Economic Policy Ministry of Finance publications – 20b/2017 Overview of Central Government Risks and Liabilities, spring 2017 Overview of Central Government Risks and Liabilities, spring 2017 Ministry of Finance, Helsinki 2017 Ministry of Finance Publication 20b/2017 Ministry of Finance ISBN Nid.: 978-952-251-869-9 ISBN PDF: 978-952-251-870-5 Layout: Government Administration Department / Information Support and Publications Unit / Pirkko Ala-Marttila Helsinki 2017 Description sheet Published by Ministry of Finance June 2017 Authors Ministry of Finance Title of publication Overview of Central Government Risks and Liabilities, Spring 2017 Series and publication number Ministry of Finance publications 20b/2017 Register number Subject Economic Policy ISBN (printed) 978-952-251-869-9 ISSN (printed) 1459-3394 ISBN PDF 978-952-251-870-5 ISSN (PDF) 1797-9714 Website address (URN) http://urn.fi/URN:ISBN:978-952-251-870-5 Pages 80 Language English Keywords Economic policy, general government finances, central government finances, government balance sheet, extrabudgetary liabilities, guarantee liabilities Abstract Fiscal risks refer to a range of factors that can have unpredictable consequences for government finances. Fiscal liabilities and associated risks may emanate from multiple potential sources within the state budget economy, government funds and state enterprises. In addition to state debt and pension liabilities, government fiscal liabilities mainly consist of guarantees. Fiscal liabilities may also accrue from the local government sector, private sector (e.g. government-controlled enterprises), or the financial market (e.g. the banking sector). Furthermore, the government often bears ultimate de facto responsibility for securing functions that are critical to society in terms of continuity of operation, even if it is under no direct legal or contractual obligation to do so. The government’s liabilities have increased sharply in recent years. There has been a particularly strong rise in the volume of government guarantees of Finnvera and the National Housing Fund. The nominal value of the government guarantees in focus here now stands at approx. 21% of GDP. This is a high figure by international comparison, although differences in reporting procedures make it difficult to compare the true nominal values of guarantees. However according to Eurostat data collected in 2015, Finland’s general government guarantees to GDP ratio was the highest in the EU at 28.34%. Likewise, Finland recorded the highest annual growth from 2014 to 2015 at 2.84% of GDP. Government fiscal risks may be broadly defined as comprising any deviations from budget forecasts that adversely affect the central government balance or budgetary position. These risks include macroeconomic shocks, market risks and other risks involved in central government assets and debts, and risks involved in the implicit contingent liabilities taken on by or otherwise falling upon central government. Several factors may work simultaneously to undermine the financial position of general government. Risks associated with macroeconomic development, general government debt, government holdings, export guarantees issued and other risks related to government liabilities correlate with one another. Typically, under conditions of normal cyclical fluctuations, only some of these risks materialise. The costs arising from the realisation of the government’s guarantee obligations may constitute a significant burden for the national economy. This underscores the importance of carefully monitoring and managing fiscal liabilities. Publisher Ministry of Finance Printed by (place and time) Lönnberg Print & Promo, 2017 Publication sales/ Distributed by Online version: julkaisut.valtioneuvosto.fi Publication sales: julkaisutilaukset.valtioneuvosto.fi Contents 1 Abstract ..................................................................................................................................................................... 7 2 Introduction ................................................................................................................................................................. 9 3 Risks associated with macroeconomic development .............................................................. 11 3.1 Macroeconomic development a major element in budget planning........................ 11 3.2 Sensitivity of general government finances to economic cycles..................................... 12 3.3 Actual economic cycles and forecast errors.......................................................................................... 13 3.4 Development in 2016 and the realisation of macroeconomic risk................................ 14 3.5 Risks associated with macroeconomic development.................................................................. 15 4 Government liabilities ........................................................................................................................................ 17 4.1 Direct government liabilities................................................................................................................................. 18 4.1.1 Debt .................................................................................................................................................... 19 4.1.2 Life cycle model (public-private partnership, PPP)....................................................................... 