maturity) falling due in one year or less mayraise practical difficulties, in which instance, oneproxy measure that might be used is the undis-counted value of principal payments on long-termexternal debt obligations (original maturity basis)due to mature in one year or less. This proxy mea-sure is incomplete in its coverage of interest pay-ments falling due in the coming year but can becompiled using the principles for projecting pay-ments in a debt-service schedule (see below).2

Trade-Related Credit

6.9 In the Guide, trade credit as presented in thegross external debt position is defined in Chapter 3—the direct extension of credit by suppliers for transac-tions in goods and services, and advance paymentsby buyers for goods and services, and for work inprogress (or to be undertaken)—consistent with the1993 SNA and BPM5. To assist in compiling addi-tional data series, this chapter introduces a wider con-

cept of trade-related credit, which also captures othercredits provided to finance trade activity, includingthrough banks. It is defined as including trade credit,trade-related bills (see below), and credit provided bythird parties to finance trade, such as loans from aforeign financial or export credit institution to thebuyer. A table for presenting data on trade-relatedcredit is provided in the next chapter.

6.10 A particularly difficult issue of classificationarises from bills drawn on the importer and providedto the exporter, which are subsequently discountedby the exporter with a financial institution. Theseinstruments might be regarded by the importer as thedirect extension of credit by the exporter but oncediscounted become a claim by a third party on theimporter. Where an instrument is provided to theexporter with such characteristics that it is tradablein organized and other financial markets, such as apromissory note, it should be classified as a securityin the gross external debt position and included inthe concept of trade-related credit.

6.11 If the importer’s bill has been endorsed (or“accepted”) by a bank in the importer’s own econ-omy in order to make the bill acceptable to theexporter, it is known as a banker’s acceptance, clas-sified as a security in the gross external debt posi-tion, and included in the concept of trade-relatedcredit. Banker’s acceptances are to be classified as afinancial liability of the bank (or, if not a bank, thefinancial institution that has endorsed the bill)because they represent an unconditional claim on thepart of the holder and an unconditional claim on thebank. However, national practices and variations inthe nature of these acceptances may suggest flexibil-ity in the application of this guideline.

Specific Characteristicsof External Debt

Currency Composition

6.12 Domestic currency is that which is legal tenderin the economy and issued by the monetary authorityfor that economy or for the common currency area towhich the economy belongs.3 Under this definition,

43

1For those economies that do not wish to include interest coststhat have accrued but are not yet payable in the gross external debtposition for all instruments, the nominal value of outstandinglong-term external debt at the reference date that is due to be paidin one year or less is the sum of principal payments on this debt tobe made in the coming year, except where the debt is in the formof securities issued at a discount, in which instance the principalamount to be paid will exceed the nominal amount outstanding atthe reference date.

2Some countries that have debt primarily in the form of instru-ments on which principal is paid only at maturity attribute the fullvalue of each long-term (original maturity) debt instrument on aremaining basis by when the instrument is due to mature. How-ever, from the viewpoint of liquidity risk analysis, this method isimperfect because payments coming due in the near term, such asinterest and partial payments of principal, are not captured withinshort-term remaining-maturity debt if the debt instrument has amaturity date further than a year ahead.

3In this context, a common currency area is one in which more thanone economy belongs and has a regional central bank with the legalauthority to issue the same currency within the area. To belong to thisarea, the economy must be a member of the regional central bank.


an economy that uses as its legal tender a currencyissued by a monetary authority of another econ-omy—such as U.S. dollars—or of a common cur-rency area to which it does not belong shouldclassify the currency as a foreign currency, althoughdomestic transactions are settled in this currency.

6.13 The attribution of external debt by currency isprimarily determined by characteristics of the futurepayment(s). Foreign currency debt is defined as debtthat is payable in a currency other than the domesticcurrency; a subcategory of foreign currency debt isdebt that is payable in a foreign currency but withthe amounts to be paid linked to a domestic currency(domestic-currency-linked debt). Foreign-currency-linked debt is debt that is payable in domestic cur-rency but with the amounts to be paid linked to aforeign currency. Domestic currency debt is debtthat is payable in the domestic currency, and notlinked to a foreign currency. In the unusual instanceof interest payments to be paid in a foreign currencybut principal payments to be paid in a domestic cur-rency, or vice versa, only the present value of thepayments to be paid in a foreign currency need beclassified as foreign currency debt (and similarly forforeign-currency-linked debt).

6.14 In attributing external debt by type of foreigncurrency—U.S. dollar, euro, Japanese yen, etc.—thecurrency to which payments are linked is the deter-mining criterion. Some types of foreign currency bor-rowing are denominated in more than one currency.However, if the amounts to be paid on such borrow-ing are linked to one specific currency, the borrowingshould be attributed to that currency. Otherwise,compilers are encouraged to disaggregate such multi-currency borrowing by the component currencies. If,for any reason at the time the data are compiled for aparticular reference date, the amounts attributable toeach currency at that date are not known with preci-sion, the borrowing should be attributed to each typeof currency using the latest firm information avail-able to the compiler—such as the currency attribu-tion at the previous reference date together with anyknown payments in specific currencies made duringthe subsequent period—and revised once firm infor-mation for the new reference date are known.4

Interest Rates

Variable- and fixed-rate external debt

6.15 Variable-rate external debt instruments arethose on which interest costs are linked to a refer-ence index—for example, LIBOR (London inter-bank offered rate), or the price of a specificcommodity, or the price of a specific financial instru-ment that normally changes over time in a continu-ous manner in response to market pressures. Allother debt instruments should be classified as fixed-rate. Interest on external debt that is linked to thecredit rating of another borrower should be classifiedas fixed-rate because credit ratings do not change ina continuous manner in response to market pres-sures, whereas interest on external debt that is linkedto a reference price index should be classified asvariable-rate, provided that the price(s) that are thebasis for the reference index are primarily market-determined.

6.16 The classification of an instrument can changeover time, if, say, it switches from fixed to variablerate. For instance, interest may be fixed for a certainnumber of years and then becomes variable. While afixed rate is paid, the instrument is to be classified asfixed-rate debt, and when it switches to variable rateit is classified as variable-rate debt. If interest islinked to a reference index or commodity price orfinancial instrument price but is fixed unless the ref-erence index or price passes a particular threshold, itshould be regarded as fixed-rate. But if thereafterinterest becomes variable, then it should be reclassi-fied as a variable-rate instrument. Alternatively, ifinterest is variable-rate until it reaches a predeter-mined ceiling or floor, it becomes fixed-rate debtwhen it reaches that ceiling or floor.

6.17 As in BPM5, when the value of the principal isindexed, the change in value resulting from indexa-tion—periodically and at maturity—is classified asinterest. So, if principal only is indexed, such debt isto be classified as variable-rate regardless of whetherinterest is fixed or variable, provided that the refer-ence index meets the criterion above: it normallychanges over time in a continuous manner inresponse to market pressures.

44

4For World Bank currency pool loans, while the composition ofthe currency pool changes on a daily basis, the currency ratios havebeen maintained within narrow limits since 1991. In the absence ofother information, debtors may wish to report the currency compo-

sition of currency pool loans as 30 percent U.S. dollar, 30 percenteuro, 30 percent Japanese yen, and 10 percent other currencies(until or unless the World Bank changes its ratio limits).


Average interest rates

6.18 The average interest rate is the weighted-average level of interest rates on the outstandinggross external debt as at the reference date. Theweights to be used are determined by the value in theunit of account of each borrowing as a percentage ofthe total. For example, for the general governmentsector the weight given to the interest rate on eachexternal debt instrument equals the value in the unitof account of that debt as a percentage of total exter-nal debt for the general government sector. Simi-larly, the weight given to the average level of interestrates for the general government sector when calcu-lating the average interest rate for the whole econ-omy is equal to the total value in the unit of accountof general government external debt as a percentageof total economy-wide external debt.

6.19 The relevant interest rate level for each debtinstrument is affected by whether it has a fixed- orvariable-linked interest rate. If the interest rate iscontractually fixed, then this rate should be used,taking account of any discount and premium atissuance. If the rate of interest had been variable inthe past but is now fixed, the current fixed-rateshould be used. For variable-rate instruments, therate of interest on each instrument should be the rateaccruing on the reference day. In other words, usu-ally variable rates of interest are reset on a periodicbasis, and it is the level of the interest rate applicableon the reference day that should be used. If the inter-est rate is reset on the reference date, that rate shouldbe reported and not the previous interest rate. If forany reason the variable rate is not observable, thenthe level of the reference index or appropriate priceon the reference date, or, if the link is to a change inthe reference index, the recorded change for the rele-vant period up to the reference date, or the closestrelevant time period available, together with anyexisting additional margin the borrower needs topay, should be used to calculate the interest ratelevel.

6.20 For calculating the weighted average of inter-est rates agreed on new borrowing during the period,the interest rates recorded would be those estab-lished at the time of the borrowing. If the interestrate is contractually fixed, then this rate should beused. For variable-rate borrowing, the rate of intereston each instrument should be that which is accruingon the day the claim is established. The weights tobe used in compiling average interest rate data are

determined by the value in the unit of account ofeach borrowing, on the date the claim was estab-lished, as a percentage of the total borrowed duringthe period.

Location of Securities Issuance

6.21 Debt securities issued by a resident of the sameeconomy in which the security is issued are to beclassified as domestically issued, regardless of thecurrency of issue. All other issues are to be classifiedas foreign issued. If there is uncertainty over thelocation of issue, then the following criteria shouldbe taken into account in descending order of prefer-ence to determine whether a resident of the economyhas issued a domestic or a foreign debt security:• The debt security is listed on a recognized

exchange in the domestic economy (domesticissue) or in a foreign economy (foreign security).

• The debt security has an International SecurityIdentification Number (ISIN) with a country codethe same as the legal domicile of the issuer, and/oris allocated a domestic security code by the domestic national numbering agency (domesticsecurity). Or the debt security has an ISIN codewith a country code different from that where theissuer is legally domiciled and/or has a foreignsecurity code issued by a foreign national number-ing agency (foreign security).

• The security is issued in a domestic currency(domestic issue), as defined in paragraph 6.12above, or in a foreign currency (foreign issue).

Concessional Debt

6.22 There is no unique definition of concessional-ity, and the Guide does not provide nor recommendone. Nonetheless, the definition of the OECD’sDevelopment Assistance Committee (DAC)5 is com-monly used. Under the DAC definition, concessionallending (that is, lending extended on terms that aresubstantially more generous than market terms)includes (1) official credits with an original grantelement of 25 percent or more using a 10 percentrate of discount (that is, where the excess of the facevalue of a loan from the official sector over the sumof the discounted future debt-service payments to be

45

5The Development Assistance Committee of the OECD wascreated in 1960. Its membership at mid-2001 comprised 22 coun-tries and the Commission of the European Union.


made by the debtor is 25 percent or more using a 10percent rate of discount); and (2) lending by themajor regional development banks (African Devel-opment Bank, Asian Development Bank, and theInter-American Development Bank) and from theIMF and World Bank, with concessionality deter-mined on the basis of each institution’s own classifi-cation of concessional lending. All external debt notclassified as concessional should be classified asnonconcessional.

Debt-Service and OtherPayment Schedules

6.23 A payment schedule provides a projection offuture payments, at a reference date, based on a cer-tain set of assumptions that are likely to change overtime. A debt-service payment schedule projects pay-ments on the outstanding gross external debt posi-tion at the reference date and helps in the assessmentof liquidity risk by allowing the data user, anddebtor, to monitor whether a bunching of paymentsis developing regardless of the original maturity ofthe debt instrument. For the debtor, early warning ofsuch bunching might allow countervailing action tobe taken.

6.24 Because the projection of a payment schedulerequires assumptions to be made, to assist compilers,some guidance is provided below on the assump-tions to apply. In compiling payment schedules, theGuide encourages the compiler to make best effortsin projecting payments. Consistent with the defini-tions in Chapter 2 (paragraph 2.5), in the debt-service payment schedule, interest payments areperiodic payments of interest costs, while principalpayments are all other payments that reduce theprincipal amount outstanding.

Projected Payments of Foreign CurrencyExternal Debt

6.25 External debt payments may be required in acurrency different from the unit of account used forpresenting data in the debt-service payment sched-ule. For such external debt payments, projected pay-ments should be converted to the unit of accountusing the market exchange rate (that is, the midpointbetween the buying and the selling spot rates) pre-vailing on the reference date (that is, the last daybefore the start of the forward-looking period). In

other words, if a debt-service payment schedule isdrawn up for external debt outstanding on an end-calendar-year reference date, then the exchange rateprevailing at the end of the calendar year (on the lastday of that year) should be used.6

6.26 For borrowing in multicurrencies, paymentsshould be projected with reference to the componentcurrencies of the borrowing and to the marketexchange rates (the midpoint between the buyingand the selling spot rates) prevailing on the referencedate. For World Bank currency pool loans, futurepayments should be projected in U.S. dollar equiva-lent terms on the basis of the pool units to be “paid”on each due date and the pool unit value at the refer-ence date, and then converted into the unit ofaccount, if this is not the U.S. dollar,7 at the marketexchange rate (the midpoint between the buying andthe selling spot rates) prevailing on the referencedate.

Receiving or Paying Foreign Currency Under a Financial Derivatives Contract

6.27 Consistent with the foreign-currency-conversionapproach adopted throughout the Guide, the amountsof foreign currency contracted to be paid andreceived under a financial derivatives contract that iscurrent and outstanding at the reference date should

46

6From a theoretical viewpoint, and given that the debt-servicepayment schedule is making projections, forward rates may beconsidered the best estimate of exchange rates for specific dates inthe future. However, while such an approach might well be readilyapplied in many instances for shorter-term debt in major curren-cies, there may be a lack of readily observable forward rates forlonger-term borrowing and for “smaller” currencies, thus leadingto possible inconsistent approaches between economies and dif-ferent maturity periods. Also, there always remains uncertaintyabout the future course of interest and currency rates. The Guidetakes the view that projections of future payments of external debtlinked to currency and interest rate movements should be based onend-period spot rates, rather than, say, forward rates, because thisapproach is more transparent, easier to compile, and more readilyunderstandable to users than projections based on rates in forwardmarkets—even though it is recognized that the use of a singleday’s exchange rate to convert payments to be made over a for-ward period could be misleading if temporary factors affect theexchange rate for that day.

7Currency pool loans are loans that are committed in U.S. dollarequivalent terms and converted into pool units, the base unit theborrower owes, through a conversion rate—pool unit value—thatis calculated on the basis of the relationship between the U.S. dol-lar and the component currencies in the pool. When pool units areto be repaid, they are converted back into the dollar-equivalentamount using the prevailing pool unit value. Currency pool loansare described in more detail in Appendix I.


be converted to the unit of account using the marketexchange rate (the midpoint between the buying andthe selling spot rates) prevailing on the referencedate (the last day before the start of the forwardlooking period).

Projected Interest Payments on Deposits

6.28 Interest on deposits that is payable once a yearor more frequently is projected as a future interestpayment. Interest payments on deposits should beprojected on the basis of those deposits that are out-standing on the reference date, using interest ratescurrent on the reference date, unless there are con-tractual reasons to assume otherwise.

6.29 Interest on deposits that are withdrawable ondemand or subject to a notice of withdrawal, and notsubject to a maturity date, should be projected intothe future,8 whereas those interest payments onthose deposits with a maturity date should be pro-jected only to that maturity date. Payments ondeposits for which notice of withdrawal has beengiven should be projected on the assumption thatthese deposits will be withdrawn on the due date,and no assumption of reinvestment should be madeunless there are explicit instructions from the depos-itor that indicate otherwise.

