Risk management of contingent liabilities within a sovereign asset-liability framework

The focus of this paper is the insight gained into managing sovereign contingent liabilities (CL) by considering their risks together with those of other government assets and liabilities. Important research has already been made on the potentially destabilizing fiscal impact of CL, which can mask the true fiscal situation of a sovereign. Additional insights can be gained by working within a broader conceptual framework based on the government's balance sheet. This approach would place contingent liabilities alongside other sovereign exposures arising from both assets and liabilities, in order to systematically identify and then quantify both the interaction between the various risk types and total sovereign risk. Although CL has characteristics which imply a specific approach to their valuation, there are more similarities than differences with other balance sheet items when it comes to identifying and quantifying sovereign risk.