23 4.1.3 Multiannual government liabilities................................................................................................... 25 4.2 Contingent government liabilities.................................................................................................................. 28 4.2.1 Government guarantees ....................................................................................................................... 28 4.2.2 Capital liabilities..................................................................................................................................... 44 4.2.3 Risks and liabilities associated with the banking sector ............................................................ 45 4.2.4 Local government.................................................................................................................................. 51 4.2.5 State-owned enterprises....................................................................................................................... 57 4.2.6 Liabilities associated with environmental and chemical safety................................................ 59 4.2.7 Contractual liabilities ............................................................................................................................ 60 5 Government assets ................................................................................................................................................ 61 5.1 General government overall revenue and expense statement and overall balance sheet.................................................................................................................................................... 62 5.1.1 Government revenue and expense statement................................................................................. 62 5.1.2 Balance sheet........................................................................................................................................... 63 6 Summary of government risks and liabilities .............................................................................. 67 REFERENCES ..................................................................................................................................................................... 71 Appendix 1 ..................................................................................................................................................................... 72 Appendix 2 ..................................................................................................................................................................... 74 7 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 1 Abstract • Fiscal risks refer to a range of factors that can have unpredictable consequences for gover- nment finances. Fiscal liabilities and associated risks may emanate from multiple poten- tial sources within the state budget economy, government funds and State enterprises. In addition to state debt and pension liabilities, government fiscal liabilities consist mainly of guarantees. Fiscal liabilities may also accrue from the local government sector, the private sector (e.g. government-controlled enterprises) or the financial market (e.g. the banking se- ctor). Furthermore, the government often bears ultimate de facto responsibility for securing functions that are critical to society in terms of continuity of operation, even if it is under no direct legal or contractual obligation to do so. This makes it necessary to adopt a fairly broad perspective when assessing risk sources, even if not all of the fiscal risks a government may face can ever be identified. • By international comparison, Finland’s guarantees are at a high level, although different reporting procedures, among other reasons, make it difficult to compare the true nominal values of guarantees. According to the most recent Eurostat data (2015), Finland’s general government guarantees to GDP ratio was the highest in the EU. The nominal value of all go- vernment guarantees has doubled in a few years to EUR 46 billion, or 21% of GDP. The increa- se in 2016 was EUR 1.7 billion. In addition, the callable capital contributions payable to inter- national financial institutions have grown multifold, mainly as a result of EU financial crisis management. Their ratio to GDP is 8.4%. • There has been a particularly sharp rise in the volumes of guarantees of Finnvera and other government funds – mainly housing loan guarantees. Even though export financing liabili- ties did not increase in 2016, these remain subject to growth pressures. During 2016, Parlia- ment approved several increases in the maximum authorisations for export financing. This is indicative of government liabilities continuing to grow strongly also in the foreseeable future. Financing arrangements arising from the regional government reform may result in a significant increase in the government guarantee portfolio due to the transfer of properties and loans (hospital districts in particular). 