The fiscal impact of financial sector
support during the crisis
During the financial crisis, most euro area governments provided financial assistanceto ailing financial institutions with the aim of safeguarding financial stability andpreventing a credit crunch. Over the period 2008-14 accumulated gross financial
sector assistance amounted to 8% of euro area GDP, of which 3.3% has been
recovered. The fiscal costs of the assistance to financial institutions are comparable
to those of other systemic banking crises in the past, as they led to a deteriorationin the euro area budget balance and debt by a cumulated 1.8% and 4.8% of GDP
respectively. However, on average the measures account for a relatively small partof the overall strong increase in general government debt since the outbreak of thecrisis. At the same time, outstanding government guarantees (amounting to 2.7% ofeuro area GDP at the end of 2014) and further potential losses of asset management
vehicles to which impaired assets had been transferred still pose additional fiscal risks
to governments. Looking ahead, it is important both to reduce the likelihood of financial
institutions facing severe balance sheet problems by enhancing bank capital, banking
regulation and supervision, and to promote bank resolution policies that include private
sector involvement, thereby protecting taxpayers. In this sense, the recent steps
towards a genuine European banking union are encouraging and should not only help
to prevent and/or resolve future banking crises in the euro area, but also to reduce
their potential fiscal impact on government deficits and debt.

1

Introduction
Since the outbreak of the financial crisis, most euro area governments haveprovided substantial financial assistance to financial institutions with theaim of safeguarding financial stability and preventing a credit crunch. These
measures contributed to the increase in euro area general government debt, whichrose by 27 percentage points between 2008 and the end of 2014, when it stood at
92% of GDP. The direct net fiscal costs of financial sector assistance (less than 5%of GDP) were only one factor explaining the overall sharp rise in government debt in
the euro area. Yet they played a much more important role in a number of euro area
countries. A preliminary assessment of the fiscal impact of financial sector support
1
was provided at an early stage of the financial crisis. Given that further support
has been provided since then and in view of the gradual recovery of the euro area
financial sector and the recent reforms supporting the prevention of banking crises,
it is now a good time to reassess the fiscal costs of financial sector support.

1

See for example “The impact of government support to the banking sector on euro area publicfinances”, Monthly Bulletin, ECB, July 2009; van Riet, A. (ed.), “Euro area fiscal policies and the crisis”,
Occasional Paper Series, No 109, ECB, 2010; and Stolz, S. and Wedow, M., “Extraordinary measuresin extraordinary times: public measures in support of the financial sector in the EU and the UnitedStates”, Occasional Paper Series, No 117, ECB, 2010.

ECB Economic Bulletin, Issue 6 / 2015 – Articles

74This article addresses the following questions: First, which financial assistancemeasures have been used? Second, how costly were the financial sector assistancemeasures for taxpayers, how much of the costs have been recovered to date andhow much have the measures contributed to the sharp increase in government
debt? Third, what are the remaining fiscal risks related to financial sector support?
In addressing these questions, the article provides a detailed overview of thegovernment measures to assist financial institutions since the beginning of the2crisis. Compared with other systemic banking crises in advanced economies, thedirect fiscal costs of financial assistance measures in the euro area are of a similar
magnitude, while the overall increase in general government debt is considerablylarger. However, the estimated fiscal costs of government intervention in the banking
sector vary substantially across studies depending on the methodology used for theirderivation and the definition of fiscal costs. This article mainly follows the bottom-up
approach which sums up all of the government measures related to the financial
crisis, although some of these measures may be difficult to quantify, especially if they3
were carried out by entities classified outside the general government sector. The
article focuses on government measures to support the financial sector and does notlook at the central bank liquidity measures adopted during the financial crisis.4
The article is structured as follows: Section 2 looks at the support measuresused by euro area governments over the period 2008-14, with a particular focus on
asset acquisitions and capital transfers. Section 3 assesses their fiscal impact onbudget balances and general government debt and discusses the recovery rates onacquired assets. Section 4 outlines the remaining fiscal risks related to government
guarantees and asset management vehicles. The article ends with some policy
conclusions in Section 5.

2

Financial sector assistance measures
Most euro area governments have supported the financial sector with a setof measures, notwithstanding considerable differences across countries andchanges over time. For example, governments supported financial institutions bypurchasing their illiquid financial assets and by providing them with direct loans.
The acquired assets included equities, debt securities and other assets, which
2

The analysis is based on data compiled by the Working Group on Government Finance Statistics ofthe European System of Central Banks (ESCB).The statistical framework is described in more detail in
Maurer, H. and Grussenmeyer, P., “Financial assistance measures in the euro area from 2008 to 2013:
statistical framework and fiscal impact”, Statistics Working Paper Series, No 7, ECB, 2015.

