for govemment to re-estimate periodically the sensitivities of its risk exposure with respect to changes in the underlying assumptions and to decide on reserve and hedging strategies accordingly. For implicit risks, medium-term fiscal strategy should be accompanied by confidential contingency plans on how to proceed when implicit and indirect risks materialize.

Similarly, equity and efficiency considerations are relevant only if they address the whole range of fiscal activities and their future likely costs. The budget law should require that guarantees and other promises of contingent government support be subject to the same scrutiny as budgetary programs.

_Create accountabilityfor risk analysis and management._ To ensure that policy makers adequately reflect fiscal risks in their fiscal plans, they must become accountable for their analysis and assumptions. Therefore, supreme audit institutions and budget reports should comment on, and evaluate ex post, government risk analysis and risk management.

_Share risk._ To create proper incentives for the borrower, lender, and program manager under programs of government contingent support, the budget law should demand a significant amount of risk to be shared by these parties. The budget law may advise that state guarantees will not cover either the full credit/obligations or risks that are under control of the borrower and lender, such as specific commercial risks.

_Make provisions and account for fiscal risk_ Budgeting and provisioning for fiscal risk has three main objectives: First, draw more attention to risk analysis, and thus build risk awareness of policy makers and the public. In this context, the process of risk analysis is often more important than the actual end estimate of government risk exposure. Second, make policymakers cash neutral, that is neutral between .,c_ `.< I", X alternative forms of providing government 3 PrivateSector Logic onPovisioning support from the viewpoint of deficit The private sector offer examples, why to, i measurement and sectoral budgetary envelopes. ;F p ily for the expeted cost of contingent ff suport immanediately in the year the program isR Third, particularly important for governments issu Prams of contingent support can bd with a limited access to debt markets, create a often shown as a put option twritten (given) by the IV buffer for the event that risks materialize. goveent. In tie private sector, financialinstitutonchatges **Yfull** option price when writing X(seIltng) anoiA£ion. Price of aln option reflects the Allen Schick, 1999 has summarized the present value of the future possible loss, which'g contemporary approaches to meet the above may be incurred by the underwriting institution.M, 26 objectives in the following principles : As illustrated by the Black-Scholes formula, theg .rtce increases0:V with the time to expiry (egJ.. Apply joint ceiling for the cost of budgetary gmaturtt of the guaranteed loan) and with theR;,R and off-budget support for each sector in a olatility of the unerlying asset (eg., share price - fiscal year. Off-budget support is a form of the enterprise the debt of which is under the subsidy, which should be considered along r ). Financial institutions charge the full . susi,ton price immediately at time of selling the^ >don. The) amount Xis: then! used either to buildlN ___eerves or to buy a hedge. See Hull, 1997.

**26** For suggestions in a country-context see Brixi, Ghanem and Islam, 1999, Mody 1999, and Brixi, Papp and Schick, 1999.

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