8 MINISTRY OF FINANCE PUBLICATION 20B/2017 • Low interest rates in recent years have brought down interest expenses despite the sharp rise in the amount of debt. In the Finnish State Budget, interest expenses have decreased from EUR 2.2 billion euro in 2008 to EUR 1.5 billion in 2016. At the same time, interest expenses as a percentage of GDP have been halved. Over the same period, the combined debt of central and local government has nearly doubled. Interest rates will not remain low in perpetuity, however. A permanent increase of e.g. one percentage point in the general rate of interest on government debt would increase the government’s interest expenses so that in 2019, for example, annual interest expenses on debt would be approximately EUR 500 million higher than at present. Rising interest rates are reflected in interest expenses i.a. when central and local government have the need to issue new debt. • The banking sector in Finland is characterised by its fairly large size relative to the econo- my, its centralised structure and its strong links to other Nordic countries and to Sweden in particular. While these constitute potential risk factors, for now the banks have healthy ca- pital adequacy and liquidity. The banking sector in Finland is currently undergoing a ma- jor restructuring that will result in considerable changes to the Finnish banking landscape when compared to e.g. the start of 2014. In the coming year, two of the three largest credit institutions active in Finland may be under the control of other Nordic authorities, while the third may come under the control of European authorities. This would leave only small and medium-sized domestic credit institutions under the direct control of Finnish authorities. Going ahead, previously unknown uncertainty will attach to the timely and comprehensive availability of information with regard to key actors in the financial sector. Any crisis resoluti- on concerning the three largest actors will also be decided by non-Finnish authorities. On the other hand, the risk of covering large deposit guarantee compensations from State funds has decreased and may continue to decrease in the coming year. Nonetheless, the Finnish sche- me will remain liable for a significant volume of guaranteed deposits. • Risks related to general government finances are usually linked to general economic trends. Under exceptionally difficult economic circumstances, general government finances may be eroded for several reasons. Risks related to macroeconomic development, general govern- ment debt, government holdings, the export guarantees issued and other risks related to ot- her government liabilities correlate with each other. Under the conditions of normal cyclical fluctuations, only some of these risks will typically be realised. 9 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 2 Introduction Fiscal risks refer to a range of factors that can have unpredictable consequences for gov- ernment finances. Since the government often bears ultimate responsibility for securing functions to ensure the functioning and continuity of the social system, its responsibili- ties reach far and wide. This in turn means that the risks affecting government finances can emanate from countless sources. Fiscal risks are typically divided into two categories: unpredictable macroeconomic disturbances and contingent liabilities. Macroeconomic disturbances include situations such as a disruption of the financial markets originating outside Finland, which through various channels causes a decline in our domestic financial activity. Contingent liabilities include government guarantees and collateral involving the guarantor's obligation to pay that depends on factors beyond the government's control.1 Risks related to macroeconomic development, general government debt, government holdings, the export guarantees issued and other risks related to other government liabil- ities correlate with each other. Under the conditions of normal cyclical fluctuations, only some of these risks will typically be realised. Therefore, the fiscal costs involved when liabilities are realised may put a considerable strain on government finances and, in the light of average figures, the probability of a major liability materialising is not particularly small. The instability of the external environ- ment underscores the importance of carefully monitoring and managing fiscal liabilities. The Ministry of Finance for its part has started implementing the recommendations of the risk management working group of 20152 and work has continued on developing the government’s fiscal risk reporting and management. This report provides an overview of the government's risks and liabilities. It seeks to pro- vide a detailed explanation of the risks involved in macroeconomic development and fis- 1 Government guarantee refers to a legal commitment by the state to assume liability for the debt of another par- ty. Government collateral meanwhile is a legal commitment to compensate for the losses arising from certain activities. Below, the term government guarantee will be used collectively for both of these. 2 Development of the government's financial risk reporting and management. Ministry of Finance publications 11/2015. 10 MINISTRY OF FINANCE PUBLICATION 20B/2017 cal liabilities emanating from various sources, and to assess the associated risks. The report also includes a government overall balance and a summary of the report is also included in the General Government Fiscal Plan. Assessing the risks involved in government liabilities is by no means a simple task. The least complicated system used by many countries in their government risk re-views in- volves reporting the nominal value of liabilities3, possibly as a ratio of a key figure, such as the state budget or nominal GDP. The nominal value of liabilities indicates the maximum loss if the government were required to settle all of the liabilities shown in full, assuming no provisions such as a funding system had been made. In this report, the nominal values of liabilities are primarily used, with different sensitivity analyses and key indicators elabo- rating the significance of risks and liabilities as far as possible. Besides indicating the nom- inal values, this report seeks to explain the provisions made for losses potentially arising from liabilities. 