3

In the literature, there are two main approaches to estimating the fiscal costs of financial sector
support (see also ECB, 2009, op. cit.). First, the bottom-up approach sums up all of the government
interventions; see for example Laeven, L. and Valencia, F., “Systemic banking crises database:an update”, Working Paper Series, No 163, IMF, 2012. Second, the top-down approach assumes
that changes in the government debt-to-GDP ratio since the crisis are related to the financial crisis,
although this approach also includes debt changes which are unrelated to financial sector support.
This approach is followed inter alia by Reinhart, C. and Rogoff, K., “Recovery from Financial Crises:
Evidence from 100 Episodes”, American Economic Review, Vol. 104(5), 2014, pp. 50-55.

4

Central bank liquidity measures are discussed, for example, in “The ECB’s non-standard measures –impact and phasing-out”, Monthly Bulletin, ECB, July 2011; “The ECB’s response to the financial crisis”,
Monthly Bulletin, ECB, October 2010; and “The implementation of monetary policy since August 2007”,Monthly Bulletin, ECB, July 2009.

ECB Economic Bulletin, Issue 6 / 2015 – Articles

75

governments exchanged against cash or other collateral at their market value.
Sometimes governments had to inject capital into ailing financial institutions byacquiring assets well above their market value. These recapitalisations aimed tocover the banks’ accumulated losses and eventually resulted in government losses.
Some governments were also forced to nationalise (systemic) banks. Moreover, someof the impaired assets were acquired by newly created asset management vehicles.
In exchange for the transferred assets, financial institutions were provided with cash
and/or bonds issued by the vehicles usually enjoying a state guarantee. Governments
also provided explicit guarantees to financial institutions, such as time-restrictedguarantees for interbank loans or bonds, and raised the coverage threshold forguaranteed bank deposits. Furthermore, the higher government debt resulting frommost of these interventions led to indirect fiscal costs in the form of additional interest
payments. At the same time, government interventions also implied indirect revenues
in the form of fees for guarantees granted, dividends on acquired equity and interest
receipts on the loans provided and debt securities bought.
Chart 1
Assets acquired over the period 2008-14(percentages of 2014 GDP)
net acquired assets
sales/repayments of aquired assets
6

5

4

3

2

1

0

Acquired financial
assets (total)

Equityinstruments

Provision of
new loans

Debt securities
and other assets

Source: ESCB.
Note: The sum of the net acquired assets (blue) and the sales/repayments (yellow)
corresponds to the gross amount of the respective acquired assets.

Among the measures mentioned above, theacquisition of financial assets was used by euroarea governments in particular in the early yearsof the financial crisis. Between 2008 and 2014
governments acquired financial assets in an amount of
5.3% of euro area GDP in gross terms (see Chart 1),
two-thirds of which were purchased in the first three
years of the crisis. When taking into account the factthat part of the assets has in the meantime beendivested without losses, the net acquired assets
amounted to 2.9% of GDP in 2014. Among the acquired
assets, debt securities and equities together accounted
for the bulk (around 90%) of the acquired assets,
while new loans were used to a much lower degree
over the period 2008-14. The net acquisition of financial
assets was particularly pronounced in Germany,
Ireland, Greece, Cyprus, Luxembourg, Portugal andSlovenia, with acquisitions being well above 5% of GDP(see column (A) of Table 2).

Moreover, euro area governments supported distressed financial institutions
via capital transfers. Besides financial assets purchased at above-market prices,
capital transfers reflected called government guarantees and other types of debt
assumption. Capital transfers amounted to 2.1% of GDP over the period 2008-14.
These deficit-increasing capital transfers played a role in particular in Ireland (above
25% of GDP), Greece, Cyprus and Slovenia, while in other countries their extent wasmore limited (see column (C) of Table 2).

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76

3

Fiscal impact of financial assistance measures

General government debt in the euro area increased from 65% of GDP inearly 2008 to 92% of GDP at the end of 2014. Only a relatively small part of thisrise in government debt, which was particularly pronounced in the first years of thefinancial crisis, was driven by the support provided by euro area governments toailing financial institutions in order to secure financial stability, although for someindividual countries the impact on government debt
Chart 2was substantial. To better understand how government
Change in government gross debt and its drivers
finances were affected by the financial crisis in
general and by financial sector support interventions(percentages of GDP)in particular, it is useful to decompose the governmentchange in government debt
primary balance (-)
debt increase into its main driving factors (see Chart 2).
interest rate-growth differential
deficit-debt adjustment

First, the debt-increasing impact of a positive
interest rate-growth differential, which captures
the difference between the interest rate paid toservice government debt and the growth rate of theeconomy, was particularly strong in the early years of
the crisis, following the cyclical downturn in the euroarea triggered by the financial crisis. More recently,
as a consequence of low interest rates and a cyclicalrecovery, its relative importance has started to decline.