Projected Payments of Index-Linked ExternalDebt, Including Variable-Rate Interest

6.30 Interest and principal payments on externaldebt may be linked to a reference index that changesover time—for instance, a variable reference interestrate index, a commodity price, or another specifiedprice index. For such payments, projected paymentsshould be estimated using the level of the referenceindex on the last day before the start of the forward-looking period or, if the link is to a change in the ref-erence index, the recorded change for the relevantperiod up to the last day before the start of the for-ward-looking period, or the closest relevant timeperiod available. If the margin over the referenceindex is subject to change, then the margin on the lastday before the start of the forward-looking periodshould be used. For debt payable in commodities or

other goods, future payments are valued using themarket price of a commodity or good as at the refer-ence date, with the split between principal and inter-est payments based on the implicit interest rate at thereference date (see also Chapter 2, paragraph 2.37).

Projected Payments on LoansNot Fully Disbursed

6.31 No payments should be projected for loans thatare not yet disbursed. If loans have been partiallydisbursed, payments should be projected only forthose funds that have been disbursed. If the paymentschedule in the loan contract is based on the assump-tion that all funds are disbursed, but only partial dis-bursement has occurred by the reference date, then,in the absence of any other information that clearlyspecifies the payment schedule arising from fundsthat have been disbursed, it is recommended that thepayment schedule in the loan contract should be pro-rated by the percentage of the loan that has been dis-bursed—for example, if half of the loan has beendisbursed, then half of each payment in the loanschedule should be reported in the debt-serviceschedule.9

Projected Payments of Service-Related Debts

6.32 In the Guide, if a payment to a nonresident fora service that has been provided is outstanding at thereference date, it is classified as an external debt lia-bility. Given this, any future payments for services—such as fees, charges, and commissions that havealready been provided by the reference date—areclassified as principal payments, within other debtliabilities (unless they are classified as debt liabili-ties to affiliated enterprises/direct investors). Anyprojection of fees that depend on moving referenceamounts, such as undrawn commitments, should bebased on the reference amount at the reference date.While not encouraged, it is recognized that nationalpractice might be to classify service charges relatedto a loan along with interest in the debt-serviceschedule.

47

8In principle, the future could be indefinite, but compilers areencouraged to make some commonsense assumptions about theaverage maturity of deposits with no stated maturity.

9For prudent debt-management purposes, in some nationalpractices, even if only partially disbursed, the full amounts fore-seen in the payment schedule of the loan are projected for eachperiod until the external debt outstanding at the reference date isfully repaid. Under this “truncated” approach, if half the amount isdisbursed on the reference date, the loan is “repaid” in half thetime that is expected in the loan schedule, thus “front-loading” thedebt-service schedule.


Projected Payments of External Debt with the Provision for Early Repayment

6.33 An external debt liability may include a provi-sion that allows the creditor to request early repay-ment. For instance, the creditor may have an optionto redeem the debt early through a put (sell) option.In principle, projected payments can be estimatedboth without and with reference to this embedded putoption. For instance, a ten-year bond with a putoption after five years can be assumed at inception tohave a repayment date of ten years, and paymentsrecorded up until that date. Alternatively, for thisbond the earliest possible date for repayment of fiveyears could be assumed, with projected payments fin-ishing at that time. The preference in the Guide is toproject debt-service payments on the basis of theoriginal maturity (ten years in the example), but toprovide additional information on payments based onthe earliest repayment date (five years in the exam-ple). But it is recognized that national practice maybe to estimate projected payments on bonds withembedded put options only until the option date (fiveyears in the example), with additional information onthe projected payments on the bond up until the orig-inal maturity date (ten years in the example).10

Projected Payments of Credit-LinkedExternal Debt

6.34 Payments of interest and/or principal may belinked to the credit rating of another borrower(s),

such as in a credit-linked note. In these instances thecredit rating of the other borrower(s) on the last daybefore the start of the forward-looking period shouldbe used to project payments.

Projected Payments Arisingfrom ReverseTransactions

6.35 Under the recording approach for reversetransactions—the collateralized loan approach—asecurity provider records a loan liability. In the debt-service payment schedule, the security providerrecords the full amount of the loan to be paid atmaturity under principal. If the reverse transactionhas an “open” maturity,11 the loan should berecorded as on-demand, under the immediate timecategory in the presentation of the debt-service pay-ment schedule, unless there is clear evidence to sug-gest otherwise.

Projected Payments on Financial Leases

6.36 Projected payments on financial leases must bedivided into interest and principal payments. Theamount of interest payments can be calculated usingthe implicit rate of interest on the loan, with all otherpayments recorded as principal payments. Con-ceptually, at inception, the implicit rate of interest onthe loan is that which equates the value of the goodprovided—the value of the loan—with the dis-counted value of future payments, including anyresidual value of the good to be returned (or pur-chased) at the maturity of the lease.

48

10The debtor might have an option to call (buy back) externaldebt early, which would also result in a drain on liquidity. Butunlike the put option for the creditor, this drain is unlikely to beexercised except at a convenient time for the debtor. Conse-quently, in assessing vulnerability, information on external debtcontaining put options is more significant.

11“Open” maturity is where both parties agree daily to renew orterminate the agreement. Such an arrangement avoids settlementcosts if both parties wish to renew the reverse transaction on acontinuing basis.

Introduction

7.1 This chapter introduces presentation tables thatfacilitate a more detailed examination of the poten-tial liquidity and solvency risks to the economythat might arise from the acquisition of externalliabilities. These tables provide information thatsupplements that included in the gross externaldebt position presented earlier in the Guide. Morespecifically, this chapter provides presentationtables on:• External debt by short-term remaining maturity

(Tables 7.1 and 7.2);• Debt-service payment schedule (Tables 7.3 and

7.4);• Foreign and domestic currency external debt

(Tables 7.5–7.7);• Interest rates and external debt (Tables 7.8–7.9);• External debt by creditor sector (Table 7.10);• Net external debt position (Table 7.11);• Reconciliation of external debt positions and flows

(Table 7.12);• Traded debt instruments (Tables 7.13 and 7.14);

and• Cross-border trade-related credit (Table 7.15).

7.2 For any individual economy, the relevance ofany table in this chapter will depend upon the cir-cumstances facing it, and so the Guide does not pro-vide a list of priorities for compiling the tablesahead. Indeed, the tables are provided as flexibleframeworks to be used by countries in the long-termdevelopment of their external debt statistics. Butexperience suggests that data on debt-maturity pro-files and currency breakdowns are essential to acomprehensive analysis of external vulnerability forcountries with substantial but uncertain access tointernational capital markets. For the IMF’s data dis-semination standards, the tables for the debt-servicepayment schedule—Table 7.3 (Special Data Dissem-ination Standard, SDDS) and Table 7.4 (GeneralData Dissemination System, GDDS)—are relevant,

as is the table on foreign currency and domestic cur-rency debt, Table 7.5 (SDDS).1

7.3 Because the concepts for its measurementremain consistent throughout the Guide, the grossexternal debt position for each institutional sectorand for the total economy should be the sameregardless of the presentation table employed, pro-vided that the same approach to valuing traded debtinstruments is adopted throughout. Also, because theconcepts remain consistent, if necessary, compilerscan combine different characteristics of externaldebt in presentations other than those set out below.In disseminating data, compilers are encouraged toprovide methodological notes explaining the con-cepts and methods used in compiling the data.

7.4 Throughout this chapter, except where statedotherwise, the first level of disaggregation by row isby debtor sector, followed (where relevant) by matu-rity on an original maturity basis. In the tables, theinstitutional sector presentation is provided, but inprinciple the presentations can also be provided on apublic sector basis, as set out in Chapter 5. Becauseof the particular importance of both measures, thedebt-service payment schedule is presented on bothinstitutional (Table 7.3) and a public sector basis(Table 7.4).

External Debt by Short-TermRemaining Maturity

7.5 Tables are provided for presenting gross exter-nal debt position data by short-term remaining matu-rity for the total economy (Table 7.1), and then byinstitutional sector (Table 7.2). Information on thetotal short-term debt of the total economy, both on

7. Further Presentation Tablesof External Debt

49

1Box 4.1 in Chapter 4 provides the precise requirements for theexternal debt category of the IMF’s data dissemination standards.


an original and remaining maturity basis, as well asby sector, is of analytical interest (see Box 7.1). Forcompiling the data for these tables, direct invest-ment: intercompany lending should be attributed tolong-term maturity unless detailed information isavailable to provide data on a short-term remainingmaturity basis.

7.6 Compiling such information helps in the assess-ment of liquidity risk by indicating that part of thegross external debt position that is expected to falldue in the coming year. Also, by separately indicat-ing short-term debt on an original maturity basisfrom debt on a long-term basis falling due in thecoming year, the presentation provides additionalinformation content, such as the extent to which highshort-term remaining maturity data is due (or not) tosignificant debt payments expected on long-termdebt (original maturity basis).

7.7 The concept of short-term remaining maturitycan also be applied to other tables in this chapter,such as those relating to foreign-currency externaldebt.

Debt-Service Payment Schedule

7.8 Like the short-term remaining maturity presen-tation table, as mentioned in the previous chapter, adebt-service payment schedule supports the assess-ment of liquidity risk.

50

Table 7.1. Gross External Debt Position:Short-Term Remaining Maturity—Total Economy

End-Period

Short-term debt on an original maturity basis Money market instrumentsLoansCurrency and deposits1


ArrearsOther

Total

Long-term debt obligations due for payment within one year or less

Bonds and notesLoansCurrency and deposits1


Total

Total Economy

1It is recommended that all currency and deposits be included in the short-term category unless detailed information is available to make the short-term/long-term attribution.

2Other debt liabilities are other liabilities in the IIP statement.

Table 7.2. Gross External Debt Position:Short-Term Remaining Maturity—By Sector

End-Period

General GovernmentShort-term debt on an original

maturity basisMoney market instrumentsLoansTrade creditsOther debt liabilities1

ArrearsOther

TotalLong-term debt obligations due for

payment within one year or lessBonds and notesLoansTrade creditsOther debt liabilities1

Total

Monetary AuthoritiesShort-term debt on an original

maturity basisMoney market instrumentsLoansCurrency and deposits2


ArrearsOther


payment within one year or lessBonds and notesLoansCurrency and deposits2


Total

BanksShort-term debt on an original



ArrearsOther




Total

7 • Further Presentation Tables of External Debt

7.9 Table 7.3 gives a presentation of a debt-servicepayment schedule. The data to be presented in thistable are projected future payments of interest andprincipal on gross external debt outstanding on thereference date.2 The data should not cover projected

51

Other SectorsShort-term debt on an original



ArrearsOther




Total

Total

Direct Investment: Intercompany Lending3

Short-term debt on an original maturity basis

Debt liabilities to affiliated enterprisesArrearsOther


Long-term debt obligations due for payment within one year or less

Debt liabilities to affiliated enterprisesDebt liabilities to direct investors

Total Short-Term External Debt (remaining maturity basis)

1Other debt liabilities are other liabilities in the IIP statement.2It is recommended that all currency and deposits be included in

the short-term category unless detailed information is available tomake the short-term/long-term attribution.

3If data on intercompany lending on a short-term remainingmaturity basis are available.

To enable authorities to monitor developments in short-term capitalflows as a source of external vulnerability, a number of countries, withthe help of IMF staff, have developed monitoring systems that generatetimely high-frequency data on the liabilities of domestic banks to foreignbanks. This box briefly sets out the rationale for such systems, theircoverage, the institutional considerations, and the use of these data.

Rationale and Design Objective

High-frequency debt-monitoring systems are intended to monitordevelopments in short-term financial flows, which are a major sourceof external vulnerability and an important factor in crisis preventionand/or resolution. Such systems are designed to obtain high-qualitydata within very short time intervals (typically, a day).

Coverage

Given these objectives, high-frequency debt-monitoring systems aretypically limited to cover consolidated interbank transactions ofdomestic banks, including their offshore branches and subsidiaries, vis-à-vis foreign banks.The core set of instruments that are typically cov-ered include short-term interbank credits, trade credit lines, paymentsfalling due on medium- and long-term loans, and receipts and paymentsrelated to financial derivatives. Reporting institutions usually providedata on amounts due and paid in the reporting period, new linesextended, interest spreads over LIBOR, and maturities. As regardscountry classification, individual banks are attributed to the country inwhich their headquarters is located.

Institutional Considerations

Monitoring systems have been tailored to the specific circumstances ofindividual countries. However, there are certain minimum require-ments—in general, a capacity to collect, process, and communicatehigh-quality data with short lags. Key factors in the success of such sys-tems include close coordination between the authorities and banks,which may be facilitated by preexisting reporting requirements, and theproportion of external financial flows being channeled through thedomestic banking system (and, if relevant, other reporting institutions).Although a capacity must be developed to respond promptly to ques-tions, and to identify and approach banks about emerging problems,the authorities need to be sensitive to concerns that private sectorparticipants might misinterpret requests for information.

Use and Interpretation of Data

The information provided permits the tracking of rollover rates,changes in exposure and the terms of external obligations, which helpto assess changes in international capital market conditions and credi-tors’ assessments of the borrowing country. (It may also reveal dif-fering assessments of different institutions within the country.)Interpretation of the data involves considerable judgment, requiringanalysis of supply- and demand-side factors in order to shed more lighton the agents’ motivations behind the monitored transactions and thusthe soundness of a country’s external position. Supply-side considera-tions include factors such as shifts in creditor bank strategies, bankingsector or country risk, and institutional/regulatory changes in thesource country. Demand for interbank lines may be affected, for exam-ple, by fluctuations of imports or an increase/decrease in the relianceon local financing sources, such as foreign currency time deposits.

Box 7.1. High-Frequency Debt-Monitoring SystemsTable 7.2 (concluded)

End-Period

2Debt-service payments can also be projected on the basis notonly of outstanding debt on the reference date but additionally ondebt not yet, but expected to be, outstanding—for example, loansthat have been agreed but not disbursed and short-term debt thatmight be assumed to be renewed. This Guide does not provideguidance for projecting payments on expected disbursementsbecause its focus is on outstanding, and not projected, debt.


52

Table 7.3. Debt-Service Payment Schedule: By Sector

For Outstanding External Debt as at End-Period_____________________________________________________________________Over one year

One year or less to two years Over(months) (months) two__________________________________________ _______________

Immediate1 0–3 4–6 7–9 10–12 13–18 19–24 years

General Government Debt securities PrincipalInterest

LoansPrincipalInterest

Trade creditsPrincipalInterest


PrincipalInterest

Monetary AuthoritiesDebt securities PrincipalInterest


Currency and depositsPrincipalInterest


PrincipalInterest

BanksDebt securities PrincipalInterest




PrincipalInterest

Other SectorsDebt securities PrincipalInterest



Trade creditsPrincipalInterest


53

Other Sectors (concluded)Other debt liabilities Principal Interest

Nonbank financial corporationsDebt securities PrincipalInterest

LoansPrincipal Interest

Currency and depositsPrincipal Interest


PrincipalInterest

Nonfinancial corporationsDebt securities PrincipalInterest


Trade creditsPrincipal Interest


PrincipalInterest


Debt securities PrincipalInterest


Trade creditsPrincipal Interest


PrincipalInterest

Direct Investment: Intercompany Lending

Debt liabilities to affiliated enterprisesPrincipal Interest

Debt liabilities to direct investorsPrincipal Interest

Table 7.3 (continued)



Immediate1 0–3 4–6 7–9 10–12 13–18 19–24 years


future payments on external debt not yet outstand-ing. Direct investment: intercompany lending is sep-arately identified, although it is recognized thatsometimes the payments schedule on debt liabilitiesbetween related enterprises might not always beknown with precision.