3 E.g. New Zealand, Australia and the Netherlands. 11 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 3 Risks associated with macroeconomic development Information on future economic prospects is essential for financial planning and de- cision-making. Forecasts are used as a basis for budget planning and for outlining the spending limits. A full understanding of the economic outlook will help to situate eco- nomic policy actions in their proper scale and promote their timely execution. The objective of macroeconomic forecasts is to provide the most likely future scenario. However, forecasts always involve risks which, if they materialise, may lead to a more nega- tive or more positive development than anticipated. Weaker than predicted development tends to result in a higher than expected increase in government borrowing. The financial crisis resulted in Finland’s total output shrinking by more than 8%, which no economic development forecast was able to predict. Similarly, recovery from the financial crisis has been weaker than anticipated; in fact, Finland's national economy has still not reached the pre-crisis total output level. 3.1 Macroeconomic development a major element in budget planning Macroeconomic development scenarios provide a starting point for tax revenue fore- casts. Tax revenue forecasts are based on estimates of the development of variables such as private consumption, salary and pension income, and corporate revenues, and the impact of any known changes in the tax basis. The rate of growth in real GDP is the key in- dicator of economic activity. To a large extent, national economic output determines how income is generated and provides the financial basis for public finances. A study commissioned by the Parliament's Audit Committee concluded that the forecast errors made by the Ministry of Finance were not materially different from forecast devia- tions made by other forecast organisations. An analysis of tax revenue accumulation over 12 MINISTRY OF FINANCE PUBLICATION 20B/2017 a period of 20 years indicated that the forecast deviations were not systematic. Typically, major over- or underestimates of tax revenue occur at turning points of the economic cycle, where their magnitude and/or timing has not been accurately forecast. Besides providing a basis for tax revenue assessment, economic forecasts are also used to predict budgetary expenditure. The economic cycle reflects particularly strongly on unem- ployment-linked expenditure. Forecasts of the general price and earnings level moreover affect the development of current transfers to private households and local government. Interest expenditure is also becoming a more significant expense item in the foreseeable future. Despite rapid debt growth, interest expenses have remained fairly modest due to the exceptionally low interest rate level. 3.2 Sensitivity of general government finances to economic cycles The sensitivity of Finnish government finances to economic cycles has been assessed by organisations such as the OECD. Due to the size of its government finances and the struc- ture of the national economy, Finland is more sensitive to macroeconomic developments than many other EU countries. In Finland’s case, total output remaining at one percentage point lower than anticipated would translate into a decline of almost 0.6% in general gov- ernment finances in relation to total output. The impact on government finances is strong- est in the case of tax revenues sensitive to economic cycles, and that of unemployment- related expenditure. Using the above example, the central government's fiscal position in relation to total output would be 0.3–0.4% weaker than forecast. Most of the effects ma- terialise through tax revenue. The sensitivity of different tax types to changes in economic activity varies, corporation tax paid by companies and capital income tax paid by natural persons being the most sensitive. This is because the financial results of companies and capital income, such as capital gains, tend to fluctuate very strongly in response to chang- es in financial activity. For instance, capital income fell by 21% in 2009 as a result of the financial crisis. Capital income tax revenue decreased by more than EUR 500 million from the previous year, and corporation tax revenue by more than EUR 1,100 million (21%). Table 1 illustrates the sensitivity of different tax types to changes in the tax base. 13 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 Table 1.  