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1 Statistics Paper Series Henri Maurer and Patrick Grussenmeyer Financial assistance measures in the euro area from 2008 to 2013: statistical framework and fiscal impact No 7 / April 2015 Note: This Statistics Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.2 CONTENTS Abstract 2 Non-technical summary 3 1 Introduction 6 2 Accounting principles for government bailouts Challenges relating to the recording of bailouts European accounting framework Eurostat decisions on open issues in Further accounting decisions, guidance and advice 12 3 Statistical frameworks for the collection of data on European financial assistance measures 15 4 Fiscal impacts of euro area interventions on the financial sector from 2008 to Introduction to the statistical analysis Financing needs for government support to the financial sector Cumulative deficits and estimated loss to governments due to the financial bailouts Changes in contingent liabilities 29 5 The way forward and further accounting challenges 32 6 References 35 7 Annexes 36 Annex 1 The excessive deficit procedure (EDP) 36 Annex 2 EFSF debt rerouted to guarantors 37 Annex 3 Overview of the financial assistance measures (FAM) up to end3 ABSTRACT This paper summarises the accounting principles and methodology used by statisticians within the European System of Central Banks (ESCB) to assess the impact on the government s fiscal position of the assistance measures undertaken to support the financial sector during the financial crisis. It then presents for the euro area and its participating countries the main fiscal impact of these measures for the period The results are mainly structured around three important questions for the wider public: (i) What is the magnitude of the financial resources needed by governments to provide financial support? (ii) What is the current gain or loss to governments from interventions to support the financial sector? And (iii) How did the guarantees provided by governments to the financing sector change over the period? Finally, the paper discusses further accounting challenges associated with this topic. Keywords Bailout measures, impact on government debt and deficit, financial needs and estimated loss, earmarking and recording imputation, capital transfers to the financial sector, change in net financial worth on balance sheet. JEL-code H81 Statistics Paper No 7 / April4 NON-TECHNICAL SUMMARY This paper takes stock of the work achieved so far by government finance statisticians within the European System of Central Banks (ESCB) to assess the impact on the government s fiscal position of the assistance measures to support the financial sector during the financial crisis. The fiscal impact covered in this report is restricted to direct bailout costs in the euro area, excluding all indirect effects on the real economy ( second-round effects ) described in the introduction. The second section of this paper summarises the coordinated European measures to deal with the accounting consequences of the financial crisis and, in particular, with the impact of public sector interventions on the deficit and debt, as defined by the Excessive Deficit Procedure (EDP) 1. At an early stage of the financial crisis, statisticians faced a few methodological challenges in the recording of financial assistance measures: (i) the volatility and uncertainty of asset valuations when the assets had been bought by the government from financial institutions in distress; and (ii) the classification of new entities or vehicles to support ailing financial institutions. While the main answers to the recording of interventions were already available through the transactions described in the European System of Accounts 1995 (ESA95), supplementary decisions and guidance on the recording of transactions have been provided by Eurostat. Many decisions were taken following a consultation procedure with statisticians from central banks and national statistical offices. The third section illustrates two statistical frameworks for the collection of data on European financial assistance measures that have been set up: first within the ESCB and then within the European Statistical System (ESS). These two complementary frameworks generate data about the impact on deficit, debt and contingent liabilities with additional breakdowns. The ESCB framework caters more for policymakers, with a breakdown by type of financial assistance measure for which debt has been issued. The approach taken by the ESS is more focused on the stocks of financial assets held as a result of the financial crisis interventions as well as the concomitant liabilities (including EDP debt). Bridging these two approaches, the fourth section presents the main fiscal impact of the financial assistance measures in the euro area for the period In terms of magnitude, the financial resources needed to finance government bailouts in the euro area are estimated at 5.1% of GDP for the whole period The government acquires these resources either by issuing debt, or in fewer cases, by selling financial assets. These financial needs were essentially recorded during the first three years (4.9% of GDP) of the period The governments allocated 3.4% of GDP to the net acquisition of financial 1 See Annex 1 for more details on the EDP framework Statistics Paper No 7 / April5 assets. The situation is very heterogeneous