10
8
6
4
2
0
-2

Second, the rise in government debt was also
driven by a sharp deterioration of the primary
Sources: Eurostat and ECB.
balance. This was inter alia the result of higher primary
Notes: Deﬁcit-debt adjustment is the difference between the government deﬁcit
and the change in government debt. For more details, see “From government deﬁcit
expenditure, reflecting the role of automatic stabilisers,
to debt: bridging the gap”, Monthly Bulletin, ECB, April 2007.
such as higher unemployment benefits, as well as
discretionary fiscal policy measures. The latter also
include part of the financial sector assistance measures, in particular the costsof capital transfers to cover accumulated losses of ailing banks. Moreover, lower
government revenues following the cyclical downturn and the rebalancing process
also contributed to the worsening of the primary balance via so-called second-roundeffects, as the decline in employment, corporate profits and asset values, triggeredby the financial crisis, resulted in lower revenues.
-4

2007

2008

2009

2010

2011

2012

2013

2014

Third, the debt increase was driven by deficit-debt adjustments. These had
several causes. Among them are those financial sector support measures that did
not affect the primary balance, but did affect general government debt, such as
governments’ acquisition of equities at market prices or the provision of government
loans to the financial sector. As the governments acquired assets, these measuresresulted in an increase in gross debt, while net debt remained largely unaffected.
Deficit-debt adjustments were particularly pronounced until 2010 for the euro area asa whole.

ECB Economic Bulletin, Issue 6 / 2015 – Articles

77

To quantify the impact of the financial sector assistance measures on thegovernment accounts, it is necessary to look at the individual transactions
and the financing requirements resulting from them. Depending on the natureand the magnitude of the assistance measures, government finances are affecteddifferently (see Table 1).
Table 1
Accounting framework for general government assistance to the financial sector
Impact on general
government debt

Impact on fiscal
balanceAcquisition of equities (market price)↑0

Acquisition of other assets, e.g. debt securities↑

0

Provision of loans↑

0

Sales of shares↓

0

Repayments of loans↓

0Acquisition of ﬁnancial assets above market
price

↑

↑

Capital injections covering bank losses↑↑

Debt assumptions↑↑

Called government guarantees↑↑

Guarantee fees↓↓

Dividends↓↓

Interest payable/ receivable↑↓↑↓

Liabilities of entities (i.e. the non-consolidated
liabilities)↑

0

Assets of entities (i.e. only the consolidated
assets)(↓)

0

Guarantees on liabilities (contingent liabilities)

00Guarantees on assets

00

ExamplesDirect impact of interventions
Acquisition of ﬁnancial assets

Capital transfers to banks

Indirect impact of interventions
Miscellaneous revenues
and expenditures

Reclassiﬁcation of entities and other ﬂows (without transactions)
Entities reclassiﬁed from ﬁnancial
sector to general government

Provision of guarantees
Government guarantees

Source: ESCB.

•

While all instruments, except for outstanding government guarantees, increase
government debt, most of them do not affect the budget balance (see Table 1). In
particular, net acquisitions of financial assets by governments, including equities,
loans and debt securities at market prices, are debt-increasing.

•

Acquisitions of financial assets usually only affect gross government debt, while
net government debt remains broadly unchanged.

•

By contrast, all financial sector support measures that include an irreversible
annual expenditure for the government are recorded in the cumulated budgetbalance (see Table 1 and column (B) of Table 2). They include capital transfers,

such as the debt of banks taken over by the government, called government
guarantees, financial assets purchased at above-market prices anddeficit-increasing capital injections into banks to cover past losses. In addition,
the general government budget balance is also affected by revenues that arelinked to financial support transactions, such as fees received by governments
for granting guarantees, dividends from acquired equities as well as interest
received on financial instruments acquired. The sum of the net acquisition of

ECB Economic Bulletin, Issue 6 / 2015 – Articles

78financial assets and the cumulated impact on the budget balance represents thegovernment’s net fiscal costs of the financial assistance measure (see Table 2).
•

The reclassification of entities from the financial sector to the general
government sector (notably in the case of bank nationalisations) increases
government debt.

•

The provision of government guarantees has no direct impact on public finances,
unless the guarantees are called.