7.10 In the table, the columns are time periods ofone year and less, over one year to two years, andover two years. The time frame in the table could beextended. Annual payment data for each year fromtwo years up to five years ahead would help to iden-tify potential significant payment amounts well inadvance. Some countries provide annual data foreach year out to 10 or 15 years.

7.11 Subperiods are presented within the time peri-ods of one year or less, and over one year to twoyears: in the one year or less period, quarterly sub-periods are presented together with an “immediate”category (see below); in the over one year to twoyears time period, semiannual (semester) subperiodsare presented. The column “0–3” months covers

payments of up to three months (excluding thosepayments falling under “immediate”); the column“4–6” months covers payments due in more thanthree months up to six months; the column “7–9”months covers payments due in more than six monthsup to nine months; the column “10–12” months cov-ers payments due in more than nine months up to12 months; the column “13–18” months coverspayments due in more than 12 months up to18 months; the column “19–24” months covers pay-ments due in more than 18 months up to 24 months.

7.12 The time period of one year or less includes asubperiod of “immediate” that covers all debt that ispayable on demand—for example, certain types ofbank deposits, as well as debt that is past due(arrears, including interest on arrears). Debt that istechnically due immediately is different in naturefrom debt due in one year or less because the actualtiming of payment on debt due immediately isuncertain. Without an “immediate” time period spec-ified, there is a possibility that an analytically mis-leading impression could be given by the data for

54

Gross External Debt PaymentsOf which: Principal

Interest

Memorandum itemSecurities with Embedded Options3

General GovernmentPrincipalInterest

Monetary AuthoritiesPrincipalInterest

BanksPrincipalInterest

Other SectorsPrincipalInterest

1Immediately available on demand or immediately due.2Other debt liabilities are other liabilities in the IIP statement.3Include only those securities that contain an embedded option with a date on which or after which the debt can be sold back to the debtor.

Table 7.3 (concluded)



Immediate1 0–3 4–6 7–9 10–12 13–18 19–24 years


short-term debt—some of this debt might not berepaid for some time.

7.13 When securities contain an embedded optionwith a date on which or after which the debt can beput (sold) back to the debtor by the creditor, asexplained in the previous chapter the preference ofthe Guide is that projected payments in Tables 7.3and 7.4 be estimated without reference to theseembedded put options, but that memorandum itemson projected payments be provided assuming earlyrepayment at the option date.

7.14 If national practice is to estimate projectedpayments on bonds with embedded put options onlyuntil the option date, additional memorandum infor-mation could be provided on the projected paymentson the bond up until the original maturity date.

7.15 Other embedded options might not include aset date, but their exercise may be dependent oncertain conditions occurring, such as a credit ratingdowngrade, or in the instance of a convertible bond,the price of equity reaching a certain level. Whileno memorandum item is provided for these instru-ments, where significant, additional data could becompiled on the value and type of this externaldebt. In particular, and if significant, credit-linkednote instruments should be separately identified in amemorandum item. In some economies, there maybe interest in historical debt-service data—that is,past payments of principal and interest on long-termborrowings including prepayments of debt.

7.16 For public debt managers, the monitoring ofthe debt-service payment schedule for public andpublicly guaranteed debt is essential for debt man-agement strategy and to ensure that payments aremade on a timely basis. Table 7.4 provides a debt-service payment schedule that presents debt-servicepayments on a public sector basis but is otherwiseidentical to Table 7.3.

Foreign Currency and DomesticCurrency External Debt

7.17 Experience suggests that information on thecurrency composition of the gross external debt posi-tion is necessary for monitoring an economy’s poten-tial vulnerability to solvency and liquidity risk. Forinstance, a depreciation of the exchange rate can

increase the burden of foreign currency debt liabili-ties in domestic currency terms for the residentdebtor (although there may be beneficial effects suchas an improvement in the competitiveness of an econ-omy’s exports of goods and services), while pay-ments on foreign currency debt can cause downwardpressure on the domestic exchange rate and/or out-flows of foreign currency from the economy. Someof the impact can be offset through the use of finan-cial derivatives, and natural hedges such as foreigncurrency assets and income, but, unlike the domesticcurrency, the domestic monetary authority cannotcreate additional foreign currency.

7.18 Three tables are provided to help users under-stand the risks to the economy of foreign currencyexternal debt. Table 7.5 is a simple foreign currency/domestic currency split of the gross external debtposition; Table 7.6 provides more information on theforeign currency external debt position; and Table 7.7provides information on foreign currency payments.

Domestic Currency/Foreign Currency Splitof the Gross External Debt Position

7.19 Table 7.5 provides information on the foreigncurrency and domestic currency split of the grossexternal debt position for the total economy. The def-inition of foreign currency debt in this table includesboth foreign currency3 and foreign-currency-linkeddebt. Foreign-currency-linked debt is included withforeign currency debt because a depreciation of theexchange rate can increase the burden of foreign-currency-linked debt liabilities in domestic currencyterms for the resident debtor.

7.20 A special case arises where an economyuses as its legal tender a currency issued by a mone-tary authority of another economy—such as U.S.dollars—or of a common currency area to which theeconomy does not belong. While this currency is tobe classified as a foreign currency, it has some of theattributes of a domestic currency because domestictransactions are settled in this currency. With this inmind, information could be separately provided onexternal debt payable in and/or linked to a foreigncurrency used as legal tender in the domestic econ-omy, and other foreign currency external debt.

55

3Including external debt payable in a foreign currency but withthe amounts to be paid linked to a domestic currency.


56

Table 7.4. Debt-Service Payment Schedule: Public and Publicly Guaranteed Debt andNonguaranteed Private Sector Debt



Immediate1 0–3 4–6 7–9 10–12 13–18 19–24 years

Public and Publicly Guaranteed DebtDebt securitiesPrincipalInterestLoansPrincipalInterestCurrency and depositsPrincipalInterestTrade creditsPrincipalInterestOther debt liabilities2

PrincipalInterest Direct investment: Intercompany lending

Debt liabilities to affiliated enterprisesPrincipal InterestDebt liabilities to direct investorsPrincipal Interest

Nonguaranteed Private Sector DebtDebt securities PrincipalInterestLoansPrincipalInterestCurrency and depositsPrincipalInterestTrade creditPrincipalInterestOther debt liabilities2

PrincipalInterestDirect investment: Intercompany lending

Debt liabilities to affiliated enterprisesPrincipal InterestDebt liabilities to direct investorsPrincipal Interest

Gross External Debt PaymentsOf which: Principal

InterestMemorandum itemSecurities with Embedded Options3

Public and Publicly Guaranteed DebtPrincipal InterestNonguaranteed Private Sector Debt Principal Interest

1Immediately available on demand or immediately due.2Other debt liabilities are other liabilities in the IIP statement.3Include only those securities that contain an embedded option with a date on which or after which the debt can be sold back to the debtor.


7.21 While Table 7.5 is based on the original matu-rity concept, data could also be compiled on aremaining-maturity basis. Also, further disaggrega-tion of the table into institutional sectors and instru-ments is possible. If significant, the foreign currencydata could be disaggregated into external debt that ispayable in foreign currency and external debt that ispayable in domestic currency but with the amountsto be paid linked to a foreign currency (foreign-currency-linked debt).

Gross Foreign Currency External Debt

7.22 For those economies with significant gross for-eign currency external debt, Table 7.6 presents moredetailed information on the position. This table pro-vides an attribution of foreign currency and foreign-currency-linked external debt by major foreigncurrency—U.S. dollars, euros, and Japanese yen.Further individual currencies could be added. Dis-semination of this detailed information is encour-aged because it provides further information on theexposure to exchange rate movements to that set outin Table 7.5.

7.23 The table could be extended to also includeforeign currency and foreign-currency-linked debtowed by each resident sector to each other residentinstitutional sector. While such debt is beyondthe definition of external debt, it can result incross-institutional sector transfers of income whenthere are movements in the domestic exchangerate vis-à-vis foreign currencies, thus affecting eco-

nomic activity and financial stability. However, ifsuch data are added to the data on nonresidentclaims, it should be remembered that if, for example,a resident bank funds a foreign currency loan toa resident corporation by borrowing from a non-resident, the foreign currency liabilities wouldappear in both the resident/resident and resident/nonresident data.

7.24 In the special case where an economy uses asits legal tender a foreign currency, borrowing in thiscurrency from nonresidents could be separatelyidentified in the table.

7.25 A memorandum item is provided in Table 7.6for the notional value—the amount underlying afinancial derivatives contract that is necessary forcalculating payments or receipts on the contract—offoreign currency and foreign-currency-linked finan-cial derivatives contracts with nonresidents both toreceive and pay foreign currency, and by type of cur-rency.4 A financial derivatives contract to purchaseforeign currency with domestic currency is classifiedas a financial derivative to receive foreign currency.If instead the contract is to purchase domestic cur-rency with foreign currency at a future date, this is afinancial derivative to pay foreign currency. Simi-larly, an option to buy foreign currency (sell domes-tic currency) is classified as a financial derivative toreceive foreign currency, and vice versa. The deci-sive factor in determining whether the financialderivative is to be classified as receiving or payingforeign currency is the exposure to currency move-ments, so if payment of a financial derivatives con-tract is linked to a foreign currency even thoughpayment is required in domestic currency, the finan-cial derivative is to be classified as a contract to payforeign currency, and vice versa.

7.26 Through the use of financial derivatives, theeconomy could become more, or less, exposed toexchange rate risk than is evidenced in the gross for-eign currency external debt data; in this context, thenotional value data—by providing a broad indicationof the potential transfer of price risk underlying thefinancial derivatives contract—are analyticallyuseful.

57

4For those economies that use a foreign currency—such as theU.S. dollar—as legal tender, information on the notional value offoreign currency derivatives to receive and pay this foreign cur-rency—such as U.S. dollars—could be presented.

Table 7.5. Gross External Debt Position:Foreign Currency and Domestic Currency Debt

End-Period

Foreign currencyShort-termLong-termTotal

Domestic currencyShort-termLong-termTotal

Gross External Debt


58

Table 7.6. Gross External Foreign Currency and Foreign-Currency-Linked Debt Position

End-Period____________________________________________________Total U.S. dollar Euro Yen Other


Monetary AuthoritiesShort-term1

Long-term

BanksShort-term1

Long-term


Nonbank financial corporations Short-termLong-term

Nonfinancial corporationsShort-termLong-term


Short-termLong-term


Gross External Foreign Currency and Foreign-Currency-Linked Debt

Memorandum itemFinancial Derivatives: Notional Value of Foreign Currency

and Foreign-Currency-Linked Contracts with Nonresidents2

To Receive Foreign Currency General Government

ForwardsOptions

Monetary AuthoritiesForwardsOptions

BanksForwardsOptions

Other SectorsForwardsOptions

Nonbank financial corporationsForwardsOptions

Nonfinancial corporations ForwardsOptions

Households and NPISH ForwardsOptions

Total


7.27 The notional amount is comparable with thevalues for debt instruments; for instance, if a foreigncurrency debt instrument is issued and the proceedssold for domestic currency with an agreement torepurchase the foreign currency with domestic cur-rency at a future date—known as a currency or forexswap—the notional amount of the financial deriva-tive is equal to the amount swapped. So, theseamounts provide an indication of the scale of activityby institutional sectors in foreign currency financialderivatives; the extent to which institutional sectorsmight be covering the foreign currency risk of theirborrowing; and/or the extent to which institutionalsectors may be exposed to foreign currency riskthrough financial derivatives contracts.

7.28 A breakdown of positions by institutional sec-tor into forwards (including swaps) and options isprovided because of their different characteristics.Notably, forwards are likely to involve the deliveryor receipt of the notional amount of foreign currencyunderlying the contract, whereas the settlement of an

option is likely to involve only a net settlement ofthe market value.5

7.29 If a single financial derivatives contract bothpays and receives foreign currency, the notionalamount should be included under both pay andreceive foreign currency. Not only does this ensurecompleteness of reporting, it also allows for the pos-sibility of attributing financial derivatives contracts bytype of currency. If a financial derivatives contractrequires the payment or receipt of foreign currency inreturn for something other than a currency (for exam-ple, a commodity), the notional amount should beincluded under either the receipt or payment of theforeign currency, as appropriate. If these contracts aresignificant, they could be separately identified.

59

To Pay Foreign CurrencyGeneral Government

Forwards Options

Monetary AuthoritiesForwardsOptions


Other SectorsForwardsOptions


Nonfinancial corporationsForwardsOptions


Total


2Excludes financial derivatives that are included in reserve assets data; that is, financial derivatives that pertain to the management of reserve assets, areintegral to the valuation of such assets, are settled in foreign currency, and are under the effective control of the monetary authorities.


End-Period____________________________________________________Total U.S. dollar Euro Yen Other

5According to data published semiannually by the Bank forInternational Settlements (BIS), market values of foreign cur-rency options are typically around 3–5 percent of the notionalamount.


Projected Payments in Foreign CurrenciesVis-à-Vis Nonresidents

7.30 Table 7.7 sets out a foreign currency paymentschedule, and a memorandum item of selected for-eign currency and foreign-currency-linked externalassets. It provides an idea of the future potentialdrains of foreign currency resources from the econ-omy to nonresidents, along with the external foreigncurrency assets that may be available to meet suchdrains in the short-term. While there is always diffi-culty in ascertaining the extent to which it might bepossible to use assets to meet outstanding debt oblig-ations as they come due, the memorandum item pro-vides a broad approximation of the concept offoreign currency liquidity by listing selected assettypes that would most likely be available in the shortterm. Only obligations to and claims on nonresidentsare to be included in this table.

7.31 The bank, nonbank financial, and nonfinancialcorporate sectors are presented in the table, but notthe general government and monetary authority sec-tors because a framework for the dissemination ofsimilar, but not identical, data for the monetaryauthorities and the central government is providedby the Data Template on International Reserves andForeign Currency Liquidity.6 However, the tablecould be extended to cover these sectors.

7.32 The rows in the table present types of foreigncurrency payments (and receipts); the time periodcolumns are defined identically to those in the debt-service schedule (Table 7.3).7 Because the focus ison foreign currency drains, all payments in domesticcurrency, even if linked to a foreign currency, areexcluded. Foreign currency external debt paymentsare those payments that are included in the debt ser-vice payment schedule and are required in foreign

currency. The requirements to deliver and receiveforeign currency from nonresidents under forwardcontracts include only contractual agreements todeliver and receive the nominal (notional) amountsof foreign currency underlying forward contracts,such as forward foreign exchange contracts, andcross-currency swaps, on contracts current and out-standing at the reference date.

7.33 This item is not intended to include projectednet settlements of financial derivatives contractsinvolving foreign currency, because such amounts arenot required under the contract and are not knownuntil the time of settlement.8 Consequently, contractssuch as options and nondeliverable forwards thatrequire only net settlement are not covered by thistable. However, such contracts contribute relativelylittle to the value of foreign currency delivered underfinancial derivatives because the settlement amountsare much smaller than the notional amount andbecause these types of contracts have a relativelysmall share of the market. Table 7.6 distinguishesbetween forwards and options and so can be used toindicate their relative shares of total foreign currencyfinancial derivatives.