among euro area countries. The impact on debt for half of the countries was over 5% of GDP up to end Taking into account the impact for the guarantors of the European Financial Stability Facility (EFSF) 2, the whole impact of the bailouts on gross government debt, as defined by the Excessive Deficit Procedure (EDP) for the euro area from 2008 to 2013, is about 6% of GDP out of a total change in debt of 26% of GDP in the same period. Up to end-2013, the cumulative losses for euro area government balances are estimated at 1.7% of GDP, including capital transfers to financial institutions of up to 2% of GDP. These capital transfers consist, for instance, of deficit-increasing recapitalisations, debt assumptions or the purchase of impaired assets (such as bad loans or toxic assets ) by governments. The losses are spread equally over the whole period. Miscellaneous revenues such as guarantee fees, dividends and net interest arising from the interventions represent, on average, a gain of 0.3% of GDP for the government. Further information on the current holding gains/losses on the acquired assets is derived from the useful but incomplete balance sheet of the EDP supplementary table collected by the ESS. The outstanding amount of contingent liabilities (guarantees) of euro area governments declines at a slow pace from 7.8% of GDP at end-2009 to 4.7% at end When compared with the huge guarantees made in the UK in 2009 (34% of GDP), which have already vanished, this suggests that persistent difficulties might exist for some financial institutions in the euro area at the end of 2013 as assets need to be further guaranteed by governments. On the other hand, the euro area governments that intervened at the earliest stage of the crisis by taking on the bulk of the losses associated with the bailout are now granting a much-reduced amount of guarantees to the banking sector. Compared with the euro area, the impact of the UK government s interventions to its financial sector were rather similar up to the end of The relative magnitude of both the respective financial needs and the estimated loss to the government is just slightly higher and could be explained by the importance of its financial sector. However, as these interventions took place in the earliest period of the financial crisis, it can be seen that the unwinding phase in the UK is slightly ahead of the euro area. Indeed, the net acquired assets have decreased more since 2011, and all the guarantees granted to the financial sector have now been withdrawn. However, since 2014, over seven years after the crisis began, the phasing-out of financial assistance measures in the euro area has become more prevalent than the development of new measures. In this closing stage, governments are predominantly unwinding past interventions by 2 See Section for further details on the recording of support to Euro Area countries Statistics Paper No 7 / April6 selling the financial assets acquired in the initial phase of the crisis. This unwinding phase of the interventions is bringing new accounting challenges such as measuring the holding gains and losses, which are described in the fifth section. Statistics Paper No 7 / April7 1 INTRODUCTION A financial crisis that leads to public interventions is not a new phenomenon. A study published by IMF in 2012 identified 147 systemic banking crises occurring all over the world for the period Estimating the size of these crises is a challenging task. Also in 2012, Patrick Honohan and Gerard Caprio estimated the average fiscal cost of 39 systemic crises at 12.5% of GDP in a study entitled Banking Crises. In 2014, Kenneth Rogoff and Carmen Reinhart concluded in a study entitled, Recovery from Financial Crises: Evidence from 100 Episodes, that, on average, it takes about eight years to return to the pre-crisis level of real income. The authors of these studies admitted to difficulties in measuring the fiscal impact of events in a cross-country or intertemporal comparison. In the economic literature, efforts have been made to separate the fiscal costs related to financial instability or financial crises into various categories. The most comprehensive analysis available is the ECB working paper entitled The fiscal costs of financial instability revisited, published in November 2002, and written by Felix Eschenbach and Ludger Schuknecht. The authors identified the three major transmission channels of financial instability (or crisis) on a country s fiscal stance, namely (i) direct bailout costs; (ii) direct revenue effects and (iii) indirect effects via the impact on the real economy. Direct bailout costs arise when a government provides support to distressed financial institutions in order to avoid a systemic financial crisis. The impact on fiscal accounts depends on the form of government intervention. This paper focuses strictly on these direct bailout costs without examining the resulting two spillover effects. The second transmission channel of the financial crisis to the fiscal accounts relates to the direct revenue effects on a country s tax system. Fiscal revenues are directly impacted through the downward change in asset prices driven by financial instability. As examples, direct taxes paid by households on wealth, direct taxes paid by corporations on assets and sales taxes are affected by a decrease in asset prices. A reduction in real estate transactions (in price and