Financial assistance measures led to a worsening of the euro area budgetbalance by a cumulated 1.8% of GDP between 2008 and 2014. How their impact
on government accounts is treated in the Stability and Growth Pact is described in
the box later in this article. The impact on the budget balance differed considerablyacross countries. The deficit impact was particularly strong in Ireland, where it led toa cumulated worsening of the budget balance of almost 25% of GDP (see Table 2).
The budget balances of Greece, Cyprus and Slovenia were also substantiallyaffected by the support measures, with a cumulated deficit impact of between 8%
and 13% of GDP during 2008-14. In most other countries, the cumulated deficit
impact was more limited, ranging from 0.4% of GDP in Belgium to 4.4% of GDP in
Spain. For France, Italy and Luxembourg, the cumulated revenues from financial
assistance measures even slightly exceeded the expenditures.
Table 2
Fiscal impact of financial sector support over the period 2008-14(percentages of 2014 GDP)Net fiscal costs

Total(A)+(B)Net
acquisitionsof financial
assets(A)

EDP debt
impactMemo item: Change
in government debt

Cumulated impact on budgetbalance(deficit (+), surplus (-))
total
(B)

due to capitaltransfers(C)(end of2014)(D)(2008-14)
19.7

BE

3.7

3.3

0.4

1.1

4.6

DE

8.0

6.7

1.3

1.8

8.2

11.0

IE

31.1

7.0

24.1

25.7

22.6

85.7

GR

22.1

9.6

12.5

14.9

22.2

73.7

ES

5.0

0.6

4.4

4.8

5.0

62.2

FR

0.0

0.1

-0.1

0.1

0.1

31.1

IT

-0.1

0.0

-0.1

0.0

0.1

32.4

CY

18.8

10.3

8.5

9.1

19.4

53.4

LV

5.2

1.9

3.3

3.3

5.5

31.6

LT

1.3

0.2

1.1

0.9

0.9

25.0

LU

5.5

5.6

-0.1

0.1

5.3

16.0

NL

4.8

4.1

0.7

0.7

5.5

26.1

AT

3.5

0.4

3.1

3.6

8.4

19.7

PT

11.3

8.4

2.9

2.6

11.0

61.7

Sl

18.1

6.1

12.0

11.5

18.2

58.2

EA

4.7

2.9

1.8

2.1

4.8

27.0

Sources: ESCB and Eurostat.
Notes: Estonia, Malta, Slovakia and Finland are not included in the table as no ﬁnancial support was provided to the ﬁnancial sector.
The difference between the cumulated budget balance (B) and capital transfers (C) includes net miscellaneous ﬁnancing costs orrevenues, such as fees on guarantees, dividends, and interest payable or receivable linked to acquired ﬁnancial instruments. As
regards column (D), in comparison to the net ﬁscal costs, the excessive deﬁcit procedure (EDP) debt impact also includes the impactof reclassiﬁcations of ﬁnancial entities (e.g. a bad bank) inside the government (without transactions), other ﬂows and ﬁnancialtransactions not recorded in EDP debt.

ECB Economic Bulletin, Issue 6 / 2015 – Articles

79General government debt in the euro area increased by 4.8% of GDP over theperiod from 2008 to 2014 owing to financial sector assistance. The impact on
government debt resulted from the sum of the net fiscal costs of financial sector
support (4.7% of GDP) and the impact of reclassifications and other flows (0.1% ofGDP).5 The debt increase as a result of financial sector support corresponds to lessthan one-fifth of the increase in government debt over the same period (see Table 2).
The debt impact of financial sector support varied considerably across countries.
Financial sector support led to a substantial increase in government debt of around
20% of GDP in Ireland, Greece, Cyprus and Slovenia. It also had a high impact
in Germany, especially owing to measures taken at the onset of the crisis, and inAustria and Portugal, mainly as a result of more recent interventions. By contrast,
government debt in Italy and France was hardly affected by financial sector support.
Compared with past financial crises in advanced economies, the deteriorationin euro area government finances was worse, despite a similar amount offinancial sector assistance. According to a recent study from the International
Monetary Fund (IMF), which measured the fiscal costs of 60 systemic banking
crises between 1970 and 2011, the median increase in overall government debt
was around 12% of GDP, of which 7 percentage points were accounted for by the6
direct fiscal costs of financial sector support. Regarding the recent crisis (2007-11),
the IMF analysis looks at a sample of 25 systemic banking crises, mainly involving
advanced economies. The median increase in government debt was 18% of GDP,of which 4.2 percentage points were due to direct fiscal costs, compared with anincrease in government debt for the euro area of almost 22% of GDP, of which only
4.6 percentage points were explained by direct financial sector support. These
differences suggest that the indirect macroeconomic costs of the financial crisis in
the euro area have been even more pronounced compared with previous systemicbanking crises.
The recovery rates, which represent the share of acquired assets whichgovernments were able to successfully dispose of, are improving, but are
still relatively low by historical standards. Recovery rates are derived from thedifference between the acquired financial assets in gross terms and the assets in
net terms. Up to now, eight years after the crisis started, only a small fraction of the
fiscal costs of the euro area has been recovered (see Chart 3). Out of 8% of GDP
7
of accumulated gross financial sector assistance measures, which corresponds to€800 billion, 3.3% of GDP has been recovered through sales of acquired assets andother miscellaneous revenues derived from the assets acquired and the guarantees
granted (e.g. dividends, fees, interest receipts). This corresponds to a recovery rate
5

While the difference is usually very small, there are some exceptions. For example, in Ireland, somefinancial assistance measures have been financed through the disposal of assets held by government
pension funds.