7.34 The memorandum item in Table 7.7 coverspositions in (and not payments of) foreign currencyand foreign-currency-linked debt instruments thatrepresent claims on nonresidents—a subcategory ofthe debt assets presented in the net external debt table(see Table 7.11)—plus foreign currency and foreign-currency-linked equity securities. The instruments inthe table are selected on the assumption that they rep-resent assets that might be available to meet a suddendrain of foreign exchange; that is, as mentionedabove, they provide an approximation of the conceptof foreign currency liquid assets. All short-terminstruments (defined on an original maturity basis)are included along with those long-term instruments(original maturity basis) that are traded or tradable(bonds and notes, and equity). Foreign-currency-

60

6This is a template on international reserves and foreign cur-rency liquidity that was introduced as a prescribed component ofthe SDDS in March 1999 by the IMF’s Executive Board. The tem-plate provides a considerably greater degree of transparency oninternational reserves and foreign currency borrowing by theauthorities than hitherto. Details are provided in the InternationalReserves and Foreign Currency Liquidity: Guidelines for a DataTemplate (Kester, 2001).

7This table could be extended to also include foreign currencypayments and receipts to each other resident institutional sector.However, as mentioned in paragraph 7.23, combining resident/nonresident and resident/resident foreign currency data couldresult in double counting (for example, payments on a foreign cur-rency loan by a resident corporation that was funded by a domes-tic bank from abroad).

8As set out in Chapter 6, paragraph 6.27, future requirements topay/receive foreign currency under forward derivatives contractsare to be converted into the unit of account at the market (spot)rate on the reference date; that is, consistent with the foreign-currency-conversion approach adopted throughout the Guide.Consequently, any gains or losses in the unit of account on thesefinancial derivatives contracts are not reflected in this table, butwould be reflected in the market value data to be reported in thefinancial derivatives memorandum table presented in Chapter 4(Table 4.3) and in the net external debt position table set out laterin this chapter (see Table 7.11).


61

Table 7.7. Projected Payment Schedule in Foreign Currency Vis-à-Vis Nonresidents: SelectedInstitutional Sectors

For External Debt and Derivatives Contracts Outstanding as at End-Period______________________________________________________________

Over one yearOne year or less to two years Over

(months) (months) two_____________________________________ _____________Immediate1 0–3 4–6 7–9 10–12 13–18 19–24 years

BanksForeign currency external debt payments

Requirements under forward financial derivatives contractsTo deliver foreign currency To receive foreign currency

Nonbank financial corporations Foreign currency external debt payments


Nonfinancial corporationsForeign currency external debt payments


Memorandum itemSelected Foreign Currency and Foreign-Currency-

Linked External Assets

BanksShort-term

Money market instruments Currency and depositsLoansOther debt liabilities2

Long-termEquitiesBonds and notes

Nonbank financial corporationsShort-term

Money market instruments Currency and depositsLoansOther debt liabilities2


Nonfinancial corporations Short-term

Money market instruments Currency and depositsLoansTrade creditsOther debt liabilities2


1Immediately available on demand or immediately due.2Other debt liabilities are other liabilities in the IIP statement.


62

Table 7.8. Gross External Debt Position: Interest Rate Composition

End-Period________________________________________________Fixed-rate-linked Variable-rate-linked__________________ __________________

Percent PercentAmount of total Amount of total Total



Long-term

BanksShort-term1

Long-term


Nonbank financial corporations Short-termLong-term

Nonfinancial corporationsShort-termLong-term

Households and nonprofit institutions serving households (NPISH)Short-termLong-term


Gross External Debt(percentage of total external debt)

Memorandum item (to include if significant)Notional Value of Financial Derivatives: Single-Currency

Interest Rate-Related Contracts2

To receive fixed-rate-linked paymentGeneral governmentMonetary authoritiesBanksOther sectors

Nonbank financial corporationsNonfinancial corporations Households and NPISH

From affiliated enterprises and direct investorsTotal

To receive variable-rate-linked paymentGeneral governmentMonetary authoritiesBanksOther sectors

Nonbank financial corporationsNonfinancial corporations Households and NPISH

From affiliated enterprises and direct investorsTotal


2Excludes financial derivatives that pertain to reserve asset management and are included in reserve assets data.


linked assets are included to ensure consistency withthe foreign currency and foreign-currency-linkedexternal debt position data presented in Table 7.6.Indeed, foreign currency liabilities might be hedgedby foreign-currency-linked assets, and vice versa. Ifforeign-currency-linked assets become significant,they could be separately identified.

Interest Rates and External Debt

Interest Rate Composition of External Debt

7.35 As with the currency composition, experiencesuggests that information on the interest rate compo-sition of the gross external debt position can be nec-essary for monitoring an economy’s potentialvulnerability to solvency and liquidity risk. Forinstance, economies with high amounts of variable-rate debt are vulnerable to a sharp increase in inter-est rates. Hence, Table 7.8 provides a presentation ofthe amounts of the gross external debt position, bothin relative and absolute terms, on which interest isfixed-rate and variable-rate. Along with the value,for each cell the percentage contribution to externaldebt is presented. In this table, the purchase of a sep-arate financial derivatives contract, which mightalter the effective nature of the interest cash pay-ments, does not affect the classification of the under-lying instrument (see also below).

7.36 A memorandum item is provided on thenotional (or nominal) value of single-currency finan-cial derivatives contracts with nonresidents forinstances where the amounts involved are signifi-cant. These are broken down into contracts toreceive fixed-rate-related cash payments and receivevariable-rate-related cash payments. For instance, ifall sectors reported that their external debt was allfixed-rate-linked but they had entered into derivativescontracts with nonresidents to swap all their interestpayments into variable-rate-related payments, thenthe memorandum item would show that despite theapparent exposure of the economy to fixed-rateinterest rates, it is actually exposed to variable rates.

7.37 In financial derivatives markets, interest ratecontracts are typically referenced to a variable-rateindex. To receive variable-rate-linked is to pay fixed-rate-linked, and vice versa. A financial derivative thatreceives variable-rate-linked is one that would havean increasing positive value, or a decreasing negative

value, as the variable rate specified in the contractincreases; similarly a financial derivative thatreceives fixed-rate-linked has an increasing positivevalue, or a decreasing negative value, as the variablerate specified in the contract decreases.

Average Interest Rates

7.38 There is analytical interest in average interestrates on external debt. While financial derivativescontracts might arguably render these data less rele-vant than otherwise, these data provide informationon the borrowing costs of the economy and can beused to help estimate debt-service interest rate pay-ments, or be used to cross-check those data. Also,concessionality of borrowing can be imputed. Infor-mation on average interest rates on direct investmentborrowing is of value because, often for tax reasons,average interest rates on this debt can vary widely.Information on average interest rates on short- andlong-term original maturity instruments, by institu-tional sector, could additionally be provided.

7.39 In addition to weighted-average interest rates onoutstanding external debt, Table 7.9 could be used topresent data on the weighted-average level of interestrates agreed on new borrowing during the period.

External Debt by Creditor Sector

7.40 Table 7.10 provides for the presentation ofcreditor sector data for five nonresident creditor sec-

63

Table 7.9. Gross External Debt Position:Average Interest Rates

End-Period

General Government

Monetary Authorities

Banks

Other SectorsNonbank financial corporationsNonfinancial corporationsHouseholds and nonprofit institutions

serving households (NPISH)Direct Investment: Intercompany Lending

(from affiliated enterprises and direct investors)

Total Economy


tors: multilateral organizations, general government(excluding multilateral organizations),9 monetaryauthorities,10 banks, and “other sectors.” Tradition-ally, this information has been most readily availablefor nontraded instruments and has been essentialwhen undertaking debt-reorganization discussions.More broadly, information on creditor sectors has

been compiled because different types of creditorsmay respond to changing circumstances differently,and this can have implications for the economic situ-ation of an economy.

7.41 Most economies may face practical difficul-ties in identifying owners of traded debt securities.Economies might attribute the value of all tradeddebt securities to “other sectors” as the creditor sec-tor. If so, this assumption should be clearly identi-fied in any presentation of data because it may beonly very broadly reliable: for instance, monetaryauthorities hold significant quantities of cross-

64

Table 7.10. Gross External Debt Position: Creditor Sector Information

End-Period________________________________________________________________Creditor Sectors________________________________________________________________

Multilateral General Monetary OtherDebtor Sectors Organizations1 Government1,2 Authorities1 Banks Sectors Total



Long-term

BanksShort-term3

Long-term


Nonbank financial corporations Short-term3

Long-termNonfinancial corporationsShort-termLong-termHouseholds and nonprofit institutions

serving households (NPISH)Short-termLong-term

Gross External Debt Excluding Direct InvestmentOf which: Short-term

Long-term

Direct Investment: Intercompany Lending (Total column only)

Debt liabilities to affiliated enterprisesDebt liabilities to direct investors

Gross External Debt

1For the multilateral organizations, general government, and monetary authorities creditor sectors, short-term lending, on an original maturity basis, maybe insignificant—under which circumstances a short-/long-term split may not be necessary.

2Excluding multilateral organizations.3It is recommended that all currency and deposits be included in the short-term category unless detailed information is available to make the short-

term/long-term attribution.

9In BPM5, multilateral organizations form part of the foreigngeneral government sector.

10This category excludes multilateral monetary institutions suchas the IMF, which are included under multilateral organizations,but includes regional central banks.


border securities as part of their foreign exchangereserves. An alternative approach would be to havea separate column for traded debt securities andexclude holdings of such securities from all the“sector” columns.

7.42 Table 7.10 can be rearranged and extended asappropriate. One possibility is to divide the creditorsector information between official and other credi-tors. The official creditors could be further subdi-vided by multilateral and official bilateral creditors,and the latter could distinguish between Paris Clubmember creditors and non–Paris Club creditors.Also, official bilateral debt could be separatedbetween concessional and nonconcessional debt.

7.43 Because direct investment liabilities do not fallnaturally into this presentation, totals are drawnbefore and after direct investment: intercompanylending. Also, the “other sectors” as creditor sectorsare not subdivided into nonbank financial, nonfinan-cial corporations, and households and NPISH, sincethis would create an additional degree of difficulty inobtaining this creditor information. On the otherhand, as private sector capital flows increase, andthese creditor sectors become more significant, therecould be analytical interest in identifying theirclaims separately.

Net External Debt Position

7.44 As an economy increasingly integrates withthe rest of the world, so analysis of the external lia-bility position, and gross external debt position inparticular, needs to take into account positions inexternal assets. Indeed, for risk-management pur-poses, entities may well manage external liabilitiesand assets in an integrated manner. On the otherhand, there is difficulty in ascertaining the extent towhich assets might be usable to meet outstandingdebt liabilities. Table 7.11 provides a presentation ofnet external debt position data, placing gross exter-nal debt in the context of claims on nonresidents inthe form of debt instruments.

7.45 The rows in the table are structured as in thegross external debt position table (Table 4.1), and thecolumns present gross external debt, gross externalassets in debt instruments, and net debt position. Atotal of net external debt position plus the net finan-cial derivatives position (this position is valued at

65

Table 7.11. Net External Debt Position: By Sector

End-Period______________________________Gross External

External Assets Net Debt in Debt External

Position Instruments Debt(1) (2) (3) = (1) – (2)

General Government Short-termMoney market instrumentsLoansCurrency and deposits1

Trade creditsOther debt instruments2

ArrearsOther




Other debt instruments2

ArrearsOther





ArrearsOther





ArrearsOther




market value and should include the position infinancial derivatives held as reserve assets) is drawnat the bottom of the table. Because of their differentcharacteristics, information distinguishing forwards(including futures and swaps) and options withinfinancial derivatives is encouraged.

7.46 The data on external assets in the form of debtinstruments to be included in this table are the sameas presented in the IIP, with short- and long-termdefined on an original maturity basis. The net exter-nal debt position is equal to gross external debt lessgross external assets in debt instruments.

7.47 Provided that traded debt instruments are val-ued at market value, net external debt in this tableequals the net IIP position excluding all equityassets and liabilities, all financial derivatives assetsand liabilities, and holdings of SDRs and monetarygold. This approach facilitates comparability withother statistics. An alternative approach, which isundertaken within the banking industry, is to pre-sent traded debt instrument liabilities at nominalvalue and traded debt instrument assets at marketvalue.

Reconciliation of External DebtPositions and Flows

7.48 Between any two end-periods, the change in thegross external debt position can be disaggregated intocomponent flows. These are financial transactions,valuation changes, and other adjustments. Such a dis-aggregation helps the compiler to reconcile and verifydata, and it provides useful analytical information tothe user of data (for example, the extent to whichchanges in the gross external debt position since theprevious period are due to transactions, valuationchanges, and/or revisions to the previous perioddata).

7.49 The reconciliation of gross external debt posi-tions at two different reference dates is set out in Table7.12. In this table, the first column is the gross externaldebt position at the beginning of the period, followedby the transactions during the period. Because theconceptual approach taken in the Guide is consistentwith BPM5, the balance of payments transaction datacan be used in the transactions column (although thesubsector analysis of “other sectors” is not explicitlyidentified in BPM5). The next two columns are price

66




ArrearsOther



Nonfinancial corporationsShort-termMoney market instrumentsLoansCurrency and deposits1


ArrearsOther



Households and nonprofitinstitutions serving households (NPISH)



ArrearsOther



Direct Investment:Intercompany Lending

Debt liabilities to affiliated enterprises

ArrearsOther


Net External Debt (3)

Table 7.11 (continued)

End-Period______________________________Gross External

External Assets Net Debt in Debt External

Position Instruments Debt(1) (2) (3) = (1) – (2)


changes11 and exchange rate changes. These changesassume greater importance with increased volatility ofprices in security and exchange rate markets. A nomi-nal-valuation presentation of traded debt instrumentswould exclude any changes in value arising from mar-ket prices. Before the position at the end of the period,a fifth item of “other adjustments” is included. Theseadjustments include reclassifications of external debtsuch as when entities switch from one institutionalsector to another, and when the nature of a debt instru-ment changes—an example being of an instrumentmoving from a specific type (say, a loan) to directinvestment: intercompany lending, when the relation-ship between the creditor and debtor becomes that ofdirect investment.

Traded Debt Instruments

Reconciliation of Nominal and Market Value

7.50 The Guide recommends that traded debt instru-ments be valued in the gross external debt position atnominal and market value. The sole differencebetween these two valuation measures is that marketvalue takes account of market price changes, whereasnominal value does not. Market prices change overtime for a number of reasons, including changes inmarket interest rates, changes in investor perception ofthe creditworthiness of the debtor, and changes in mar-ket structure (such as might affect market liquidity).

7.51 The divergence in the market and nominalvalue of traded debt instruments at one moment intime, and over time, is of analytical value. For thisreason, Table 7.13 provides a framework for recon-ciling nominal and market valuation of traded debtinstruments included in the gross external debt posi-tion. The instruments in the table include moneymarket instruments, bonds and notes, and, if applica-ble, arrears. It is intended that data be presented inabsolute amounts in the same unit of account used topresent the gross external debt position.

Location of Debt Securities Issuance

7.52 Information on the location of issuance of debtsecurities issued by residents and owned by nonresi-

67

LiabilitiesGeneral government

ForwardsOptions

Monetary authoritiesForwardsOptions


Other sectorsForwardsOptions


Nonfinancial corporationsForwardsOptions


Total (4)

AssetsGeneral government

ForwardsOptions

Monetary authoritiesForwards Options


Other sectorsForwards Options


Nonfinancial corporations ForwardsOptions


Total (5)

Net External Debt Position plus Financial Derivatives (6)

(6) = (3) + (4) – (5)


2Other debt instruments are other assets and other liabilities in the IIP statement.