volume), slowdown of equity markets, decrease in dividends or the emergence of other depreciated assets all have a negative impact on fiscal revenues due to various tax rules. As a third transmission channel, financial turmoil can affect fiscal accounts indirectly through its impact on the real economy. These second-round effects on fiscal variables are revealed in the medium term in various ways. Lower salaries and higher unemployment trigger a reduction in personal income tax and in social contributions but an increase in unemployment benefits. The negative wealth effect generated by the depreciation of financial and non-financial assets 3 See Luc Laeven and Fabian Valencia (IMF WP/12/163) in Systemic Banking Crises Database: An Update Statistics Paper No 7 / April8 curbs consumption and investment. Thus it reduces indirect tax revenues. Moreover, tighter credit conditions would further exacerbate this decrease. Finally, the subsequent increase in government debt would, in turn, affect the fiscal deficit via higher interest payments. All in all, the government debt ratio would increase as a result of effects on both the numerator and the denominator. During the period under analysis, government debt in the euro area has increased by 26.3% of GDP. For the preceding six-year period ( ), it decreased by 1.7% of GDP. The scope of the paper is to determine precisely the fiscal impact of direct bailouts on the deterioration of the fiscal ratio. The impact generated by the second and third transmission channels are not covered by our analysis. The financial crisis that started in the summer of 2007 originated in the US mortgage market. The sharp increase in defaults revealed the exuberance in the housing market and brought the sub-prime lending business to a sudden halt. The securitisations market froze, banks had to record assets held by special purpose vehicles on their balance sheets and confidence in funding markets was eroded. The crisis spread rapidly through the worldwide financial sector. Central banks across the world responded to the emerging crisis by injecting very large amounts of liquidity into the financial system. The liquidity crisis appeared to be turning into a solvency crisis and governments started to take traditional rescue measures directed at financial institutions. The early support measures took the form of credit lines to failing institutions and rescue mergers. In September 2008, the collapse of Lehman Brothers sent a shockwave through the global financial system, leading to a sharp rise in risk aversion, mistrust between financial players and a drying-up of the funding markets. When the confidence of depositors was affected, governments and central banks were forced to act swiftly to avert the failure of their financial systems. In Europe, after an emergency meeting of the euro area countries in October 2008, EU governments implemented coordinated support measures to alleviate the strain on their banking systems and to restore confidence. Statistics Paper No 7 / April9 2 ACCOUNTING PRINCIPLES FOR GOVERNMENT BAILOUTS 2.1 CHALLENGES RELATING TO THE RECORDING OF BAILOUTS In general, statisticians are confronted by the following main methodological challenges in the recording of financial assistance measures: (i) the volatility and uncertainty over asset values when bought by governments from financial institutions in distress; (ii) the classification of new entities to support ailing financial institutions. Moreover, at the early stage of a financial crisis, statisticians are required to capture and interpret a new flow of information for the recording of sometimes complex interventions in national accounts. As per the general accounting principle in ESA 95 4, financial transactions are recorded at transaction values, which are assumed to represent the market values in normal circumstances. In the case of bailouts, the difficulty lies in the purchase by governments of assets from distressed institutions whose markets are temporarily inactive or somewhat dysfunctional at the peak of the crisis, with highly volatile values. It raises the question of whether the government paid more than the market value for the assets it acquired. This assessment is important because if the government paid more than the market price for the assets, the difference is recorded as a capital transfer (gift) to the entity that sold it, which impacts the government deficit. In national accounts, when a new body is created, its sector classification must be determined. In particular, it must be assessed as to whether or not this entity is a separate institutional unit (e.g. with autonomy of decision-making and a complete set of accounts) and, if so, whether its activities are predominantly market-based. This issue may trigger a significant fiscal impact, as a non-autonomous entity controlled by the government or a non-market unit controlled by the government is classified within general government 5. It implies that the liabilities of such entities are part of the government debt and their balances contribute to the government deficit/surplus. 