Budget sensitivity and economic development Tax type Tax base / demand category Change Change in tax re- venue*, EUR million Taxes collected in 2015, EUR million Income tax (incl. employees’ contributions Earned income 1% 387 4 871 Pension income 1% 123 611 Capital income tax Capital income 1% 34 2 645 Corporate income tax Operating surplus 1% 45 2 761 VAT Value of private consumption 1% 119 16 628 Vehicle tax No. of new passenger cars sold in 1,000 6 884 Energy tax Electricity consumption 1% 9 862 Petrol consumption 1% 13 1 290 Diesel consumption 1% 14 1248 Tax on alcoholic beverages Alcohol consumption 1% 14 1 356 Tobacco tax Cigarette consumption 1% 9 881 Expense type Basis of payment Change Change in expenses, EUR million Expenditure in 2015, EUR million Unemployment-related expend- iture Unemployment rate 1% 300 2 700 Compensation of employees Salary level 1% 66 6 600 Interest expenditure Interest rate level 1% 200 1 531 * From 2016 Source: Ministry of Finance Overall, automatic stabilisers are clearly less significant on the expenditure side than on the revenue side. During a recession, other factors besides automatic stabilisers which may increase expenditure include any discretionary public intervention measures needed. The effects of the cyclical fluctuation on government finances and borrowing may vary de- pending on which factors contributed to the weaker or stronger-than-anticipated devel- opment. The more economic activity is affected by domestic demand, the stronger the effect on government finances. 3.3 Actual economic cycles and forecast errors The reasons for deviations between the forecast and actual development may include false initial assumptions and an inaccurate picture of the interaction between economic players or sectors. Figure 1 below illustrates the accuracy of the cycle forecasts published by the Ministry of Finance in September 1989–2016 in terms of gross domestic product 14 MINISTRY OF FINANCE PUBLICATION 20B/2017 growth in the current (forecast preparation year) and the following year4. These forecasts were used for planning the government budget for the following year. An examination reveals that forecast errors have been more significant than usual during deep recessions and depression. In terms of GDP growth, the average forecast error in year t+1 in the peri- od 1988–2016 was -0.7 percentage points, which means economic growth was forecast to be stronger than it actually turned out. The audit performed by the National Audit Office in 2016 concluded that the economic forecasts produced by the Ministry of Finance are statistically reliable and correspond in terms of accuracy to those published by other fore- casting institutes. Figure 1.  GDP percentage growth forecast deviations, % 3.4 Development in 2016 and the realisation of macroeconomic risk According to preliminary data published by Statistics Finland in March 2017, total output increased by 1.4% in 2016. The Budget for 2016 was based on the forecast published in September 2015, which predicted GDP growth of 1.3%. In subsequent forecast updates, the views taken of development in economic activity were a touch more cautious. While 4 The Ministry of Finance publishes annually a report on forecast deviations and their reasons (Forecast Deviation Report) -4 -2 0 2 4 6 8 10 12 -4 -2 0 2 4 6 8 10 12 89 91 93 95 97 99 01 03 05 07 09 11 13 15 16 Forecast prepared in September of the year before Forecast prepared in September of the same year Forecast error = Forecast - Actual Sourece: Ministry of Finance 15 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 exports showed a slow upward swings in 2016, development turned out to be weaker than forecast in autumn 2015. Private consumption, on the other hand, showed strong- er than expected growth, partly due to inflation being more moderate than anticipated. The rise in investments was driven by housing construction. Figure 2 illustrates how better than anticipated macroeconomic development was reflected also in the general govern- ment balance and indebtedness. Figure 2.  More detailed macro forecasts for development in 2016, % GDP Exports Private consumption Private investment General government, net lending Sources: Statistics Finland, Ministry of Finance -4 -2 0 2 4 6 8 -4 -2 0 2 4 6 8 Sept 15 Dec 15 March 16 June 16 Sept 16 Dec 16 Actual 3.5 Risks associated with macroeconomic development Risks relating to global economic development tend towards weaker than forecast de- velopment. Rising protectionism may serve to slow global trade to a greater extent than anticipated. Economic recovery in the euro area may prove even more difficult than pro- jected now that the impact of favourable conditions has come to an end. A weaker global economy represents a downward risk for Finland’s exports. However, there is also a posi- tive risk associated with exports. The outcome/result of the Competitiveness Pact will create the conditions to exploit the export potential opening up and will bolster confi- 16 MINISTRY OF FINANCE PUBLICATION 20B/2017 dence in domestic economic policy. However, it should be borne in mind that there will be a lag before the pact’s effects on economic development become evident. Both negative and positive risks are associated with the private consumption forecast. Private consumption may develop more favourably than anticipated if households contin- ue to accumulate debt at the same rate as seen in recent years. Low interest rates and the availability of credit together with higher confidence among households may thus accel- erate the growth of debt beyond the rate projected, which would be reflected not only as a rise in private consumption, but also as rising prices in the housing market. The negative risks associated with private consumption may be realised in the event of weaker than anticipated improvement in employment. The impacts on consumption would arise through both income formation and consumer expectations, which might make consum- ers more cautious and result in a higher savings rate. 17 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 4 Government liabilities The financial liabilities of a government are often described using the fiscal risk matrix shown here (Table 2).5 In the matrix, liabilities are divided as follows: −− Liabilities involve a contractual, lawful or other legal obligation, or social/political obligation, in which case the government considers it necessary to take action to avoid any disruption to the national economy or society. −− Liabilities represent an obligation in all circumstances, or the government is only required to fulfil its obligation if a particular event occurs. Table 2.  