Definition
Contingent Liabilities (Government Guarantees)
Contingent liabilities are potential future obligations of the government, such as guarantees on borrowings by PSUs, that crystallise only if certain events occur.
When the government guarantees the borrowing of a PSU or backs a scheme, it does not record an immediate expense, but it takes on a contingent liability that becomes real if the borrower defaults. Such guarantees are disclosed separately from the headline fiscal deficit.
Large contingent liabilities can mask the true risk to public finances, much like off-budget borrowing. Rating agencies and the CAG watch them closely, since a wave of invoked guarantees could force unplanned spending and widen the deficit.
Related terms
- Off-Budget BorrowingOff-budget borrowing is debt raised by public sector entities on behalf of the government that does not appear in the headline fiscal deficit.
- Bank RecapitalisationBank recapitalisation is the infusion of fresh capital into public sector banks, often by the government, to shore up their balance sheets and lending capacity.
- Fiscal DeficitThe fiscal deficit is the gap between the government's total spending and its total revenue, showing how much it must borrow in a year.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.