2.2 EUROPEAN ACCOUNTING FRAMEWORK In a rapidly deteriorating macro-economic environment, the national and European statistical authorities have had to deliver timely and reliable deficit and debt ratios, which remain a cornerstone of the fiscal discipline laid down in the Stability and Growth Pact (SGP) and its 4 5 ESA 95 was replaced by ESA 2010 from September 2014 onwards. The main accounting principles are unchanged while there is more guidance in ESA 2010 on special purpose entities (SPEs) in particular. A Eurostat decision in July 2009 gave further guidance on the classification of Special Purpose Entities (SPEs), addressing the financial crisis for a short temporary duration, as described in Section 2.2. Statistics Paper No 7 / April10 corollary, the Excessive Deficit Procedure (EDP). Providing reliable fiscal data is essential to restore public confidence when many governments have embarked on bank rescue packages. As part of the European coordinated measures, the Committee on Monetary, Financial and Balance of Payments (CMFB) 6 set up a Task Force in November 2008 to deal with the accounting consequences of the financial crisis and, in particular, with the impact of public sector intervention in response to it. Eurostat consults the CMFB before taking its final decision on difficult or controversial methodological issues impacting government deficit and debt. The cornerstone of the statistical response to the recording challenges from government bailouts has been the application of the existing legal framework of national accounts in the EU, the ESA, as well as the former Eurostat s guidance or decisions in the context of the Excessive Deficit Procedure (EDP). The various interventions carried out by public authorities to support the financial sector could be classified into seven types: (i) A recapitalisation of a unit; (ii) A loan granted to a financial unit; (iii) The purchase of existing assets; (iv) An exchange of assets; (v) Debt assumption or a debt cancellation; (vi) Guarantees provided to a financial unit; (vii) Setting-up of new units or special vehicle entities. In general, the recording of underlying transactions included in interventions is already well grounded in national accounts. The respective transactions consist mainly of the purchase by governments of financial assets (e.g. equities, unquoted shares, etc.), in granting loans, assuming debt or providing guarantees in various ways. Statisticians, however, require additional recording guidance due to the specific features of these interventions, especially in the European statistical context when striving for harmonised statistical compilation practices across countries. 2.3 EUROSTAT DECISIONS ON OPEN ISSUES IN 2009 In respect of the typology of interventions and existing accounting rules, the CMFB Task Force examined the first wave of individual intervention cases. It then arranged a consultation in 6 The CMFB is an advisory committee of senior statisticians from national statistical offices and central banks, Eurostat and the ECB. Statistics Paper No 7 / April11 March 2009 for the remaining open issues. Based on the opinion of the CMFB, Eurostat published a decision in July 2009 to ensure consistent treatment across countries for interventions that are the same in substantive terms. This decision refers in its various provisions to existing ESA rules such as those on the classification of units and the valuation rules for financial transactions. It stresses that substance should prevail over form meaning that the accounting treatment should reflect the economic reality rather than the legal or administrative framework of the interventions GUIDANCE ON RECORDING INTERVENTIONS THAT IMPACT DEFICIT The decision further determines how to distinguish, within interventions, the transactions that impact the deficit (e.g. transactions recorded as a capital transfer from government to banks) from those which are neutral to it (e.g. financial transactions), as this distinction is paramount for the EDP. As main examples: a) In the case of governments recapitalisation operations for banks in the form of ordinary shares, this intervention is a financial transaction as long as the transaction takes place at the market price. If, in the capital injection, the government pays for the ordinary shares above the market price, the difference should be recorded as expenditure that impacts the deficit (e.g. a capital transfer to the bank). In the common case of recapitalisation in the form of preference shares, a capital transfer is recorded only if the expected rate of return is deemed insufficient under EU State Aid rules. Where the EU State Aid rules are not complied with, injections could be divided into a financial transaction and a government expenditure component. b) In the case of lending to a financial institution, this should be recorded as a capital transfer (government expenditure); if there is a written or any other irrefutable evidence that the loan or a defined portion of it will not be repaid. Any subsequent cancellation or forgiveness of loans will lead to the recording of government expenditure (capital transfer) for the full amount of the loans involved. c) In the case of the purchase of assets by governments from financial institutions in distress (commonly involving equity instruments and debt securities), a decision tree is used to value the assets when there is no adequate market operating. In short, if the purchase price paid by the government is higher than the estimated market price, a capital transfer (government expenditure) is recorded from the government to the financial institution for the price difference. If the market is disrupted, the estimated market price