6

See “From Banking to Sovereign Stress – Implications for Public Debt”, IMF, 2015, which analyses how
certain country and banking sector characteristics impact the fiscal costs of banking crises.

7

To get an idea of governments’ financial exposure arising from financial sector support, the net fiscal
costs have to be supplemented by the amount of outstanding government guarantees and include
the indirect revenues. In the literature, however, it is sometimes argued that gross fiscal costs (which
encompass recovered assets) are a better metric to reflect the taxpayers’ money spent at the time ofthe support. This indicator could also serve as a basis for determining the financial buffers needed
for government assistance in the context of possible future crises (see for example Laeven, L. andValencia, F., op.cit.).

ECB Economic Bulletin, Issue 6 / 2015 – Articles

80Chart 3
Fiscal costs and recovery rates over the period 2008-14(percentages of 2014 GDP)fiscal costs (gross)fiscal costs (net)
45
40
35
30
25
20
15
10
5
0
-5

BE

DE

IE

GR

ES

FR

IT

CY

LV

LT

LU

NL

AT

PT

SI

EA

Sources: ESCB and Eurostat.
Notes: Estonia, Malta, Slovakia and Finland are not included in the chart as no ﬁnancial sector support was provided in these countries. As regards Greece, see also footnote 9.
The recovery rate is the difference between the acquired ﬁnancial assets in gross and net terms.

of slightly more than 40% of gross fiscal costs, which is relatively low by international
comparison. For example, Sweden was able to recover almost 95% of its budgetary
outlays five years after the crisis in 1991.8 The recovery rates to date are particularly
low in Ireland, Cyprus and Portugal, while they are relatively high in the Netherlands.9
The recovery rates, however, differ for different types of acquired assets.
Looking at the different instruments, most (92%) of the loans provided to banks had
been paid back by the end of 2014 (see Chart 1). By contrast, governments still holda large share of the acquired debt securities and equities, although they were able tosell 43% of the debt securities and 34% of the equities by end-2014. Consequently,
the accumulated net acquisition of both debt securities and equities amounted to
1.4% of GDP by the end of 2014.
At the same time, the recovery rates also need to be carefully analysed, together
with the accumulated losses related to the assistance measures. In fact, a low
recovery rate might be due to very different scenarios and does not necessarily
indicate high accumulated losses. For example, a limited recovery rate could indicate,in the best case, that a government retains ownership of a well-performing bank which
would generate substantial gains in the event of a subsequent privatisation. In theworst case, a limited recovery rate could indicate that the interventions led to major
irreversible losses, as in the case of Cyprus, with a holding loss for the government onequity instruments amounting to 10.5% of GDP owing to the restructuring of one of its
largest banks. For the period 2008-14 the accumulated losses on average for the euroarea amounted to 1.8% of GDP, thus indicating that almost 25% of the gross fiscal
needs are currently accounted for as a loss which cannot be recovered.
8

See also Table 1 in ECB, July 2009, op. cit.

9With regard to Greece, the substantial difference between gross and net fiscal costs is mainly
explained by the following facts. Until 2012 the Hellenic Financial Stability Fund provided loans to the
Greek banking system. These loans were subsequently used to bridge the time until recapitalisationsin the form of equity acquisitions could take place (2013). Although this basically represents a shift in
instruments, the gross fiscal costs include both loans and recapitalisations, while the net fiscal costs
are adjusted for the loans cancelled after recapitalisations.