Position inFinancial Derivatives

Financial Derivatives at End of Period

11In addition to market price changes, this column covers othernon-exchange-rate valuation changes—for example, changes inthe value of pension fund liabilities to nonresident participantsand policyholders arising from revaluations.


68

Table 7.12. Gross External Debt Position: Reconciliation of Positions and Flows

Position at Changes in Position Reflecting________________________________________________Beginning Price Exchange Other Position atof Period Transactions changes rate changes adjustments End of Period

General Government Short-termMoney market instrumentsLoansTrade creditsOther debt liabilities1

ArrearsOther




ArrearsOther





ArrearsOther





ArrearsOther




69




ArrearsOther



Nonfinancial corporations Short-termMoney market instrumentsLoansTrade creditsOther debt liabilities1

ArrearsOther


Households and nonprofit institutions serving households (NPISH) Short-termMoney market instrumentsLoansTrade creditsOther debt liabilities1

ArrearsOther


Direct Investment: Intercompany Lending Debt liabilities to affiliated enterprises

ArrearsOther


Gross External Debt

1Other debt liabilities are other liabilities in the IIP statement.2It is recommended that all currency and deposits be included in the short-term category unless detailed information is available to make the short-



Position at Changes in Position Reflecting________________________________________________Beginning Price Exchange Other Position atof Period Transactions changes rate changes adjustments End of Period


dents can also be of analytical value. For instance,such data provide an indication of the motivation ofdebtors and creditors—whether residents are attract-ing foreign investors by issuing securities in theirmarkets; and of possible liquidity risk—securitiesissued in foreign markets may be harder to refinancein the event of an external shock to the economy.Also, in the absence of information on foreign cur-rency debt, these data can provide a broad idea of theforeign currency/domestic currency attribution ofdebt securities—for instance, foreign-issued debt islikely to be foreign-currency-linked. From a compi-lation viewpoint, data on securities issued in foreignmarkets might well be captured in a different mannerfrom that of issues in the domestic market.

7.53 A presentation for these data is provided inTable 7.14. The rows distinguish debt securitiesissued by general government from those issuedby other sectors. The separate identification of gov-ernment issues reflects the government’s importantand special role, in most economies, as a borrower.Depending on the extent of security issuance by theother institutional sectors, a further disaggregation ofissues, such as for banks, might also be of analyticalinterest. The maturity attribution is on an originalmaturity basis, although the table can also be pre-sented on a remaining maturity basis.

7.54 Consistent with the concepts set out in theGuide, Table 7.14 only covers information on

70

Table 7.13. Gross External Debt Position:Traded Debt Instruments—Reconciliation of Nominal and Market Value

Nominal Value Market Price Market ValuePosition at End of Period Change Position at End of Period

General GovernmentMoney market instrumentsBonds and notesArrears (if applicable)

Monetary AuthoritiesMoney market instrumentsBonds and notesArrears (if applicable)

BanksMoney market instrumentsBonds and notesArrears (if applicable)

Other SectorsMoney market instrumentsBonds and notesArrears (if applicable)

Nonbank financial corporations Money market instrumentsBonds and notesArrears (if applicable)

Nonfinancial corporations Money market instrumentsBonds and notesArrears (if applicable)


Money market instrumentsBonds and notesArrears (if applicable)

Total Money market instrumentsBonds and notesArrears (if applicable)


nonresident ownership of resident-issued secu-rities. But there might also be interest in pre-senting data on resident as well as nonresidentownership of resident-issued securities, both indomestic and foreign markets. By including addi-tional columns for resident- and nonresident-owned

securities, the table can be extended to cover suchinformation.

Cross-Border Trade-Related Credit

7.55 In addition to presenting data by type of instru-ment, another approach is to present data by the type ofuse of the borrowing. In this regard, of special interestis information on cross-border trade-related credits bydebtor and creditor sector—that is, credits that financetrade. Such credit is directly linked to activity in thereal economy. Table 7.15 provides a model for present-ing data on borrowing used to finance trade, with thedisaggregation by, first, maturity (original basis) and,second, institutional sector. In presenting these data,trade-bills could be separately identified, both becauseof the analytical interest in such data and to help withreconciliation with creditor-based statistics.

7.56 The debtor sectors are presented in rows, andthe creditor sectors in columns. The rows and col-umn for direct investment entities relate only to theprovision of trade-related credit between relatedentities—that is, those transactions classified underdirect investment in the balance of payments, andnot the provision of trade-related credit by unrelatedparties to direct investment entities. The maturityattribution is on an original maturity basis.

71

Table 7.14. Gross External Debt Position:Resident-Issued Debt Securities Ownedby Nonresidents—Location of Issuance

End-Period

Domestically issuedShort-term

General governmentAll other sectors

Long-termGeneral governmentAll other sectors

Foreign issuedShort-term

General governmentAll other sectors

Long-termGeneral governmentAll other sectors

Table 7.15. Gross External Debt Position: Cross-Border Trade-Related Credit

End-Period______________________________________________________________________________Creditor Sectors______________________________________________________________________________

General Direct Debtor Sectors government Banks1 Other sectors investment entities

Short-termGeneral governmentMonetary authoritiesBanksOther sectorsDirect investment entities

Long-termGeneral governmentMonetary authoritiesBanksOther sectorsDirect investment entities

Total

1It is recommended that any cross-border trade-related debt of monetary authorities be included within the bank category, unless the monetary author-ities are significant debtors, in which instance, they should be separately identified.

Introduction

8.1 Debt-reorganization transactions are a featureof external debt activity. Economies sometimes facedifficulties in meeting their external debt obliga-tions, or debtors may want to change the repaymentprofile of their external obligations for differentreasons, including reducing the risk of future pay-ment difficulties or reducing the cost of borrowing.In this context, they may undertake debt restructur-ing and debt conversions. This chapter defines debtreorganization, discusses the various types of debt-reorganization operations, and provides guidance onhow they affect the measurement of the gross exter-nal debt position. Further, this chapter defines debtrelief and recommends the measurement and pre-sentation of statistics on debt reduction, which isalso defined.

8.2 Reference is made in the chapter to the recordingof debt-reorganization transactions in the measuredflow data of the balance of payments, the OECD’sDevelopment Assistance Committee (DAC) system,and the World Bank’s Debtor Reporting System(DRS). Full details of such recording approaches areset out in BPM5 (IMF, 1993), the OECD’s Handbookfor Reporting Debt Reorganization on the DACQuestionnaire (OECD, 1999), and the DebtorReporting System Manual (World Bank, 2000).1

Definitions

8.3 Debt reorganization is defined as bilateralarrangements involving both the creditor and thedebtor that alter the terms established for the servic-ing of a debt. Types of debt reorganization includedebt rescheduling, refinancing, forgiveness, conver-sion, and prepayments. A creditor can also reduce

debt through debt write-offs—a unilateral action thatarises, for instance, when the creditor regards aclaim as unrecoverable, perhaps because of bank-ruptcy of the debtor, and so no longer carries it on itsbooks. This is not debt reorganization as defined inthe Guide because it does not involve a bilateralarrangement. Similarly, a failure by a debtor econ-omy to honor its debt obligations (default, morato-rium, etc.) is not debt reorganization.

8.4 Generally, debt reorganization is undertaken toprovide some debt relief to the debtor and canaddress liquidity and/or sustainability problems aris-ing from future and current payment obligations.Debt relief results where there is (1) a reduction inthe present value of these debt-service obligations;and/or (2) a deferral of the payments due, thus pro-viding smaller near-term debt-service obligations(this can be measured, in most cases, by an increasein the duration of these obligations; that is, paymentsbecome weighted more toward the latter part of thedebt instrument’s life). However, if debt reorganiza-tion results in changes in present value and durationthat are countervailing in their impact on the debtburden, then there is no debt relief, unless the netimpact is significant, such as could occur if there wasa deep reduction in present value (together with smalldecrease in duration) or a sharp increase in duration(together with a small increase in present value).

8.5 Debt reduction is defined as the reduction in thenominal value of external debt arising from a debt-reorganization arrangement, excluding any pay-ments of economic value made by the debtor to thecreditor as part of the arrangement. This is the defin-ition to be used for compiling data to be presented inTable 8.1—debt reduction arising from debt reorga-nization. Debt reduction in present value terms isdefined as the reduction in the present value of debt-service obligations arising from a debt reorganiza-tion, as calculated by discounting the projectedfuture payments of interest and principal both before

8. Debt Reorganization

72

1See also Chapter 17.

8 • Debt Reorganization

and after the reorganization at a common interestrate and comparing the difference. To illustrate thedifference between debt reduction and debt reduc-tion in present value terms, if the contractual rate ofinterest is reduced with no impact on the nominalvalue of external debt, no debt reduction is recordedbut there is debt reduction in present-value terms.

8.6 Debt swaps are exchanges of debt, such as loansor securities, for a new debt contract (debt-to-debtswaps), or exchanges of debt-for-equity, debt-for-exports, or debt-for-domestic currency, such as to beused for projects in the debtor country (also known asdebt conversion).2 This definition is intended toinclude debt-for-development swaps where economicvalue is provided by the debtor to the creditor for usein development projects in the debtor’s economy.

Types of Debt Reorganization

8.7 The three main types of debt reorganization are:• A change in the terms and conditions of the

amount owed, which may result, or not, in a reduc-tion in burden in present-value terms. These trans-actions are usually described as debt rescheduling.They are also sometimes referred to as refinancingor as debt exchanges. Included are transactionsthat change the type of debt instrument owed—forexample, loan for bond swaps—but not debt-forgiveness transactions.

• A reduction in the amount of, or the extinguishingof, a debt obligation by the creditor via a contrac-tual arrangement with the debtor. This is debt for-giveness as described in BPM5 and the DRS and isalso classified as debt forgiveness in the DAC sys-tem if there is a development/welfare motive.

• The creditor exchanges the debt claim for some-thing of economic value other than another debtclaim on the same debtor. This includes debt con-version, such as debt-for-equity swaps, debt-for-real-estate swaps, and debt-for-nature swaps,3 anddebt prepayment or buybacks for cash.

8.8 Debt-reorganization packages may involve morethan one type; for example, most debt-reorganiza-tion packages involving debt forgiveness also resultin a rescheduling of the part of the debt that is notforgiven or canceled.

8.9 For clarification purposes, in discussing the sta-tistical treatment of debt reorganization, each of thethree types of debt reorganization is considered sep-arately. This has a number of advantages: each typeof debt reorganization raises different statisticalissues, hence encouraging a type-by-type approach;present international statistical guidelines, on whichthe guidelines in this chapter are based, are moreadvanced for some types of debt reorganization thanfor others; and there is interest in the different typesof debt reorganization, and so there is an analyticalbenefit, where possible, in separately measuring andreporting any debt reduction resulting from theirapplication.

73

Table 8.1. Nominal Value Debt ReductionArising from Debt Reorganizations

DebtorPublic sector

Of which: Multilateral Official bilateral Commercial bank1

Bonds and notes

Publicly guaranteed private debtOf which: Multilateral

Official bilateral Commercial bank1

Bonds and notes

Other private debtOf which: Multilateral

Official bilateral Commercial bank1

Bonds and notes

Of which:Rescheduled and refinanced

Public and publicly guaranteed debtOther private debt

ForgivenPublic and publicly guaranteed debtOther private debt

Debt conversions and prepaymentsPublic and publicly guaranteed debtOther private debt

1Excluding bonds and notes.

2A debt swap should be distinguished from a financial deriva-tive swap. The financial derivative swap involves two partiesagreeing to swap future cash flows, while a debt swap involves theexchange of the debt instrument itself for economic value.

3Some agreements described as debt swaps are equivalent todebt forgiveness from the creditor together with a commitmentfrom the debtor country to undertake a number of development,environmental, etc., expenses. These transactions should be con-sidered under the second type of debt reorganization, as counter-part funds are not provided to the creditor.


Debt Rescheduling

8.10 Rescheduling refers to the formal deferment ofdebt-service payments and the application of newand extended maturities to the deferred amount. Thismay be conducted: (1) through the exchange of anexisting debt instrument for a new one, as in refi-nancing or debt exchanges; or (2) through a changeof the terms and conditions of the existing contracts(this is often simply referred to as rescheduling, asopposed to refinancing). Rescheduling may or maynot result in a reduction in the present value of debt,as calculated by discounting the old and new pay-ment schedule by a common interest rate.

8.11 Refinancing of a debt liability involves thereplacement of an existing debt instrument or instru-ments, including arrears, with a new debt instrumentor instruments. For instance, the public sector mayconvert various export credit debt it is owed into asingle loan. Refinancing may involve the exchangeof one type of debt instrument, such as a loan, foranother, such as a bond. Some debt-refinancingarrangements feature new money facilities (seebelow, paragraph 8.51). Also, refinancing can besaid to have taken place when countries with privatesector bond creditors exchange existing bonds fornew bonds through exchange offers (rather than achange in terms and conditions).

8.12 Rescheduling can be characterized as flow orstock rescheduling. A flow rescheduling typicallyrefers to a rescheduling of specified debt servicefalling due during a certain period and, in somecases, of specified arrears outstanding at the begin-ning of that period. A stock rescheduling involvesprincipal payments that are not yet due, and arrears,if any, and like a flow rescheduling, can include bothan element of debt forgiveness and a rescheduling ofthe amounts not reduced.

Recommended treatment

External debt position

8.13 Any agreed change in the terms of a debtinstrument is to be recorded as the creation of a newdebt instrument, with the original debt extinguishedat the time both parties record the change in terms intheir books. Whether the gross external debt positionincreases, decreases, or remains unchanged dependson whether the value of the new instrument(s) isrespectively greater than, smaller than, or the same

as the original debts being replaced—this is the caseregardless of the valuation method employed tomeasure external debt instruments.4 In other words,both before and after a debt rescheduling, the valueof the gross external debt position is simply deter-mined by the value of outstanding external debt lia-bilities of residents owed to nonresidents at thereference date.

8.14 As explained in Chapter 2, and as the examplesin that chapter illustrated, the stock of external debtat any moment in time can be calculated by dis-counting future payments at a specified rate of inter-est. This interest rate can be the contractual rate (fornominal value), or a market rate for the specific bor-rower (for market value), or another rate. Usingthese different rates to discount payments will pro-vide different position data for the same paymentschedule. Debt reduction in present-value terms aris-ing from rescheduling might be calculated using anyof these rates—in the HIPC Initiative, a market-based rate is used.

8.15 If, as part of official and private debt-reductionpackages, loans denominated in foreign currency areswapped for debt securities denominated in the domestic currency, the difference between the valueof the loan and the value of the debt security in thedomestic currency will be reflected in the grossexternal debt position. The extinguishment of the olddebt liability, the loan, results in a decrease in thevalue of short-term or long-term loans, as appro-priate, while an increase in bonds and notes isrecorded.