is determined using the seller s accounting book or a valuation by an independent entity. However, if the Statistics Paper No 7 / April12 assets are later sold in similar market conditions at a lower price than the price paid by the government, the difference in price should be recorded as a capital transfer from the government to the private sector CLASSIFICATION OF NEW DEFEASANCE BODIES Another important aspect of the decision consists of carefully defining the classification of new bodies set up by government or by public or private corporations to address specific aspects of the turmoil. In usual cases, specific assets are incorporated into a special vehicle or entity and treated differently from those assets which are kept within the balance sheet of the residual financial institutions. The decision states that government-owned special purpose entities with no autonomy of decision-making, whose purpose is to conduct specific government policies related, for example, to defeasance or to recapitalisation, are to be classified as belonging to the general government sector. Conversely, majority privately-owned special purpose entities which are established for a short temporary duration to address the financial crisis, even if they receive a government guarantee, are to be recorded outside the general government sector if the losses they are expected to bear are small in comparison with the total size of their liabilities RECORDING OF THE TEMPORARY EXCHANGE OF FINANCIAL ASSETS The decision defines the treatment for recording a specific scheme involving the temporary exchange of financial assets, which is carried out by national central banks to improve the liquidity of the financial sector 7. Under this scheme, government securities are exchanged but they are to return to the government at a pre-determined date in a short period of time and with the risk of loss expected to be small. Fulfilling these conditions, the exchange of securities is recorded as a securities lending transaction. This recording is justified as the government retains economic ownership of these securities. As a consequence, these government-owned securities do not form part of government consolidated debt but act as a guarantee. In the case that triggered this accounting rule, the respective national central bank (NCB) played a pivotal role under this scheme by receiving as collateral from the private banks discounted asset backed securities or covered bonds against securities lent by government. When the exchange of financial assets is not constrained by a specific duration or is exposed to the risk of loss, the government that issued the securities can no longer retain economic 7 The sizeable scheme that initiated the consultation was the Special Liquidity Scheme (SLS) conducted by the UK Treasury together with the Bank of England. Treasury bills with a face value of 185 bn have been lent under this Scheme (more than 12% of GDP). Statistics Paper No 7 / April13 ownership of them. Therefore, the transaction is recorded as a back-to-back repurchase agreement rather than as securities lent by the government. Under these circumstances, the government-issued securities are initially held by banks before the agreed repurchase. In this case, these issued securities are part of government gross debt CONTINGENT LIABILITIES (GUARANTEES) The Eurostat decision confirms that guarantees are contingent liabilities (i.e. contractual arrangements where specified conditions must be fulfilled before a transaction takes place) with no direct impact on the government accounts when they are granted, unless there is irrefutable written evidence that they will be called. In the context of financial institutions, guarantees provide an assurance that should a debtor (financial institution) be unable to meet its liability, the guarantor (here the government) will meet it. Guarantees are granted in relation to deposits or borrowing, or might be extended to the value of assets in some circumstances. 2.4 FURTHER ACCOUNTING DECISIONS, GUIDANCE AND ADVICE Since the Eurostat decision in 2009, the recording of bailout interventions in national accounts has been supported by other accounting decisions and advice that can be classified as follows: (i) a Eurostat decision to define the statistical treatment for lending money to euro area countries in financial difficulties; (ii) advice granted by Eurostat to individual Member States on the statistical treatment of specific cases in their country; (iii) further guidance supplementing initial accounting rules RECORDING OF THE SUPPORT TO EURO AREA COUNTRIES The severe economic downward spiral due to the financial crisis and all subsequent rapid fiscal deterioration obliged the European authorities to find support mechanisms consisting of the granting of loans to a few euro area countries. At that stage, the risk premium on their sovereign bonds was an obstacle to obtaining further financing by the market and returning to fiscal balance. The first solutions such as the Greek loan facility, the European Financial Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF) were deemed to be temporary 8. The European Council, at its meeting in March 2011, agreed on important steps to 8 The EFSF granted loans to Greece, Ireland and Portugal. As of 1 July 2013, the EFSF is no longer engaging in new financing programmes. Ireland and Portugal officially exited the