Government liabilities Liability / obligation Direct Obligation in any event Contingent Obligation if a particular event occurs Explicit Liability recognised by a law - loan, interest - public-private-partnership (PPP) - other contractual obligations - legal obligations to pay - budgetary expenditure -government collateral -government guarantee -export financing obligations -Such -callable capital in international financial institu- tions -climate change liabilities -nuclear liabilities Implicit Social/political obligation - citizens’ basic social security -deposit guarantee - other support to the banking sector - state enterprises (increase in share capital to maintain ownership or to ensure business capa- bility) - municipal sector - environmental liabilities, disasters, external se- curity Source: Ministry of Finance This division allows liabilities to be examined as explicit direct liabilities (such as a govern- ment loan), explicit contingent liabilities (such as government guarantees or capital in in- 5 See Polackova (1989), and Polacova Brixi and Mody (2002). 18 MINISTRY OF FINANCE PUBLICATION 20B/2017 ternational financial institutions), or implicit contingent liabilities (such as support for the banking sector, or activities in the local government sector).6 The following figure summarises the development of liabilities that for the most part are under government control (Figure 3). In the Figure, pension liability (EUR 93 billion) is in- cluded under other liabilities. Items showing a particular increase are guarantees by Finn- vera and the National Housing Fund. Figure 3.  Development of government liabilities 2010–2016, EUR billion In the following, liabilities are reported in accordance with the division into direct govern- ment liabilities and contingent government liabilities. 4.1 Direct government liabilities This Chapter examines direct government liabilities that are recognised by law. Such lia- bilities include government debt, life cycle model projects (PPP) and government pension liabilities. 6 Implicit direct liabilities have been excluded from this analysis. 0 50 100 150 200 250 300 350 2010 2011 2012 2013 2014 2015 2016 Other liabilities (incl. pension liability) Government debt Government guarantees Capital liabilities Sources: Ministry of Finance, Statistics 19 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 4.1.1 Debt The concept of debt The term 'government debt' usually means the debt managed by the State Treasury, which at present mainly indicates the on-budget nominal debt. Since 2015, this concept of debt has also included the new borrowing of Senate Properties. Another commonly used con- cept is ‘general government debt,’ or public debt. This term is used for international com- parison and it is generally expressed as a percentage of GDP. In 2014, Finland's general government debt-to-GDP ratio exceeded the 60% reference value7 set out in the Treaty on European Union and threatens to remain above the reference value also in the coming years. On-budget nominal debt at the end of 2016 stood at EUR 102 billion. Debt has been on the rise every year since 2008. The debt of municipalities and joint municipal authorities has grown by more than EUR 10 billion since 2008 and now stands at approximately EUR 19 billion. General government debt mainly consists of central and local government debt. The Unemployment Insurance Fund, one of the social security funds, has also been forced to borrow approximately EUR 1 billion in the past few years, as contributions and govern- ment transfers have not been sufficient to cover rising unemployment expenditure. There is a major risk of both state and municipal debt continuing to grow, and not just nominal- ly, but also relative to GDP. Coverage of the debt recorded by the State Treasury is less extensive than debt as un- derstood in national accounting terms. The debt recorded by the State Treasury includes on-budget nominal debt and, as of 2015, the new borrowing of Senate Properties, but ex- cludes the debt of other units included in general government finances in the national ac- counts. Other off-budget entities include the universities, Solidium Oy, Yle Oy, VTT, and the real estate companies of universities. The total debt of these off-budget entities amounts to approximately EUR 3 billion, with real estate companies accounting for the majority of the debt. The debt of Finnvera, a state-owned company, is not included in public debt be- cause the company is classified as a financial institution.8 Finland's participation in the management of the euro crisis has caused an increase in public debt of roughly EUR 6 billion, which includes the capital contribution made to the European Stability Mechanism in 2012 and the loan granted to Greece. In addition, bor- 7 Incorporating items included in EDP debt (excessive deficit procedure) in the State Treasury's definition of debt produces what is known as the general government debt, or EDP debt. The most significant items include Fin- land's guarantees to the European Financial Stability Facility (EFSF) and security deposits associated with deri- vative contracts. Other items included in EDP debt include capital in the National Nuclear Waste Management Fund, debt arising from the government's PPP projects, and coins in circulation. 