Flow data

8.16 In the flow data in the balance of payments,both the extinguishment of the old debt liabilityand the creation of the new debt(s) are recorded. Inthe DAC system these flows are also recorded,except when the category of debt does not change,in which case only the capitalization of interest isrecorded as a flow. The DRS does not record thesetransactions in flow data (but they are reflected in

74

4If external debt is lower or higher because at the time ofrescheduling it was agreed between the debtor and creditor thatthe amount of late interest on arrears was to be more or less thanthat which accrued, back data of the gross external debt positionshould not be revised to reflect this agreement, provided that theaccrual of interest costs on arrears in past periods was in line withthe contract(s) that existed at that time.


the position data). In the balance of payments, anydifference between the value of the old and newdebts is treated as a valuation change, such as in thecase of exchanges of Brady bonds (see Box 8.1) fornew global bonds, except when nonmarketable debtowed to official creditors is involved, in whichinstance any reduction in the nominal value of debtis recorded as debt forgiveness (see below).5

Debt reduction

8.17 The Guide recommends that debt reduction aris-ing from debt rescheduling and debt refinancing—thatis, a reduction in the nominal amount outstanding,excluding any external debt-service payments made bythe debtor as part of the arrangement—be measuredand presented as in the debt-reduction table providedin this chapter. If the new external debt liability isdenominated in a different currency from that of theexternal debt liability it is replacing, then any debtreduction should be determined using the marketexchange rate between the two currencies prevailingon the transaction date (that is, the midpoint betweenthe buying and selling spot rates).

8.18 In many instances of debt rescheduling, themethod by which debt relief is provided is morecomplex than a simple reduction in nominal amountoutstanding. For instance, a debt might be resched-uled with the same nominal value but with a lowerinterest rate or with extended maturities. By simplycomparing the nominal amounts outstanding beforeand after the rescheduling, no debt reduction wouldbe evident, but there may be debt reduction in pres-ent value terms, calculated by discounting futuredebt-service payments, both on the old and newdebts, at a common rate. In such circumstances, akey issue is which rate to use: in debt-reorganizationoperations such as those under the HIPC Initiativeand similar arrangements, debt reduction in present-value terms is calculated using an interest rate equalto a market-based so-called risk-neutral rate—suchas the OECD’s Commercial Interest Reference Rates(CIRRs).6 In other cases, debt reduction in presentvalue may be based on a rate that includes a risk pre-mium, reflecting the creditor’s assessment of thevalue of the claim (this is generally the case for therestructuring of claims held by private creditors).

8.19 Also, in some debt rescheduling, such as withconcessional Paris Club agreements (Box 8.2), credi-

75

Box 8.1. Sovereign Bond Restructuring

The restructuring of a country’s sovereign bonded external debt(eurobonds and Brady bonds) began with Pakistan at the end of 1999,following the extension of the “comparability of treatment” principleto bondholders in Pakistan’s agreement with the Paris Club in January1999.

In terms of restructuring debt, bonds have a number of characteristicsthat distinguish them from other types of debt instruments.

• First, there is usually a wider range of investors than for nontradedexternal debt instruments, and hence various investor groups allwith potentially different investment motivations. For instance, theinvestment motivations of retail—nonfinancial institution—investorsmay be different from those of financial institutions.

• Second, market prices are invariably quoted. Thus, those investorsthat mark-to-market frequently—having borne the market-value lossin the secondary market price of the to-be-exchanged bonds, or hav-ing purchased at a low market value—might well compare the pre-sent value of the exchange offered (discounting payments at a partic-ular interest rate) with the current market price of theto-be-exchanged bonds. In the simplest case, if the present value ofthe exchange bond is higher than the market price of the originalbond, the holder of the to-be-exchanged bond has an incentive totender his bonds in the exchange.

• Finally, most eurobonds and Brady bonds have cross-default clausesor cross-acceleration clauses in their covenants, thus perhaps makingit impossible for a sovereign debtor to pick and choose which bond-holders are repaid and which are not. So, markets debate the issue ofwhether a restructuring of external bonded debt needs to be com-prehensive across other foreign currency debt instruments as well.

The consequence of the above is that successful bond restructuring—mostly bond exchanges—has involved the debtors exchanging securi-ties at a premium to the market price, although well below the facevalue, or providing other “sweeteners” to encourage bondholders toparticipate. Bonds with the larger percentage of retail investors havetended to pay a higher premium. But, as with creditors for other typesof debt instruments, a key consideration of creditors in any restructur-ing is whether the sovereign borrower is facing a liquidity or solvencyproblem, or neither.

5See BPM5, paragraph 534.

6These rates are determined monthly for 13 currencies on thebasis of secondary market yields on government bonds with aresidual maturity of five years, and additionally three and sevenyears for the Canadian dollar, the U.S. dollar, and the euro. Thesedata are published monthly on the Internet at: http://www.oecd.org/statistics/news-releases. For the HIPC Initiative, debt denominatedin currencies for which no CIRR is available, if the currency ispegged to another currency such as the U.S. dollar, the CIRR forthe latter should be used; in the absence of an exchange ratearrangement, as well as for the units of account used by variousmultilateral institutions, the SDR CIRR should be applied.


76

The Paris Club has developed procedures for the collective rescheduling ofofficial bilateral debt since the 1950s, when Argentina approached bilateralcreditors.The Club is an ad hoc organization of creditor countries (mainlyOECD members) that responds to requests for debt relief with respect toguaranteed export credits and intergovernmental loans.

Debts to Paris Club official creditors are now restructured through theParis Club, especially since Russia became a member of the Club in 1997.Debts to commercial banks are typically restructured through consortia ofcommercial banks. Noninsured supplier credits and debts to governmentsthat do not participate in the Paris Club are normally restructured throughbilateral negotiations.

Paris Club

The Paris Club is an informal group of creditor countries.The French Trea-sury maintains a permanent secretariat, and a senior official serves as Chair-man, to administer the Paris Club on behalf of other creditor countries.There are 19 permanent members; nonmember creditor countries may beinvited to take part in meetings for the treatment of the debt of a specificdebtor country if they have significant claims on that country. The Clubmeets virtually every month in Paris, both for discussion of debt issuesamong the permanent members and for the rescheduling of the debt of aspecific debtor country.

Countries facing difficulties in servicing of debt to official bilateral creditorswill approach the Chairman of the Paris Club and ask to be considered forrelief.The creditors at their monthly meeting will agree to hear that country’sapplication, provided that an IMF-supported adjustment program is in placeand that there is a financing need that requires rescheduling. Agreement isnormally reached in face-to-face negotiations, or by mail if there are very fewcreditors.The Paris Club can “treat” debt owed (contracted or guaranteed)by the government and/or the public sector of the debtor country to credi-tor countries or their appropriate institutions: officially guaranteed exportcredits and bilateral loans. The representatives of the creditor countries atthe Paris Club decide on the period over which debt relief will be given(known as the consolidation period), the debts that will be included (currentmaturities, possibly arrears, possibly previously rescheduled debt), and therepayment terms on consolidated debt (grace and repayment periods).

Two types of “treatment” may be implemented by the Paris Club:• A flow treatment of usually both scheduled amortization and interest

payments falling due in a given period; and• A stock treatment of the entire outstanding principal at a given date, for

countries with a good track record with the Paris Club if this wouldensure an end to the rescheduling process.

Paris Club negotiations result in a multilateral framework agreement(Agreed Minute), which must be followed up with bilateral implementingagreements with each creditor agency. The interest rate on rescheduleddebt (known as moratorium interest) is not arranged at the Paris Club butis negotiated bilaterally, reflecting market rates.

At the beginning of the debt-relief process, Paris Club creditor countrieswill establish a “cutoff date.” This means that all loan contracts signed afterthat date will not be eligible for debt relief by the Paris Club.The aim is tohelp the debtor country reestablish its creditworthiness by paying newobligations on their original schedules. Even though debt relief may extendover many years through a succession of Paris Club agreements, the cutoffdate will remain unchanged.

It was increasingly recognized in the 1980s that some low-income countrieswith high external debt were facing solvency as well as liquidity problems.Over the years, the Paris Club has provided increasingly concessional

rescheduling terms to low-income countries.The level of debt reduction oncommercial claims was gradually increased from Toronto terms (1988—33.33percent debt reduction) to London terms (1991—50 percent debt reduction)to Naples terms (1995—50 percent to 67 percent debt reduction) to Lyonterms (1996—80 percent debt reduction) and to Cologne terms (1999—90percent reduction or more if needed under the HIPC Initiative).The evolutionof Paris Club terms up to Lyon terms is presented in Table 8.2.

In 1996, the debt initiative for heavily indebted poor countries (HIPCs) wasestablished, leading for the first time to multilateral creditors providingdebt relief to a country. The Paris Club provides its debt-relief effort in thecontext of the HIPC Initiative through the use initially of Lyon terms, andnow of Cologne terms.

A country benefiting from Paris Club debt relief commits to seek at leastsimilar restructuring terms from its other external creditors (other thanmultilateral creditors, which only provide debt relief to countries eligible forassistance under the HIPC Initiative).This applies to non–Paris Club bilateralcreditors, who generally negotiate with the debtor country on a bilateralbasis, as well as private creditors (suppliers, banks, bondholders, etc.).

Paris Club agreements may include a debt-swap provision, within a limitusually set at 20 percent of commercial claims. Paris Club creditors on abilateral basis conduct debt-swap operations.

Commercial Bank Debt Relief

Multilateral debt relief is much more difficult to organize for commercialbanks than for official creditors.While a national export credit insurer cannegotiate on behalf of any individual creditor, there is no way to consolidatenational commercial bank claims. Rather, each creditor bank must approvethe resulting agreement and, for loan syndication, the number is often in thehundreds.

The pattern of negotiations was established in a 1970 agreement between thePhilippines and its commercial bank creditors. Creditor banks form a com-mittee (sometimes known as the London Club) of about a dozen people whorepresent the major creditor banks. The composition of the committee—which can be completely different from case to case—takes into accountthe nationality of the banks in the consortium so that the negotiations canmake provision for the different tax and regulatory systems that affectbanks of different countries. The committee negotiates an “agreement inprinciple” with debtor country representatives. After all creditor banksapprove this agreement, it is signed. It takes effect when certain require-ments are met, such as payment of fees and of arrears. As with the resched-uling of debts to official creditors, banks provide debt relief normally in thecontext of a debtor country’s adjustment program supported by an IMFarrangement. Unlike with Paris Club creditors, there is no “cutoff” date.

Commercial bank agreements restructure principal; consolidation of origi-nal interest costs is rare. Like Paris Club agreements, consolidation ofshort-term debt is also unusual (but when a major portion of arrears hasarisen from short-term debt, there is often no option but to restructure).Among the initiatives for reducing the commercial debt burden was theBrady Plan (1989).This market-based debt-restructuring initiative provideda menu of options to the creditor banks. These included buybacks—thedebtor government repurchases debt at a discount that is agreed upon withthe creditor banks; an exchange of debt into bonds at a discount but offer-ing a market rate of interest (discount bonds); and an exchange at par intobonds that yielded a below-market interest rate (interest-reduction bonds).The discount bonds and the interest-reduction bonds were fully collateral-ized by zero-coupon U.S. government securities for principal and partiallycollateralized for interest payments.

Box 8.2. Paris Club and Commercial Bank Debt Relief


tors are offered a choice between different options,one of them being a partial debt reduction, the otherone being a rescheduling at a reduced interest rate(debt reduction in present value terms). Some credi-tors may forgive part of the claims and reschedulethe outstanding part at the appropriate market rate(“debt-reduction” option), whereas other creditorsreschedule the whole claim at a lower interest rate(“debt-service-reduction” option), resulting in a debtreduction in present value equivalent to the onegranted by creditors that chose the “debt-reduction”option. Table 8.2 shows the variety and evolution ofParis Club debt-rescheduling terms.

8.20 Because of the complexities involved, and thedifferent interest rates that may be employed, inter-national statistical standards have not developed tothe point where there is general agreement on howto measure and make comparable the differentmethods of providing debt reduction in present-value terms.

8.21 Given the above, the Guide provides no recom-mended guidance on measuring and presenting debtreduction in present-value terms. Nonetheless,economies that undergo debt rescheduling andrefinancing are encouraged to disseminate (1) thetotal nominal amounts involved; (2) the amount ofdebt reduction in present-value terms they haveachieved—the difference between the present values(using a common interest rate) of the rescheduled/refinanced debt-service payments before and afterrescheduling/refinancing (present-value method);7

and (3) provide detailed information on how theamount of the present-value reduction was calcu-lated, including the interest rate(s) used.

8.22 Similarly, no guidance is provided for measur-ing debt relief in terms of an increase in durationbecause of the difficulty in measuring such relief andpresenting it in a manner that is comparable withother forms of debt reorganization.

Debt Forgiveness

8.23 Debt forgiveness is defined as the voluntarycancellation of all or part of a debt obligation withina contractual arrangement between a creditor in one

economy and a debtor in another economy.8 Morespecifically, the contractual arrangement cancels orforgives all or part of the principal amount outstand-ing, including interest arrears (interest that fell duein the past) and any other interest costs that haveaccrued. Debt forgiveness does not arise from thecancellation of future interest payments that have notyet fallen due and have not yet accrued.

8.24 If the debt reorganization effectively changesthe contractual rate of interest—such as by reducingfuture interest payments but maintaining future prin-cipal payments, or vice versa—it is classified as debtrescheduling. However, in the specific instance ofzero-coupon securities, a reduction in the principalamount to be paid at redemption to an amount thatstill exceeds the principal amount outstanding at thetime the arrangement becomes effective could beclassified as either an effective change in the con-tractual rate of interest, or as a reduction in principalwith the contractual rate unchanged. Unless thebilateral agreement explicitly acknowledges achange in the contractual rate of interest, such areduction in the principal payment to be made atmaturity should be recorded as debt forgiveness.


External debt position and debt reduction

8.25 Debt forgiveness reduces the gross externaldebt position by the value of the outstanding princi-pal that has been forgiven. Any reduction in princi-pal is recorded under the appropriate debt instrumentwhen it is received—that is, when both the debtorand creditor record the forgiveness in their books.Where possible, debt forgiveness in nominal termsshould be separately identified and recorded underdebt reduction in Table 8.1.

8.26 If forgiveness relates to payments on debtobligations that are past due and are yet to be paid—that is, arrears of interest and principal—a reductionin the gross external debt position under arrears isrecorded. Forgiveness of interest costs that have

77

7The payment schedule for both the original and rescheduleddebt could also be provided as memorandum information.

8This includes forgiveness of some or all of the principalamount of a credit-linked note due to an event affecting the entityon which the embedded credit derivative was written, and forgive-ness of principal that arises when a type of event contractuallyspecified in the debt contract occurs—for example, forgiveness inthe event of a type of catastrophe.


78

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here

fore

var

ies.

See

foot

note

8.


accrued during the period or amounts disbursed inthe current recording period has no impact on thegross external debt position at the end of the periodbecause any increase in the outstanding value of thedebt instrument is matched by the debt forgiveness.However, any such forgiveness should be reportedunder debt reduction in Table 8.1.

8.27 A special case of debt forgiveness is where thecreditor provides a grant to the debtor that is used topay the debt-service payments as they fall due. Insuch instances, the gross external debt position isonly affected when debt-service payments aremade—that is, the same as for all debt instrumentsbeing serviced. Nonetheless, such assistance isrecorded in the table as debt reduction when thedebt-service payments are made.

Flow data

8.28 In flow terms, debt forgiveness is recorded inthe balance of payments as a capital transfer, and inthe DAC and DRS systems as a debt-forgivenessgrant. The counterpart transaction in the balance ofpayments and DAC is a repayment of the principalowed. When debt forgiveness is in the form of agrant by the creditor to the debtor (as in the previousparagraph), repayment of the principal owed is gen-erally similarly recorded in the DRS.

Debt Conversion and Debt Prepayments

8.29 External debt conversion is an exchange ofdebt—typically at a discount—for a non-externaldebt claim, such as equity, or for counterpart funds,such as can be used to finance a particular project orpolicy. Debt-for-equity, debt-for-nature, and debt-for-development swaps are all examples of debt con-version. A debt buyback is the repurchase, usually ata discount, by a debtor economy (or on its behalf) ofall or part of its external debt. It may be undertakenon the secondary market or through negotiationswith creditors.