EFSF financial assistance programme in 2013 and 2014 respectively. Statistics Paper No 7 / April14 strengthen the EU economic governance framework. The package included the establishment of a permanent financing facility (ESM) 9 in case of imbalances in individual countries. There is a major difference in the statistical treatment decided on for the EFSF and ESM. The EFSF is acting on behalf of the guarantor euro area countries when lending to a country in financial need. Therefore, the fact that the guarantor countries lend the money to the respective country is recorded. As a consequence, it is not only the government debt of the country receiving financing that increases but also the gross debt of the guarantor countries rises in proportion to their respective shares in the guarantees provided to the EFSF. On the other hand, the ESM is treated in the same way as similar international financial organisation such as the IMF. Accordingly, loans from the ESM impact the debt of the debtor country but not the guarantors of the ESM. Therefore, loans from the ESM have no impact on the government debt of the guarantors BILATERAL ADVICE TO MEMBER STATES During the period of financial turmoil, EU Member States have regularly consulted Eurostat for advice on the recording treatment of specific cases. Further interpretation of the rules is needed for borderline cases. In the European context of harmonised fiscal data, the published response of Eurostat to the National Statistical Institutes (NSIs) goes beyond bilateral advice as it may set a precedent for similar cases in other Member States. This response can take the progressive form of a preliminary view, advice or decision. Unless a decision is taken by Eurostat, a methodological discussion might be held among appropriate experts. As an example, in the event of substantial new methodological developments, Eurostat drafts a note with the support of the national experts of NCBs, NSIs and the ECB. After consultation, this guidance note is included in the Manual on Government Deficit and Debt (MGDD) FURTHER GUIDANCE ON BANK RECAPITALISATIONS AND THE CLASSIFICATION OF UNITS The recording of government capital injections to banks had to be further clarified beyond the Eurostat decision in July 2009 as the reference to compliance with the State Aid rules does not guarantee a market return to the government. This is especially the case where the bailed out entity is to exit the market. 9 The ESM (with financial assistance for Cyprus and Spain) entered into force on 8 October 2012 replacing the EFSF. The assistance to Spain expired in Statistics Paper No 7 / April15 The recording of the recapitalisation of Dexia in 2012 led to a CMFB consultation 10. As a consequence, Eurostat published a new decision in March 2013 which created a hierarchy in the criteria for a recapitalisation. Accordingly, the most decisive criterion is to assess whether the financial instrument used for recapitalisation ensures a sufficient non-contingent rate of return for the government. As complementary criteria to define the transaction, the existence of private shareholders (in favour of a financial transaction) and the accumulations of net losses (in favour of a capital transfer) might be applied. Due to the magnitude of the transaction, the decision to record the recapitalisation as a capital transfer or financial transaction is sensitive because it impacts the government s deficit during the year concerned. Future holding gains and losses related to the acquired asset through the recapitalisation (usually unquoted shares) might offset or worsen the initial recording. During a financial crisis, bank recapitalisations have been a frequent state aid measure. A survey carried out at the ECB 11 identified 80 recapitalised banks in the euro area from 1 July 2007 to 30 June Among them, 25 banks were nationalised, i.e. the government gained, at least temporarily, more than 90% of the votes due to capital injection(s) This CMFB consultation of March 2013 (see opinion: supplements the guidance note published in July in 2012 on the impact of bank recapitalisations by creating a further hierarchy in the criteria for classification. (see ) A survey carried out by the General Financial Stability Directorate. Statistics Paper No 7 / April16 3 STATISTICAL FRAMEWORKS FOR THE COLLECTION OF DATA ON EUROPEAN FINANCIAL ASSISTANCE MEASURES Since the beginning of the financial turmoil in 2008, the members of the ESCB Working Group on Government Finance Statistics have provided the ECB with information on the financial interventions taken by their respective governments to stabilise the financial markets. It enabled the ECB s decision-making body, the Executive Board, to be regularly informed of the fiscal impact of these interventions on the government deficit, debt and contingent liabilities. The initial data collection allowed the ECB to communicate the impact of the first wave of interventions to the wider public through various outputs such as an article in the Monthly Bulletin in July 2009 and an Occasional Paper in April 2010 (see references). Later, the Eurostat decision in July 2009 required national statisticians to inform the wider public of the direct fiscal impact of the bailout measures. In order to do so, supplementary tables were set up within the statistical reporting area of the Excessive Deficit Procedure (EDP) to collect and publish, twice