On Contingent Liabilities and the Likelihood of Fiscal Crises&ast

Craig Burnside

Comparative Economic Studies, 2002, vol. 44, issue 1, 14 pages

Abstract: A contingent liability is a commitment to take on an actual liability that could be realized in the future. International organizations emphasize the dangers of contingent liabilities when providing advice. Why? One reason is that when contingent liabilities are realized they often commit governments to substantial fiscal costs. Another reason is subtler: by taking on a contingent liability the government can increase the probability of the event that would trigger its realization. This paper focuses on a particular case: it describes the process by which government guarantees to bank creditors can make a banking system more fragile. Comparative Economic Studies (2002) 44, 1–14; doi:10.1057/ces.2002.2

Date: 2002
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