and accumulating arrears in taxes, social security contributions, and/or wages, and/or to their suppliers."<sup>2</sup> Prior to the end of 1998, 13 domestic and two external guarantees have been called. Expanding our ALM approach to cover contingent liabilities, we mainly observe that enterprise debt covered by state guarantees largely has floating interest rate and is denominated in foreign currency. An increase in interest rates and appreciation of the dollar vis-A-vis the Euro will make the guarantees more likely to be called as well as will raise the budgetary cost of each guarantee called. Chart 8 shows future possible budgetary cost of the outstanding external guarantees (excluding the IMF guaranteed debt) according to different default risk levels. The maturity of enterprise debt is relatively short, thus front-loading the fiscal risk of the existing guarantees. Under a 60-percent default scenario, the fiscal loss would range between 1.2 and 1.4 percent of budget revenues in 2000-2004.'3 The demand for new guarantees is high emanating both from official donors and the private sector. Box 1, below illustrates the case of the energy sector.

The government has established a simple framework for dealing with guarantees. Particularly the government has developed a comprehensive register of guarantees (placed in the State Audit Office as well as both the Ministry of Finance and Bulgarian National Bank) and introduced regular publishing of the aggregate amounts of guarantees outstanding along with government debt figures. The register covers all external and domestic guarantees, indicating the beneficiary, creditor, project title, amount, currency, and debt repayment schedule. The government also centralized the issuance of new guarantees and subjected each new guarantee to executive and legislative scrutiny associated with regular budget process. Each guarantee request, accompanied by opinion of appropriate line ministries, has to be reviewed by the Ministry of Finance. With opinion of the Ministry of Finance and possible input of the State Audit Office, each guarantee needs an approval by Council of Ministers and Parliament's ratification.

In terms of nominal limits, Decree 482 of 1997 set the annual limit on guarantees (face value) issued at 20 percent of expected budget revenues. A recent amendment to this Decree, however, dropped the complementary ceiling of 20 percent of GDP on the total amount of guaranteed debt outstanding (replacing it with a flexible ceiling to be set in the budget process each year). This change significantly expands the legal room for the government to issue new guarantees. Moreover, relatively lax limits on guarantee amounts are accompanied by flexible reserve requirements. So far, the government has followed prudent reserve policy, though not underpinned by any rules or clear risk assessment practices. The state budget included reserves in the amount of 50 and 20 percent of the total scheduled guaranteed debt repayment (normally to be paid directly by the debtors) in 1998 and 1999, respectively. Furthermore, under guarantee

> 12 Beneficiaries of state guarantees include such continued loss-makers as the Bulgarian Railways, Bourgas Port, and Maritza Iztok mines. Other large loss-makers with obligations covered by the state, such as Zarneni Hrani, are in the process of shutting down.

> 13 In Hungary and the Czech Republic, state guarantees covering all risks under the contract have been called with roughly 20 and 40 percent probability.

23