a year, national data on guarantees, liquidity support measures and special purpose entity operations relating to the financial turmoil. As this decision was backed by the CMFB Task Force, NCBs joined forces with NSIs to produce this output. As a result of these initiatives at the ESCB and Eurostat, two statistical frameworks for the collection of data on European financial assistance measures have been set up. Based on similar source data, the compiled data are presented with different breakdowns. The two approaches, however, have the same three fundamental features: (i) The recording in national accounts of the transactions relating to the interventions is the same. It follows the accounting principles, rules and guidance described in the previous section; (ii) It is assumed that each government intervention resulting in a transfer of cash to the banking sector (e.g. capital injections, purchase of financial assets, loans granted) is financed and impacts government debt. (iii) The fiscal results of the bailouts are converging into three indicators: a) the impact of interventions on government gross debt; b) the impact on annual government balances (deficit/surplus) and c) the impact on government contingent liabilities. A closer examination of these three fiscal measurements in both approaches (see Table 1 below) shows the following differences: Statistics Paper No 7 / April17 Table 1 Data requests on the fiscal impact on government debt of financial assistance measures (Status in March 2014) ECB DG-Statistics 1: Impact on general government gross debt (change in relation to the previous year) Net acquisition of shares of which acquisition of new shares of which sales of shares Net provision of loans of which provision of new loans of which repayment of loans Net purchases of (impaired) assets of which asset purchases of which asset sales Debt assumptions / cancellations Other measures Eurostat Part 1 : Net revenue/cost for general government (impact on ESA95 government deficit) REVENUE Guarantee fees receivable Interest receivable Dividends receivable Other EXPENDITURE Interest payable Capital injections recorded as deficit-increasing (capital transfer) Calls on guarantees Other Net revenue/cost for general government DIRECT NET IMPACT ON GROSS DEBT of which total acquisitions of which redemptions Indirect impact on debt TOTAL IMPACT ON GROSS DEBT 2: Contingent liabilities of general government (g) (h) (change in relation to the previous year) Change in debt of other special purpose entities of which covered by government guarantee Other guarantees provided Asset swaps / lending Total contingent liabilities 3: Impact on general government net lending / borrowing REVENUE Part 2A : Outstanding amount of assets, actual liabilities 2A.1 Assets - Closing balance sheet Loans Securities other than shares Shares and other equity 2A.2 Liabilties - Closing balance sheet Loans Securities other than shares Part 2B: Contingent liabilities of general government Outside general government - Contingent liabilities Liabilities and assets outside general government under guarantee Securities issued under liquidity schemes Special purpose entities Guarantee fees receivable Interest receivable Dividends receivable Other EXPENDITURE Interest payable Guarantees called Capital injections recorded as deficit increasing (capital transfers) Capital transfers recorded in the context of asset purchases Other NET LENDING / BORROWING With regard to the impact on the debt (part 2A.2 of the Eurostat table and part 1 of the ECB table), the ECB data requirement does not include a breakdown of the EDP debt by instrument. Statistics Paper No 7 / April18 Instead, it contains a breakdown of the change in debt by type of financial assistance measure (e.g. net purchases of impaired assets, debt assumption). Second, the ECB requires gross acquisitions and redemptions of financial instruments in order to collect information on both the building-up and unwinding of the financial assistance measures. These alternative breakdowns are deemed useful for policy analysis, especially in the second phase of the crisis when the assets acquired by government are progressively disposed of. Third, the last difference is that the ECB DG-S table requires two levels of liabilities: (i) the immediate borrowing needs related to financial assistance measures and (ii) the (net) subsequent borrowing needs or financing costs triggered by those measures. Second-round effects include items such as compound income or expenditure generated in subsequent accounting periods. For instance, the financial income generated by the fees received from banks against guarantees granted by the government in the initial accounting period. By contrast, in the Eurostat presentation, the liabilities recognised in respect of the financing of measures are part of EDP debt and are classified under the item, securities other than shares 12. For the fiscal balance (deficit/surplus) of governments (part 1 of the Eurostat table and part 3 of the ECB table), the headings for government revenues and expenditure are almost identical. ECB Table 3 has an additional heading with Guarantees called in the expenditure section. Likewise, the difference for contingent liabilities (part 2B of the Eurostat table and part 1 of the ECB table) is just in the presentation. The Eurostat table shows an outstanding amount while the ECB table