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81

Box
Treatment of financial sector support in the Stability and Growth Pact
In the Stability and Growth Pact (SGP), financial sector support is treated in a special manner
given its importance for safeguarding financial stability. At times of severe banking problems,
Member States are generally not required to compensate for the fiscal costs arising from financial
sector support, provided the measures are of a temporary nature.10 Given that the fiscal costs tosecure financial stability are largely beyond the control of governments, this seems broadly justified.
In fact, it is important that the SGP does not provide disincentives to effective public backstops. A
similar approach has also been taken in the EU-IMF adjustment programmes, in which nominal fiscal
targets are set explicitly by excluding the impact of financial sector support on the deficit.
Under the preventive arm of the SGP, capital injections are excluded from the calculationof the structural effort, provided they are temporary. The structural effort is the main indicator
under the preventive arm to assess whether the adjustment path towards the medium-term
objective (MTO) is fulfilled. The structural effort is calculated based on the change in the structuralbalance, which excludes temporary and one-off measures such as capital injections.
Under the corrective arm of the SGP, an excessive deficit procedure (EDP) may not be
opened in the case of financial sector support. If a Member State were to be temporarily inbreach of the deficit criterion as a result of financial sector support, but the deficit would remainclose to 3% of GDP (i.e. not more than 0.5% of GDP above the reference rate), opening an EDP
can be avoided. Likewise for the debt, when non-compliance with the debt reduction benchmark
results from financial sector support, a debt-based EDP will not be opened. In both cases, financial
sector support measures (including contingent liabilities) are accounted for as relevant factors, as
under the debt-based EDP assessments for Belgium and Italy published in February 2015.
In addition, financial sector support would not lead to the stepping-up of an existing EDP.
Compliance with the EDP requirements is assessed based on the structural effort, which excludes
temporary and one-off measures. Thus, Member States providing financial sector support are notforced to make additional fiscal consolidation efforts, provided that the necessary structural efforts
are made. For example, in the context of the 2013 extension of the EDP deadline for Slovenia,
the Council recommendation also referred to deficit targets, netting out the expected fiscal costsof financial sector support. Moreover, if a country is not able to correct its excessive deficit by
the agreed deadline as a result of financial sector support, the procedure will not be stepped
up. Instead, the abrogation of the procedure would be delayed for some time (usually one year).
However, when deciding on the abrogation of an EDP, the decision is based on the nominal(headline) deficit, which is not adjusted for financial sector support.

10

See the box entitled “The fiscal implications of financial sector support”, Monthly Bulletin, ECB,
June 2013.

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82

4

Fiscal risks related to government interventions
in financial institutions
In addition to the above-mentioned fiscal costs, financial sector support
can entail significant broader fiscal risks. If one were to include the amount of
explicit contingent liabilities related to government guarantees granted to financial
institutions, which have no immediate direct impact on government finances but posea potential fiscal risk should they be called, the government’s exposure would bemuch higher.11 Moreover, governments also provided implicit guarantees to financial
institutions, partly motivated by the too-big-to-fail argument and in order to avoid
spillover effects. However, these implicit guarantees are difficult to quantify and are
therefore not discussed further in this article.

At the outbreak of the financial crisis, many euro area governments provided
explicit guarantees to financial institutions to support financial stability. Most
explicit government guarantees were granted to ailing financial institutions fordifferent kinds of liabilities and assets, such as issued bonds, interbank deposits,
senior unsecured debt, asset-backed securities and dated subordinated debt.
Furthermore, in a few cases, for example in Ireland, Spain and France, government
guarantees were also granted for the financing of asset management vehicles (onaverage these amounted to about 20% of outstanding government guarantees at theend of 2014). Explicit guarantees were mainly grantedin the early years of the crisis. The level
Chart 4of government guarantees granted, expressed in terms
Financial exposure of governments arising fromof GDP, exceeded the net fiscal costs of financial
interventions in financial institutions
sector support until 2012 (see Chart 4). Government(percentages of GDP)guarantees in the euro area peaked at almost
net fiscal costs
government guarantees
8% of GDP in 2009 (excluding government guarantees
12
on retail deposits) and declined to 2.7% of GDP by theend of 2014.
10

8

6

4

2

0
2008

2009

2010

2011

2012

2013

2014

Source: ESCB.
Notes: The ﬁnancial exposure of governments arising from interventions in ﬁnancial
institutions comprises the ﬁnancial assistance measures recorded under direct net
ﬁscal costs and the amount of outstanding government guarantees. Government
guarantees and net ﬁscal costs are expressed as a percentage of annual GDP.
Government guarantees do not include deposit insurance schemes.

11

Since 2012 the amount of outstanding government
guarantees has declined strongly. This can be
explained by three factors. First, a large share ofguarantees has expired since then and, because
financial stability has been re-established, it was notnecessary to prolong them. There were no or only
limited new guarantees granted to financial institutionsin 2014. Second, in a few cases guarantees werecalled and the amounts were then recorded as general
government debt. Third, some financial entities towhich governments granted guarantees were recently
reclassified inside the general government. This impliedthat the liabilities of the reclassified entities became part

The immediate direct impact of state guarantees on government finances relates to the collection offees that financial institutions usually have to pay in exchange for the state guarantee, which results ingovernment revenues. However, the collected fees have been rather limited for most countries. For the
euro area, they amounted to an annual average of less than 0.05% of GDP during 2008-14.