Debt conversion

8.30 Rather than exchanging debt for debt, coun-tries might enter into a debt conversion process—thelegal and financial transformation of an economy’sliability. Typically, debt conversions involve anexchange of external debt in foreign currency for anondebt obligation in domestic currency, at a dis-count. In essence, external debt is prepaid, and the

nature of the claim on the economy is changed. Anexample is a foreign currency debt-for-equity swap,which results in debt claims on the debtor economybeing reduced, and nonresident investments inequity investments increased. Debt-for-equity swapsoften involve a third party, usually a nongovernmen-tal organization or a corporation, which buys theclaims from the creditor and receives shares in a cor-poration or local currency (to be used for equityinvestment) from the debtor. Other types of debtswaps such as external debt obligations for exports(debt for exports), or external debt obligations forcounterpart assets that are provided by the debtor tothe creditor for a specified purpose such as wildlifeprotection, health, education, and environmentalconservation (debt for sustainable development), arealso debt conversions.

Prepayments and buybacks

8.31 Prepayments consist of a repurchase, or earlypayment, of debt at conditions that are agreedbetween the debtor and the creditor; that is, debt isextinguished in return for a cash payment agreedbetween the debtor and the creditor. When a dis-count is involved relative to the nominal value of thedebt, prepayments are referred to as buybacks. Also,debtors may enter the secondary market and repur-chase their own debt because market conditions aresuch that it is advantageous financially to do so.


External debt position

8.32 For both debt conversions and debt prepay-ments, a reduction in the gross external debt positionis recorded to the value of the debt instruments thatare extinguished, irrespective of the value of thecounterpart claim (or assets) being provided. Thisreduction in gross external debt position should berecorded at the time when the debt instrument isextinguished; more accurately, the gross externaldebt position no longer includes debt that has ceasedto exist.

Flow data

8.33 In the transaction data in the balance of pay-ments, the reduction in the outstanding debt instru-ment is recorded at the value of the counterpartclaim (or assets). Any difference in value is recordedas a valuation change in position data. An exception

79


arises when nonmarketable debt owed to officialcreditors is involved, and the counterpart claim(assets) has a lower value than the debt, in whichinstance both the debt instrument and the counter-part claim (or assets) are separately valued, and anydifference in value is recorded as debt forgiveness inthe balance of payments. The DAC system employsa similar approach, except that all differences invalue are classified as transactions and not as valua-tion changes provided that they are the result ofbilateral negotiation and there is a developmentmotive for the operation. The DRS records both thereduction in the nominal value of the debt instrumentand the value at which the debt was repurchased,allowing the discount to be measured.

Debt reduction

8.34 Where official debt is exchanged for equity orcounterpart funds to be used for development pur-poses, the difference between the value of the debtbeing extinguished and the counterpart claim orfunds provided is classified as debt reduction.9 Thisincludes cases where the buyback of debt is by athird party, such as a nongovernmental organizationor a corporation, which then sells the debt back tothe debtor at a discount, under a deal that is arrangedunder a bilateral arrangement between debtor andgovernment creditor.

8.35 In other cases, replacing a debt instrument withanother type of claim may only be the recognition ofreality. In other words, and particularly for mar-ketable instruments, the price at which the debtor iswilling to repurchase the debt may be greater than theprice at which the debt previously traded. So, if thecreditor purchased the security at the lower marketprice, the creditor might be making a holding gain.

8.36 The Guide recommends that in measuring andpresenting data on debt reduction from such transac-tions, a distinction is made between (1) collaborativearrangements arising from discussions between thecreditor(s) and debtor; and (2) buybacks that areinitiated by the debtor through purchases in the sec-ondary market. When buybacks arise from collabo-rative arrangements, any difference between thevalue of the counterpart claims (or assets) providedby the debtor and the nominal amount bought back

should be recorded as debt reduction in Table 8.1.Debt reduction arising from buybacks in the sec-ondary market initiated by the debtor should not berecorded as debt reduction in the table.

8.37 For both public and private sector transactions,if external debt and the counterpart claims (or assets)are denominated in different currencies, any debtreduction should be determined using the marketexchange rate between the two currencies prevailingon the transaction date (the midpoint between thebuying and selling spot rates).

Presentation of Data on Debt Reduction

8.38 In Table 8.1, as far as possible, economiesshould present information on debt reduction accord-ing to the sector of the debtor (public-sector-basedapproach), and by type of creditor. Additionally, thetable captures information on debt reduction arisingfrom debt reorganization of bonds and notes.

8.39 Also, data could be presented by type of debtreorganization under which the debt reduction wasgiven: (1) debt rescheduling; (2) debt forgiveness;and (3) debt conversion and debt prepayments.Where a debt-relief package includes elements ofmore than one type, separately identifying each typeis encouraged. For example, if a part of the debt is tobe repaid for cash, a prepayment should be recorded;if part of the debt is cancelled, debt forgivenessshould be recorded; if the repayment terms of part ofthe debt are changed, a debt rescheduling should berecorded. But if it is not possible to provide separateidentification, all debt reduction should be includedalong with the dominant type of reorganization inthe package.

8.40 In Table 8.1, debt reduction should be recordedat the time when the external debt is reduced. If alldebt reduction occurs at one time, debt reductionshould be recorded at that time rather than when thedebt-service payments would have fallen due. How-ever, it is recognized that national practices may dif-fer in this regard, and if the latter approach isfollowed, it should be recorded in a note to the pre-sentation of the debt-reduction data.

8.41 Debt reorganization might also be phased overa period of time, such as under multiphase contracts,

80

9In the DAC system it is classified as debt forgiveness, and inthe DRS it is classified as debt reduction.


performance-related contracts, and when debt reduc-tion is dependent on contingent events. In such cir-cumstances, debt reduction is recorded when thechange in debt-service payment schedule of thedebtor takes effect—for instance, if debt reductionoccurs when the debt-service payments fall due, thenthis is the time when the debt reduction is recorded.

8.42 As noted above, the exchange rate used to cal-culate debt reduction should be the market rate onthe transaction date (the midpoint between the buy-ing and selling spot rates).

8.43 It is recommended that methodological notesaccompany the presentation of debt-reduction statis-tics. Inter alia, these notes should cover each type ofdebt reorganization.

8.44 In Table 8.1, debt reduction is measured onlyin nominal value terms. This is because the analyti-cal usefulness of presenting debt-reduction data inmarket-value terms is uncertain. For instance, whenan economy faces payment difficulties (which is sys-tematically the case when the country receives debtreduction), its debt is generally valued at a deep dis-count, since the market is still uncertain about theprospects of payment. In such circumstances, debtreorganization can result in the new debt having ahigher value than the old debt. Similarly, in mostcases (and in all multilateral agreements, such asthose of the Paris Club or the London Club—seeBox 8.1—or the HIPC Initiative), debt relief aims torestore the creditworthiness of the debtor country,thus increasing the possibility of repayment of exist-ing debts and hence raising their market value.While there may be analytical interest in measuringthe effect of debt reorganization on the value of out-standing debt—that is, the amount by which themarket value rises—changes in the nominal amountoutstanding rather than the market value is the pre-ferred approach to measuring debt reduction arisingfrom debt reorganization.

Other Transactions Relating to Debt Reorganization

Debt Assumption

8.45 Debt assumption is a trilateral agreementbetween a creditor, a former debtor, and a newdebtor under which the new debtor assumes the for-

mer debtor’s outstanding liability to the creditor andis liable for repayment of the debt.

8.46 Debt assumption is recorded—in the transac-tion and position data—when the creditor invokesthe contract conditions permitting a guarantee to becalled. If debt assumption arises under other circum-stances, it is recorded when the liability is actuallyremoved from the debtor’s balance sheet, and thecorresponding entries made in the new debtor’s bal-ance sheet, and not necessarily the time when agree-ment was reached to make the debt assumption. Therecording by the entity assuming the debt has to bemade in one time period: the successive dates ofrepayment previously foreseen in the context of theformer debt are not relevant.

8.47 After it has been assumed, the debt, which wasoriginally a liability of the former debtor, becomes aliability of the new debtor. The debt may carry thesame terms as the original debt, or new terms maycome into force because the guarantee was invoked.If the original and new debtors are from differentinstitutional sectors, the external debt of the institu-tional sector of the original debtor is reduced, andthe external debt of the institutional sector of thenew debtor increased. The amount to be recorded bythe new debtor is the full amount of the outstandingdebt that is assumed. No debt reduction is recorded,unless there is an agreement with the creditor toreduce the external debt.

8.48 An example of debt assumption could be agovernment taking over the debts of a corporation.If, in such an example, the government acquires afinancial claim on the corporation as a consequenceof the debt assumption, the corporation will need torecord a new debt liability, which is classified asexternal debt only if the government and corporationare residents of different economies. Every transferof liabilities between a quasi-corporation and itsowner is reflected in the value of its equity stake.

8.49 Rather than assume the debt, a governmentmay decide to repay a specific borrowing or make aspecific payment on behalf of another institutionalunit, without the guarantee being called or the debtbeing taken over. In this case, the debt stays recordedsolely in the balance sheet of the other institutionalunit, the only legal debtor. If a new liability is cre-ated in the form of a government claim on thedebtor, this is classified as external debt only if the

81


government and other institutional unit are residentsof different economies (and the debtor is not a quasi-corporation of the government).

Borrowing for Balance of Payments Support

8.50 Borrowing for balance of payments supportrefers to borrowing (including bond issues) by thegovernment or central bank (or by other sectors onbehalf of the authorities) to meet balance of pay-ments needs.10 In the external debt statement, unlikethe analytical presentation of the balance of pay-

ments, no special “below-the-line” recording ofthese borrowings or their advance repayment isrequired.

New Money Facilities

8.51 Some debt-reorganization packages featurenew money facilities (new loan facilities that may beused for the payment of existing debt-service obliga-tions). In the gross external debt position, outstand-ing drawings by the debtor on new money facilitiesare usually recorded under long-term loans. If theexisting debt liabilities remain outstanding, theyshould continue to be reported in the gross externaldebt position, until they are repaid. New moneyfacilities are not to be recorded as debt reduction.

82

10A balance of payments need is defined more fully in para-graphs 451 through 453 of BPM5.

Introduction

9.1 The financial crises of the 1990s highlighted theshortcomings of conventional accounting systems incapturing the full extent of financial exposures aris-ing from traditional “off-balance-sheet” obligations,such as contingent liabilities, and from financialderivatives contracts. The discovery of the magni-tude and role of these obligations in these crisesreinforced the need to monitor them. This chapterfocuses on contingent liabilities.1 Guidelines formonitoring financial derivatives positions were pro-vided earlier in the Guide.

9.2 Contingent liabilities are complex arrange-ments, and no single measurement approach can fitall situations; rather, comprehensive standards formeasuring these liabilities are still evolving. Indeed,experience has shown that contingent liabilities arenot always fully covered in accounting systems.Nonetheless, to encourage the monitoring and mea-surement of contingent liabilities, with a view toenhancing transparency, this chapter provides somemeasurement approaches, after first defining contin-gent liabilities and then providing some reasons fortheir measurement. More specifically, also providedis a table for the dissemination of external debt dataon an “ultimate risk” basis; that is, adjusting resi-dence-based external debt data for certain cross-border risk transfers.

Definition

9.3 Contingent liabilities are obligations that arisefrom a particular, discrete event(s) that may or maynot occur. They can be explicit or implicit. A keyaspect of such liabilities, which distinguishes themfrom current financial liabilities (and external debt),

is that one or more conditions or events must be ful-filled before a financial transaction takes place.

Explicit Contingent Liabilities

9.4 Explicit contingent liabilities are those definedby the 1993 SNA as contractual financial arrange-ments that give rise to conditional requirements—that is, the requirements become effective if one ormore stipulated conditions arise—to make paymentsof economic value.2 In other words, explicit contin-gent liabilities arise from a legal or contractualarrangement. The contingent liability may arise froman existing debt—such as an institution guaranteeingpayment to a third party; or arise from an obligationto provide funds—such as a line of credit, whichonce advanced creates a claim; or arise from a com-mitment to compensate another party for losses—such as exchange rate guarantees. Some of the morecommon explicit contingent liabilities are set outbelow.

Loan and other payment guarantees

9.5 Loan and other payment guarantees are commit-ments by one party to bear the risk of nonpaymentby another party. Guarantors are only required tomake a payment if the debtor defaults. Some of thecommon types of risks that are assumed by guaran-tors are commercial risk or financial performancerisk of the borrower; market risk, particularly thatarising from the possibility of adverse movements inmarket variables such as exchange rates and interestrates; political risk, including risk of currency incon-vertibility and nontransferability of payments (alsocalled transfer risk), expropriation, and political vio-lence; and regulatory or policy risk, where imple-mentation of certain laws and regulations is critical

9. Contingent Liabilities

83

1This chapter draws on work at the World Bank.2The European System of Accounts: ESA 1995 (Eurostat, 1996)

defines contingent liabilities in a similar way.


to the financial performance of the debtor.3 Loan andother payment guarantees usually increase the initialdebtor’s access to international credit markets and/orimprove the maturity structure of borrowing.

Credit guarantees and similarcontingent liabilities

9.6 Lines of credit and loan commitments provide aguarantee that undrawn funds will be available in thefuture, but no financial liability/asset exists untilsuch funds are actually provided. Undrawn lines ofcredit and undisbursed loan commitments arecontingent liabilities of the issuing institutions—namely, banks. Letters of credit are promises tomake payment upon the presentation of prespecifieddocuments.

Contingent “credit availability” guarantees orcontingent credit facilities

9.7 Underwritten note issuance facilities (NIFs) pro-vide a guarantee that a borrower will be able to issueshort-term notes and that the underwriting institu-tion(s) will take up any unsold portion of the notes.Only when funds are advanced by the underwritinginstitution(s) will an actual liability/asset be created.The unutilized portion is a contingent liability.

9.8 Other note guarantee facilities providing contin-gent credit or backup purchase facilities are revolv-ing underwriting facilities (RUFs), multiple optionsfacilities (MOFs), and global note facilities (GNFs).Bank and nonbank financial institutions providebackup purchase facilities. Again, the unutilizedamounts of these facilities are contingent liabilities.

Implicit Contingent Liabilities

9.9 Implicit contingent liabilities do not arise from alegal or contractual source but are recognized after acondition or event is realized. For example, ensuringsystemic solvency of the banking sector might beviewed as an implicit contingent liability of the cen-tral bank.4 Likewise, covering the obligations of sub-

national (state and local) governments or the centralbank in the event of default might be viewed as animplicit contingent liability of the central govern-ment. Implicit contingencies may be recognizedwhen the cost of not assuming them is believed to beunacceptably high.5 Table 9.1 provides a practicalway of classifying the types of potential liabilities ofthe central government.

9.10 Although implicit contingent liabilities areimportant in macroeconomic assessment, fiscalburden, and policy analysis, implicit contingent lia-bilities are even more difficult to measure thanexplicit contingent liabilities. Also, until measure-ment techniques are developed, there is a danger ofcreating moral hazard risks in disseminating infor-mation on implicit contingent liabilities of the typeset out in Table 9.1. Thus, the rest of this chapterfocuses only on the measurement of explicit contin-gent liabilities.

Why Measure Contingent Liabilities?