shows a yearly net change compared with the previous year). In Table 2A.1, Eurostat also presents a balance sheet of the financial assets acquired by the government as part of the intervention. This data set will be used in the next section to calculate changes in balance sheet positions and its methodology will be discussed in the conclusions. Despite these differences in statistical frameworks 13, the major fiscal aggregates on the impact of the interventions generated by them are almost identical, especially when reported as a percentage of GDP. Some differences can be removed through appropriate bridges between data. With further co-ordination, the two presentations could have been merged into a single harmonised data requirement encompassing the benefits of both approaches and reducing the need for further methodological clarification between compilers This heading is renamed debt securities under the ESA The two data requirements as presented above are those which were used until Spring A few enhancements to the two frameworks were made later in order to address specific recording challenges related to the unwinding phase of the interventions including the reclassification of financial entities. These issues are further described in Section 5. Statistics Paper No 7 / April19 4 FISCAL IMPACTS OF EURO AREA INTERVENTIONS ON THE FINANCIAL SECTOR FROM 2008 TO INTRODUCTION TO THE STATISTICAL ANALYSIS The government assistance measures to the financial sector initiated since 2008 are not yet over in the whole euro area, although the last phase of the crisis seems to have been almost reached or is under way in many countries. Indeed, most national governments are no longer introducing any new supportive measures but are phasing out past interventions by selling the financial assets acquired in the initial phase of the crisis. However, a final series of interventions can be observed in a few countries in The following analysis should, therefore, be considered as a first interim report on the estimated direct fiscal impact of the bailouts up to The analytical presentation of the fiscal impact of government financial assistance measures in the euro area from 2008 to 2013 mainly seeks to answer three questions: 1. What is the magnitude of the financial resources needed by euro area governments from 2008 to 2013 to provide the financial support? (see section 4.2) 2. What is the current gain or loss (up to 2013) for euro area governments due to the interventions to support the financial sector? (see section 4.3) 3. How did the guarantees granted by euro area governments to the financing sector develop over the period? (see section 4.4) In all cases, the answers are given as a ratio expressed as a percentage of 2013 GDP. 4.2 FINANCING NEEDS FOR GOVERNMENT SUPPORT TO THE FINANCIAL SECTOR As a general principle, all measures to support the financial sector need to be financed. These financing needs are met either by issuing debt or through the sale of financial assets. In most countries, these financing needs were solely met through the issuance of debt, or it is assumed to be so unless there is evidence that the sale of financial assets financed the respective support. This was only the case in Ireland where a government intervention was financed through the disposal of a pensions reserve fund. Accordingly, Table 2 assumes that a debt is imputed to any net acquisitions of financial assets by government. Statistics Paper No 7 / April20 Table 2 Financial needs for government bail-outs & impact on EDP debt (In ratio expressed as a % of 2013 GDP) A. Financial needs to support Financial Sector from 2008 to 2013 B. Impact on EDP Debt 1. Total & breakdown per period 2. Breakdown of transactions per kind of need 3. Nontransaction % of GDP from 2008 to 2010 from 2011 to Financial balance Net acquisitions of financial assets (*) 2.2. Non-financial balance Cumulated deficit/surplus (**) (***) Reclassification and other flows (****) Impact on EDP Debt up to 2013 BE DE EE IE GR ES FR IT CY LV LU MT NL AT PT Sl SK FI EA UK Sources: ESCB (for columns 1, 2 and 3) ; Eurostat (impact on EDP debt, last column) (*) A debt is imputed to the net acquisitions of financial assets by government (equities, loans, debt securities,..) The capital transfers to the banks are excluded from these transactions as they are recorded in (**) (**) Should the interventions lead to a deficit, the balance is presented here with a positive sign (+) because it expresses a financing need related to these interventions (***) The revenue of government excludes non-cash transfer imputed from financial corporations to central government (****) In addition to the impact due to reclassification and other flows (i.e. change in liabilities valuation) this data set contains also in a few countries some miscellaneous financing cost or revenue not imputed in the debt for the EDP supplementary table As illustrated by the above Table 2 (section A), the financial needs for government bailouts in the euro area are estimated at 5.1% of GDP for the whole period Government responses have varied greatly among euro area countries. Those requesting the most significant financial resources up to the end of more than 3.5% of their GDP - are Ireland (37.3%), Greece (24.8%), Slovenia (14.2%), Cyprus (10.5%), Portugal (10.4%), Statistics Paper No 7 / April View more
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