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Contingent liabilities have gained prominence in the analysis of public finance. Indeed, history is full of episodes in which the financial position of the public sector is substantially altered-or its true nature uncovered-as a result of government bailouts of financial or nonfinancial entities, in both the private and the public sector. The paper discusses theoretical and practical issues raised by contingent liabilities, including the rationale for taking them on, how to safeguard against the fiscal risks associated with them, how to account and budget for them, and how to disclose them. Co

The global financial crisis has underscored the need to pay attention to contingent government liabilities that could arise from bank failures for sovereign risk management. This paper proposes a simple method to construct a contingent liability index (CLI) for a banking sector that takes into account the size and concentration of the banking system, market expectations of bank defaults, and perceptions of government support to each bank. This method allows us to track potential government liabilities related to bank failures for 32 advanced and emerging economies on a monthly basis from 2006 to 2013. Furthermore, we find that the CLI is a significant determinant of sovereign CDS spreads. Our results suggest that a 1 percentage point increase in the CLI is associated with an increase in sovereign CDS spreads by 24 basis points for advanced economies and 75 basis points for emerging markets on average.

The global financial crisis has underscored the need to pay attention to contingent government liabilities that could arise from bank failures for sovereign risk management. This paper proposes a simple method to construct a contingent liability index (CLI) for a banking sector that takes into account the size and concentration of the banking system, market expectations of bank defaults, and perceptions of government support to each bank. This method allows us to track potential government liabilities related to bank failures for 32 advanced and emerging economies on a monthly basis from 2006 to 2013. Furthermore, we find that the CLI is a significant determinant of sovereign CDS spreads. Our results suggest that a 1 percentage point increase in the CLI is associated with an increase in sovereign CDS spreads by 24 basis points for advanced economies and 75 basis points for emerging markets on average.

Prior to 2012, Washington municipalities frequently relied on contingentliability agreements ("CLA" or "CLAs") to reduce borrowing costs because such liabilities did not constitute debt under article VIII of the Washington State Constitution. But the viability of CLAs was called into question by the Washington State Supreme Court's 2012 plurality decision in In re Bond Issuance of Greater Wenatchee Regional Events Center Public Facilities District ("Wenatchee Events Center"), which applied a new method for determining what constitutes debt—the risk-of-loss principle—to conclude that the entire value of a CLA constitutes debt. This Essay urges the Court to revisit the opinion because the decision fails to offer clear guidance and relies on an unpersuasive distinction between debt and indebtedness to explain the holding. Additionally, this Essay argues that the risk-of-loss principle is not the correct standard for municipal debt because the framework is not supported by Washington precedent and the principle is a novel approach that disregards the origins of Washington's debt provisions. If the Court decides to continue treating CLAs as debt, this Essay suggests the Court should not follow Wenatchee Event Center's conclusion that the entire value of the CLA is debt and instead adopt the approach of the Generally Accepted Accounting Principles for governments: The amount of debt equals only that portion that is likely to become owed.