9.11 By conferring certain rights or obligations thatmay be exercised in the future, contingent liabilitiescan have a financial and economic impact on theeconomic entities involved. When these liabilitiesrelate to cross-border activity, and they are not cap-tured in conventional accounting systems, it can bedifficult to accurately assess the financial position ofan economy—and the various institutional sectorswithin the economy—vis-à-vis nonresidents.

9.12 Analysis of the macroeconomic vulnerabilityof an economy to external shocks requires informa-tion on both external debt obligations and contingentliabilities. Experience has shown that contingent lia-bilities are not always fully covered in accountingsystems. Moreover, there is an increasing realiza-tion, when assessing macroeconomic conditions,that contingent liabilities of the government and thecentral bank can be significant. For example, fiscalcontingent claims can clearly have an impact on

84

3Regulatory or policy-based guarantees are especially relevantin infrastructure financing. For more details and country-specificexamples, see Irwin and others (1997).

4A case in point is Indonesia, where the government’s domesticdebt increased from practically nothing, in the period before thecrisis (mid-1997), to 500 trillion Indonesian rupiah by the end of

1999, mostly due to the issuance of bonds to recapitalize the bank-ing system. The increase in the government’s stock of domesticdebt was accompanied by a rise in its assets, which were receivedin exchange for issuing bank-restructuring bonds. See also Blejerand Shumacher (2000).

5See Guidelines for Public Debt Management (IMF and WorldBank, 2001).

9 • Contingent Liabilities

budget deficits and financing needs, with implica-tions for economic policy. Recognizing the implica-tions of contingent liabilities for policy and analysis,the 1993 SNA (paragraph 11.26) states:

Collectively, such contingencies may be important forfinancial programming, policy, and analysis. Therefore,where contingent positions are important for policy andanalysis, it is recommended that supplementary infor-mation be collected and presented. . . .

Measuring Contingent Liabilities

9.13 Contingent liabilities give rise to obligationsthat may be realized in the future, but because oftheir complexity and variety, establishing a singlemethod for measuring them may not be appropriate.Several alternative ways of measuring contingenciesare outlined below. The relevance of each willdepend on the type of contingency being measured,and the availability of data.

9.14 A first step in accounting for contingent liabili-ties is for economic entities to record all such contin-gent liabilities as they are created, such as with anaccrual-based reporting system. But how shouldsuch liabilities be valued? One approach is to recordthese liabilities at full face value or maximum poten-tial loss. Thus, a guarantee covering the full amountof a loan outstanding would be recorded at the fullnominal value of the underlying loan. Some govern-ments have adopted this approach. For example, theNew Zealand government routinely publishes themaximum potential loss to the government of quan-tifiable and nonquantifiable contingent liabilities,6

including guarantees and indemnities, uncalled capi-tal to international institutions, and potential settle-ments related to legal proceedings and disputes.

85

Table 9.1. Fiscal Risk Matrix with Illustrative Examples

Direct ContingentLiabilities1 (obligation in any event) (obligation if a particular event occurs)

ExplicitGovernment liability • External and domestic sovereign • Central government guarantees for nonsovereign borrowing as recognized by a borrowing (loans contracted and and obligations issued to subnational governments and public law or contract securities issued by central government) and private sector entities (development banks)

• Budgetary expenditures • Umbrella central government guarantees for various types of • Budgetary expenditures legally binding loans (mortgage loans, student loans, agriculture loans, small

in the long term (civil servants’ salaries business loans)and pensions) • Trade and exchange rate guarantees issued by the central

government • Guarantees on borrowing by a foreign sovereign government• Central government guarantees on private investments• Central government insurance schemes (deposit insurance,

income from private pension funds, crop insurance, floodinsurance, war-risk insurance)

ImplicitObligations that may be • Future public pensions (as opposed to • Default of subnational government, and public entity on recognized when the civil service pensions) nonguaranteed debt and other obligationscost of not assuming • Social security schemes • Liability cleanup in entities under privatizationthem could be • Future health care financing • Banking failure (support beyond state insurance)unacceptably high • Future recurrent cost of public • Investment failure of a nonguaranteed pension fund,

investments employment fund, or social security fund (social protection of small investors)

• Default of central bank on its obligations (foreign exchange contracts, currency defense, balance of payment stability)

• Bailouts following a reversal in private capital flows• Environmental recovery, disaster relief, etc.

Source: Adapted from Polackova Brixi (1999).1The liabilities listed refer to the fiscal authorities, not the central bank.

6New Zealand Treasury, Budget Economic and Fiscal Update(Wellington, annual). As the name suggests, nonquantifiable con-tingent liabilities cannot be measured and arise from either institu-tional guarantees that have been provided through legislation orfrom agreements and arrangements with organizations.


9.15 Likewise, the Australian government identifiesquantifiable and nonquantifiable contingencies.7 Inaddition, it identifies “remote” contingent losses(mostly guarantees), including nonquantifiable“remote” contingencies. The Indian government reg-ularly reports the direct guarantees provided by thecentral government on external borrowings of publicsector enterprises, development financial institu-tions, and nonfinancial private sector corporations.8

The guarantees are presented by sector and at nomi-nal value.

9.16 The maximum potential loss method has anobvious limitation: there is no information on thelikelihood of the contingency occurring. Especiallyfor loan and other payment guarantees, the maximumpotential loss is likely to exceed the economic valueof the contingent liability because there is no cer-tainty that a default will occur (that is, the expectedprobability of default is less than unity). Theoreti-cally, a better approach is to measure both the maxi-mum possible loss and the expected loss, butcalculating the expected loss requires estimating thelikelihood of losses, which can be difficult.

9.17 Several alternative methods of valuing theexpected loss exist. These range from relatively sim-ple techniques requiring the use of historical data, tocomplex options-pricing techniques. The actualapproach adopted will depend on the availability ofinformation and the type of contingency. If theexpected loss can be calculated, an additionalapproach is to value this loss(es) in present-valueterms—expected present value. In other words, sinceany payment will be in the future and not immediate,the expected future payment streams could be dis-counted using a market rate of interest faced by theguarantor; that is, the present value. As with allpresent-value calculations, the appropriate interestrate to use is crucial; a common practice with gov-ernment contingent liabilities is to use a risk-freerate like the treasury rate. Under this present-valueapproach, when a guarantee is issued the presentvalue of the expected cost of the guarantee could berecorded as an outlay or expense (in the operatingaccount) in the current year and included in the posi-tion data, such as a balance sheet.

9.18 Exact valuation requires detailed market infor-mation, but such information is often unavailable.This is particularly true in situations of market fail-ure or incomplete markets—a financial marketplaceis said to be complete when a market exists with anequilibrium price for every asset in every possiblestate of the world. Other means are then required tovalue a contingency. One possibility is to use histori-cal data on similar types of contingent operations.For example, if the market price of a loan is notobservable, but historical data on a large number ofloan guarantees and defaults associated with thoseguarantees are available, then the probability distrib-ution of the default occurrences can be used to esti-mate the expected cost of a guarantee on the loan.This procedure is similar to that employed by theinsurance industry to calculate insurance premiums.Rating information on like entities is often used toimpute default value on loan guarantees as well. TheU.S. Export-Import Bank employs this method forvaluing loan guarantees that it extends.

9.19 Bank regulatory guidelines established by theBasel Committee on Banking Supervision also drawon historical data to measure risks in banks’ off-balance-sheet activities. For traditional off-balance-sheet items like credit contingent liabilities, theguidelines provide “credit conversion factors,”which when multiplied with the notional principalamount provide an estimate of the expected “pay-out” from the contingent liability. The conversionfactors are derived from the estimated size and likelyoccurrence of the credit exposure, as well as the rela-tive degree of credit risk. Thus, stand-by letters ofcredit have a 100 percent conversion factor; theunused portion of commitments with an originalmaturity of over one year is 50 percent; and RUFs,NIFs, and similar arrangements are assigned a 50percent conversion factor as well.

9.20 Market-value measures use market informationto value a contingency. This methodology can beapplied across a wide range of contingent liabilities,but it is particularly useful for valuing loan and otherpayment guarantees, on which the following discus-sion focuses. This methodology assumes that com-parable instruments with and without guarantees areobservable in the market and that the market hasfully assessed the risk covered by the guarantee.Under this method, the value of a guarantee on afinancial instrument is derived as the differencebetween the price of the instrument without a guar-

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7Aggregate Financial Statement (Australia, annual).8See the Ministry of Finance’s annual publication on external

debt, India’s External Debt: A Status Report.


antee and the price inclusive of the guarantee. In thecontext of a loan guarantee, the nominal value of theguarantee would be the difference between the con-tractual interest rate (ip) on the unguaranteed loanand the contractual interest rate (ig) on the guaran-teed loan times the nominal value of the loan (L):(ip – ig)L. The market value of the guarantee woulduse market, not contractual, rates.9

9.21 Yet another approach to valuing contingent lia-bilities applies option-pricing techniques fromfinance theory. With this method, a guarantee can beviewed as an option: a loan guarantee is essentially aput option written on the underlying assets backingthe loan.10 In a loan guarantee, the guarantor sells aput option to a lender. The lender, who is the pur-chaser of the put option, has the right to “put” (sell)the loan to the guarantor. For example, consider aguarantee on a loan with a nominal value of F and anunderlying value of V. If V – F < 0, then the putoption is exercised and the lender receives theexercise price of F. The value of the put option atexercise is F – V. When V > F, the option is not exer-cised. The value of the guarantee is equivalent to thevalue of the put option. If the value of the creditinstrument on which a guarantee is issued is belowthe value at which it can be sold to the guarantor,then the guarantee will be called.

9.22 Although the option-pricing approach is rela-tively new and sophisticated, it is being applied inthe pricing of guarantees on infrastructure financingand interest and principal payment guarantees.11 Butstandard option pricing has its limitations as well.This is because the standard option-pricing modelassumes an exogenous stochastic process for under-lying asset prices. However, it can be argued that thevery presence of a guarantee (especially a govern-ment guarantee) can affect asset prices.12

Recommended Measures

9.23 The Guide encourages the measurement andmonitoring of contingent liabilities, especially ofguarantees, and has outlined some measurement tech-

niques. However, it is recognized that comprehensivestandards for measuring contingent liabilities are stillevolving. Consequently, only the recording of a nar-row, albeit important, range of contingent liabilities isspecified ahead: guarantees of domestic private sectorexternal debt by the public sector, and the cross-border provision of guarantees. In both instances, it isrecommended that the contingency should be valuedin terms of the maximum exposure loss.

Public sector guarantees

9.24 In Chapter 5 the dissemination of data on pub-licly guaranteed private sector debt—that is, thevalue of private sector debt that is owed to nonresi-dents, and is guaranteed by the public sector—through a contractual arrangement is discussed.

Ultimate risk

9.25 Set out in Table 9.2 is a format that pre-sents external debt according to an “ultimate” riskconcept—augmenting residence-based data to takeaccount of the extent to which external debt is guar-anteed by residents for nonresidents. Countries couldpotentially have debt liabilities to nonresidents inexcess of those recorded as external debt on a resi-dence basis if their residents provide guarantees tononresidents that might be called. Also, branches ofdomestic institutions located abroad could create adrain on the domestic economy if they ran into dif-ficulties and their own head offices needed to providefunds.

9.26 In Table 9.2 residence-based external debt data(column 1) is increased by the amount of debt ofnonresidents, not owned by residents, that is guaran-teed by a resident entity (inward risk transfer, col-umn 2). Column 3 is the adjusted external debtexposure of the economy. The table is set out in thismanner so that external debt on an ultimate-riskbasis can be related back to the gross external debtposition measured on a residence basis.

9.27 The intention of column 2 is to measure anyadditional external debt risk exposures of residentsarising from contingent liabilities. The definition ofcontingent liabilities adopted is deliberately narrow.To be included in this definition of contingent liabil-ities, the debt must exist, so lines of credit and simi-lar potential obligations are not included. The dataon the inward transfer of risk covers only the debt of

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9For a further discussion of market-value methods see Towe(1990) and Mody and Patro (1996).

10Robert C. Merton (1977) was the first to show this.11See Irwin and others (1997) and Borensztein and Pennacchi

(1990).12See Sundaresan (2002) for a detailed exposition on this issue.


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Table 9.2. Gross External Debt Position: Ultimate Risk Basis

End-Period______________________________________________________________________Memorandum item:

Gross Inward risk External Debt Outward risk External Debt transfer (+) (ultimate-risk basis) transfer

(1) (2) (3) (4)

General Government Short-termMoney market instrumentsLoansTrade creditsOther debt liabilities1

ArrearsOther




ArrearsOther





ArrearsOther





ArrearsOther




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Other Sectors (continued)Nonbank financial corporations Short-termMoney market instrumentsLoansCurrency and deposits2


ArrearsOther



Nonfinancial corporations Short-termMoney market instrumentsLoansTrade creditsOther debt liabilities1

ArrearsOther



Short-termMoney market instrumentsLoansTrade creditsOther debt liabilities1

ArrearsOther


Direct Investment: Intercompany LendingDebt liabilities to affiliated enterprises

ArrearsOther


Gross External Debt

1Other debt liabilities are other liabilities in the IIP statement.2It is recommended that all currency and deposits be included in the short-term category unless detailed information is available to make the short-



End-Period______________________________________________________________________Memorandum item:

Gross Inward risk External Debt Outward risk External Debt transfer (+) (ultimate-risk basis) transfer

(1) (2) (3) (4)


a nonresident to a nonresident on which, and as partof the agreement between debtor and creditor, pay-ments are guaranteed to the creditor(s) by a residententity under a legally binding contract—the guaran-tor will most commonly be an entity that is related tothe debtor (for example, the parent of the debtorentity), and debt of a legally dependent nonresidentbranch of a resident entity that is owed to a nonresi-dent. If debt is partially guaranteed, such as if princi-pal payments or interest payments alone areguaranteed, then only the present value of theamount guaranteed should be included in columns 2or 4. To avoid double counting the same externaldebt risk exposure, the following should be excludedfrom column 2: all debt liabilities of nonresidentbranches to other nonresident branches of the sameparent entity; and any amounts arising from externaldebt borrowings of nonresidents that were guaran-teed by a resident entity and on-lent by the nonresi-dent borrower to that same resident entity or any ofits branches. This guidance is not intended toexclude debt exposures of residents from the ulti-mate risk concept, as defined above, but to ensurethat they are counted only once.

9.28 External debt is the liability of the debtor econ-omy. However, as a memorandum item, the amount

of external debt of the economy that is guaranteedby nonresidents is also presented (outward risktransfer, column 4). The data on the transfer of riskoutward covers only external debt on which, and aspart of the agreement between debtor and creditor,payments are guaranteed (or partially guaranteed) tothe creditor(s) by a nonresident under a legally bind-ing contract—the guarantor will most commonly bean entity that is related to the debtor (for example,the parent of the debtor entity)—and external debt ofa resident entity that is a legally dependent branch ofa nonresident entity.

9.29 No reallocation of risk is made because of theprovision of collateral by the debtor, or because adebt instrument is “backed” by a pool of instru-ments or streams of revenue originating from out-side of the economy. Because the intention of Table9.2 is to monitor the potential risk transfer from thedebtor side, no reallocation of risk is made if therisk transfer is initiated from the creditor side,without any involvement of the debtor—for exam-ple, the creditor has paid a premium to a guarantor,such as an export credit agency unrelated to thedebtor, to insure against payment default or has pur-chased a credit derivative that transfers credit riskexposure.

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Documents

External Debt Statistics: Guide for Compilers and Users, 2003 -- Part