Contingent liabilities - a threat to fiscal stability

Contingent government liabilities are associated with major hidden fiscal risks. Thus fiscal adjustment that targets deficit and debt reduction does not necessarily prevent fiscal instability. Banking problems, for example, have often unexpectedly drawn on public resources.

Fiscal risks and uncertainties are increasing for four main reasons. Private capital flows are increasing and becoming more volatile. States are moving from financing services to guaranteeing outcomes. Moral hazard in markets is on the rise. And policymakers are engaging in fiscal opportunism.