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83

of general government debt, while the amount of government guarantees to these
entities declined accordingly.
While most euro area countries provided explicit government guarantees,
their outstanding amount varied across countries. By far the highest level ofgovernment guarantees in terms of GDP was observed in Ireland, which peaked at190% of GDP in 2008, but substantially declined thereafter to around 13% of GDP
by the end of 2014 (see Table 3). Government guarantees at end-2014 were still
sizeable in Greece and to a lower degree in Belgium, while they had been almost
fully phased out in the Netherlands and Austria. For the latter, the decrease inguarantees is explained by the fact that one financial institution is now classified
inside the general government, which implies that the respective government
guarantees are no longer recorded, whereas gross government debt has increasedby the amount of the outstanding liabilities of this entity.
Table 3
Outstanding government guarantees
Peak amount
Percentage of GDP

End of 2014
Year

BE

15.4

(2009)

DE

5.5(2009)

9.3
0.8

IE

190.0

(2008)

12.9

GR

37.9

(2011)

28.5

ES

9.9

(2012)

5.2

FR

4.7

(2009)

2.2

IT

5.3

(2012)

1.4

CY

16.9

(2010)

5.7

LV

2.8

(2009)

0.2

LU

4.8

(2013)

4.6

NL

12.1

(2009)

0.0

AT

5.0

(2009)

0.0

PT

9.5

(2012)

3.6

Sl

5.9

(2010)

0.3

EA

7.6

(2009)

2.7

Sources: ESCB and Eurostat.
Notes: Estonia, Lithuania, Malta, Slovakia and Finland are not included in the table as they did not provide government guarantees toﬁnancial institutions. The outstanding government guarantees do not include the guarantees on retail deposits and state guarantees
for emergency liquidity assistance. The latter do not fall within the scope of the statistics on government guarantees

Several countries have experienced losses on government guarantees thatwere called. While for the euro area as a whole, the share of called guarantees
seems to be rather limited, amounting to roughly 0.3% of total outstanding
guarantees (less than 0.01% of GDP) in 2014, this figure might be somewhat
misleading. In particular in cases of major restructuring of financial institutions,to which government guarantees were granted, the outstanding government
guarantees decreased through the purchase of impaired assets previously
guaranteed. In this respect, estimates of default probabilities can help form a view of12
the risk of government guarantees being called.

12

See “Fiscal implications of the global economic and financial crisis”, Occasional Paper Series, No 269,
IMF, 2009. Based on the estimation of the expected default frequency-implied credit default swap
spreads, using November 2008 market data, outlays from state guarantees were estimated to be in theorder of 1-3% of GDP in cumulative terms for 2009-13 for advanced economies.

ECB Economic Bulletin, Issue 6 / 2015 – Articles

84In addition, many countries lifted the coverage threshold of their deposit
insurance schemes. At the beginning of the crisis, the coverage of the national
schemes was increased to a minimum level of €50,000 per depositor per bank. This
threshold was then further raised to €100,000 as part of the revisions to the EU
Directive on deposit guarantee schemes, which also led to the banks – rather thangovernments – having to cover the insurance. In contrast to the explicit guarantees
provided for financial institutions’ assets, the deposit guarantee schemes are
not time-restricted. Thus, they do not phase out unless it is decided to lower thethreshold covered by the insurance. If claims were to be made, they would in the first
instance be covered by the insurance, so the impact on budget balances would likely
be limited.
Moreover, government guarantees might imply higher fiscal costs in the longrun as they could, like other financial sector interventions, create adverse
incentives for financial institutions. In fact, those institutions benefiting fromgovernment guarantees and other interventions might be inclined to take morerisks or postpone a speedy repair of their balance sheets (see IMF, 2015, op. cit.).
Moreover, government guarantees might not be fully credible, in particular if they
are sizeable while the country’s fiscal space is limited, in which case governments
13
would be unable to pay if the guarantees were to be called. Credibility concerns,
however, would make the resolution potentially more costly, as they would increase
the likelihood of guarantees being called and the need for further measures insupport of the financial sector. Thus, although government guarantees have almost
no immediate direct impact on government finances, they might in the end result inhigher direct fiscal costs.
Fiscal risks also relate to the newly created asset management vehicles forwhich fiscal costs could turn out higher than expected. More than half of theeuro area countries created such vehicles in order to relieve the balance sheetsof financial institutions by transferring impaired assets to these new entities at a
reduced book value. Generally, asset management vehicles can be seen as an
14
effective means for dealing with non-performing loans. However, the potential fiscal
risks related to asset management vehicles vary considerably across countries,
depending on their specific characteristics in terms of government ownership,
governments’ responsibilities in case of losses and the underlying financing strategyof the entities.15 In particular when asset management vehicles are classified within
the general government sector, all their liabilities are part of general government
debt, as for example in the case of the BAMC in Slovenia (see Table 4). The future
impact on the budgetary balance depends on how future revenues and expenditures
evolve. If, however, the asset management vehicles are classified within the financial
13

Partly as a result of substantial government guarantees, rating agencies have downgraded a numberof euro area countries, which led to an increase in their financing costs (see Stolz and Wedow, 2010,
op. cit.).

