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Benjamin Hartung

18 May 2021
Financial Stability Review Issue 1, 2021
Public loan guarantee schemes have been crucial in mitigating financial stability risks during the pandemic. At the same time, these schemes constitute sizeable and novel contingent liabilities for governments in most euro area countries, adding to the stock of both existing government guarantees and other implicit contingent liabilities, which reinforces concerns about the emergence of an adverse sovereign-bank-corporate nexus. More conventional materialisations of contingent liabilities related to implicit commitments towards large corporates and state-owned enterprises have occurred more frequently and have also entailed higher costs in the past and may still occur going forward. This would pose a larger tail risk for sovereigns than their direct exposure through guarantees would suggest. Against this backdrop, this box presents historical evidence from contingent liability materialisations, investigates their commonalities and differences with the situation under the current pandemic-induced shock and assesses the ensuing risk for sovereigns.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
H81 : Public Economics→Miscellaneous Issues→Governmental Loans, Loan Guarantees, Credits, Grants, Bailouts