What is the extent of contingent liabilities and non- performing loans in the EU Member States?

What is the extent of contingent liabilities and non- performing loans in the EU Member States?

What is the extent of contingent liabilities and non- performing loans in the EU Member States?

The FINANCIAL -- Eurostat, the statistical office of the European Union, publishes today information on contingent liabilities and non-performing loans of government for the year 2015.

These data have been provided by the EU Member States in the context of the reinforcement of European economic and fiscal governance (the "six-pack").

The contingent liabilities published in this release include data on government guarantees, liabilities related to public-private partnerships recorded off-balance sheet of government and liabilities of government controlled entities classified outside general government (public corporations). The liabilities are contingent in the sense that they are only potential and can materialise as actual government liabilities only if certain specific conditions prevail. Non-performing loans (government assets) could imply a loss for government if these loans were not repaid. Thus, this data collection represents an important step towards further transparency of public finances in the European Union by providing a more comprehensive picture of potential impacts on Member States' financial positions.

Data are country specific and closely linked to the economic, financial and legal structure of the Member State. Significant progress has been achieved in this data collection in terms of coverage and completeness of the data. Nevertheless data coverage is still not fully exhaustive for some Member States, as indicated in the country footnotes. In particular, comparability is limited for the liabilities of public corporations as not all Member States have included the liabilities of financial institutions and/or the liabilities of units controlled by local government.

Other aspects should be taken into account when analysing the figures for the liabilities of public corporations. Firstly, data for liabilities of public corporations are not consolidated, which means that part of the liabilities of these units could be towards entities in the same company group and these amounts cannot be identified from the data reported. Secondly, the data collection only refers to liabilities without balancing them with the assets. This aspect is very important in the case of financial institutions, which normally have both significant amounts of assets and debt liabilities. Furthermore, some Member States have more entities controlled by general government and involved in financial services than other, and therefore they report higher liabilities than those where such entities do not exist at all, or are very few. Additionally, for some of the Member States, a large part of the liabilities reported by financial institutions concern deposits held by government controlled banks.

There might be differences between the data published last year and the data released today. Revisions and/or changes between the two reference years are mainly due to significant improvements in data coverage, updated data sources or sector reclassifications.

Guarantees are arrangements whereby the guarantor undertakes to a lender that if a borrower defaults, the guarantor will make good the loss the lender would otherwise suffer. A one-off guarantee is defined as individual, and guarantors are not able to make a reliable estimate of the risk of calls. One-off guarantees are linked to debt instruments (e.g. loans, bonds). Data refer to the total stock of debt guaranteed by government units. Standardised guarantees are guarantees that are issued in large numbers, usually for fairly small amounts, along identical lines. It is not possible to estimate precisely the risk of each loan being in default but it is possible to estimate how many, out of a large number of such loans, will default. Examples are mortgage loan guarantees, student loan guarantees, etc. Data refer to the total stock of assets covered by the standardised guarantees. While the provisions for standardised guarantees are considered an actual liability, the total stock of assets covered by standardised guarantee is regarded as a contingent liability.

Public-private partnerships (PPPs) are complex, long-term contracts between two units, one of which is normally a corporation (or a group of corporations, private or public) called the operator or partner, and the other normally a government unit called the grantor. PPPs involve a significant capital expenditure to create or renovate fixed assets by the corporation, which then operates and manages the assets to produce and deliver services either to the government unit or to the general public on behalf of the government unit. Public-private partnership recorded off- balance sheet of government means that the assets are not considered as economically owned by government and the gross-fixed capital formation is not recorded as an expenditure of government at the moment it is incurred.

Total outstanding liabilities related to PPPs recorded off-balance sheet of government are expressed as the adjusted capital value. This is an initial contractual capital value that is progressively reduced over time by the amount of "economic depreciation" which is calculated on the basis of estimates or actual data. The adjusted capital value reflects the current value of the asset at the time of reporting. The amount is deemed to reflect the gross fixed capital formation and debt impact in the case that government would have to take over the assets during the life of the contract.

Liabilities of government controlled entities classified outside general government (public corporations) are defined as the stock of liabilities at the end of the year, based on the business accounts of corporations. These government controlled entities are classified outside general government due to their behaviour as market units. For a better picture of the extent of liabilities depending on the sector activities, these liabilities are split into liabilities of entities involved in financial activities and entities involved in other activities. Entities involved in financial activities include units classified according to NACE Rev 2 Division 64: "Financial service activities, except insurance and pension funding", but excluding sub-division 6411 "National Bank"; Division 65: "Insurance, reinsurance and pension funding, except compulsory social security"; and Division 66: "Activities auxiliary to financial services and insurance activities". Entities involved in other activities refer to units performing all other activities.

Non-performing loans (government assets): a loan is non-performing when payments of interest or principal are past due by 90 days or more, or interest payments equal to 90 days or more have been capitalized, refinanced, or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons (such as a debtor filing for bankruptcy) to doubt that payments will be made in full. Data are reported at nominal value.

It is to be underlined that the above indicators have a heterogeneous nature and represent different types of potential impact on public finance. Additionally, in some cases, the same fiscal risk might be reflected by two or more indicators. For instance, when a government guarantees the liability of a government controlled entity classified outside general government, the potential risks are covered both by data presented for 'Guarantees' and 'Liabilities of government controlled entities classified outside general government'. Therefore, evaluating the total risk for public finance by summing up the indicators could overestimate the potential impact.