14

See “Resolving the legacy of non-performing exposures in euro area banks”, Financial Stability Review,
ECB, May 2015.

15

Privately owned asset management vehicles usually impose larger haircuts on the acquired assets
than publicly owned entities, which affects the profitability of the entities and the subsequent fiscal
risks. The haircut applied to transferred assets has varied from 0% to more than 50%. See Gandrud, C.
and Hallerberg, M., “Bad banks in the EU: the impact of Eurostat rules”, Working Paper Series, No 15,
Bruegel, 2014.

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85

Table 4
Key features of selected asset management vehicles
Year of Government
creation
share

Financing(outstanding
bond issuance)1)

Assets1)
percentage
of GDP

percentage of GDP

total

o/w bankloans

Haircuts ontransferredassets2)

Net loss (-)/
profit (+)
in 2014per cent percentage of GDP

NAMA (Ireland)

2009

49%

7.3

8.4

7.2

57

0.2

SAREB (Spain)

2012

45%

4.3

4.8

3.1

46/63

-0.1

BAMC (Slovenia)

2013

100%

4.2

4.7

3.8

71

0.1

Sources: Websites of the asset management vehicles, and Gandrud and Hallerberg (2014, op.cit.).
1) Data refer to outstanding amounts as at the end of 2014.
2) Average haircuts applied by selected asset management vehicles (see Gandrud and Hallerberg, 2014, op.cit.). As regards Ireland,
the haircut relates to loans worth €74 billion in total transferred to NAMA by the ﬁve participating institutions (on payment of €31.8
billion as consideration) by the end of 2011. For Spain, the average haircut for the assets transferred was 46% in the case of loans
and 63% in the case of foreclosed assets. For Slovenia, the ﬁgure given relates to assets transferred in 2013.

sector, the direct fiscal impact is likely to be more limited and mainly related to therisk that future dividends will not cover future losses, in which case the outstanding
government guarantees would need to be called. In addition, ownership may beshared, as is the case with the asset management vehicles of Ireland (NAMA) andSpain (SAREB). Moreover, as demonstrated by NAMA and BAMC in 2014, asset
management vehicles can also generate profits.

5

Conclusions
During the financial crisis, most euro area governments provided financial
assistance to financial institutions with the aim of safeguarding financial
stability and preventing a credit crunch. Accumulated gross financial sector
assistance measures amounted to 8% of euro area GDP, of which only 3.3% has
been recovered. The fiscal costs of the financial assistance measures over theperiod 2008-14 caused the euro area budget balance and debt to worsen by acumulated 1.8% and 4.8% of GDP respectively. For the euro area as a whole, thefinancial sector support explains only a small part of the sharp increase in general
government debt since the start of the crisis, while for some individual countries
the impact on government debt has been substantial. Euro area countries used
a variety of support measures, including bank recapitalisations, the provision of
government loans, the acquisition of impaired assets, bank nationalisations and the
granting of government guarantees. These measures impact recorded government
debt and deficits to different extents. The size of these assistance measures is very
heterogeneous across euro area countries. The interventions’ overall recovery rateis on average relatively low by international comparison. However, the recovery
process is still ongoing. To complete the picture, it is also important to take thefiscal risks related to financial sector support into account, which mainly include theremaining government guarantees granted (amounting to 2.7% of euro area GDP
at the end of 2014) and the potential losses (or possible holding gains) of asset
management vehicles.
Looking ahead, it is important to secure financial stability while limiting
taxpayers’ involvement. This requires in the first instance reducing the likelihoodthat financial institutions will face severe balance sheet problems. Much has alreadyECB Economic Bulletin, Issue 6 / 2015 – Articles

86been achieved in tightening banking legislation, strengthening banking supervision,and should financial institutions indeed face problems, having the appropriate
resolution instruments at hand. One important way to reduce the potential fiscal
costs of financial assistance measures is to ensure an appropriate contribution
by private shareholders and bondholders. Indeed, the EU Capital Requirements
Regulation and Capital Requirements Directive IV and the newly created Single
Supervisory Mechanism will enhance the resilience of the banking sector and should
help prevent the build-up of severe problems on banks’ balance sheets which could
ultimately result in a severe banking crisis. In addition, the EU Bank Recovery and
Resolution Directive and the Single Resolution Mechanism will ensure private sector
involvement ahead of government assistance. Taken together, these key pillarsof the European banking union should ensure that the risk of additional taxpayer
support gradually diminishes.

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