8 In accordance with the Eurostat guidelines, Statistics Finland will carry out an assessment this year to determine whether Finnvera will be classified as a financial institution or a public sector entity. In the latter case, Finnvera's debt would, in the future, be included in public debt. 20 MINISTRY OF FINANCE PUBLICATION 20B/2017 rowing by the European Financial Stability Facility has added more than EUR 3.5 billion to Finland's public debt. Government debt management risks Debt management refers to budgetary borrowing, the investment of the government's cash assets, the risks arising from budgetary debt and invested cash assets, and the man- agement of such risks. Cash assets consist of funds in government accounts in financial institutions and in the Bank of Finland. The objective of the government's budgetary debt management is to meet government budgetary borrowing needs and to minimise debt-related costs at a risk level considered acceptable in the long term. A policy specifying the objective of risk management and ac- ceptable risk levels has been prepared for debt management related risks. The government assumes no foreign exchange risk in its borrowing activities. Flows relat- ing to the government’s other income and expenses in foreign currencies are examined individually for each currency and managed primarily from the viewpoint of liquidity man- agement. The foreign exchange risk associated with these cash flows is managed within the framework of the limitations imposed. A quantitative model has been drawn up for the interest rate risk associated with debt and a target has been set. The Ministry of Finance makes decisions concerning the debt man- agement policy and provides instructions to the State Treasury, which is responsible for the operative side of debt management. Government debt management risks can be grouped as follows: −− Financial risks (liquidity and refinancing risks) −− Market risks (interest rate and foreign exchange risks) −− Credit risks, and −− Legal and operational risks, and model risks Financial risks include risks associated with the availability or terms of financing. This may refer to the risk of insolvency or an increase in the cost of debt caused by exceptional mar- ket conditions, government credit rating decline, or other adverse economic conditions. At present, borrowing accounts for approximately 10% of government income. Even if central government finances were balanced, loans maturing annually need to be refinanced with market financing. In 2016, government borrowing was approximately EUR 17 billion gross and EUR 2.3 billion net. 21 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 Liquidity risk refers to a situation in which the sources of financing available to the govern- ment are insufficient to allow the government to cost-efficiently meet its payment obliga- tions in the next 12 months. The objective of financial risk management is to ensure that the government is able to fulfil its payment obligations in any given situation. This is achieved by maintaining suffi- cient short-term liquidity with cash assets and invested liquid assets. To ensure long-term liquidity, fundraising is diversified to avoid excessive reliance on individual sources and the formation of temporal financial risk clusters. For this purpose, long-term fundraising is arranged in such a way as to permit evenly spread maturities for government loans over future years. Figure 4.  Government debt amortisation in 2017–2043 (31 December 2016), EUR million 0 2 000 4 000 6 000 8 000 10 000 12 000 14 000 16 000 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28 20 29 20 30 20 31 20 32 20 33 20 34 20 35 20 36 20 37 20 38 20 39 20 40 20 41 20 42 20 43 20 44 20 45 20 46 20 47 Serial bonds Other debt Treasury bills Source: State Teasury Government debt securities, cash assets and other debt management instruments involve interest rate risk. In government debt management, interest risk assessment (debt, cash assets, other debt management instruments) is based on Cost at Risk (CaR) analysis, in other words an analy- sis of the variance of interest cash flow. This includes systematic modelling of the interest sensitivity of the debt, and comparison of the costs of different debt management strate- gies using model analyses. The purpose of the strategic interest rate risk target selected on the basis of analyses is to minimise expected long-term interest expenses at the selected 22 MINISTRY OF FINANCE PUBLICATION 20B/2017 risk level. Despite central government debt having almost doubled since 2007, interest ex- penses have remained virtually unchanged or even decreased somewhat (Figure 5). Figure 5.  On-budget interest expenses, EUR million 0 1 000 2 000 3 000 4 000 5 000 6 000 Interest expenses Change to accrual-based accounting Source: State Treasury The interest rate risk associated with debt management can also be analysed using the concept of budgetary risk; this involves examining the change in interest expenses when the general interest rate level rises permanently by one percentage point. This type of rate increase would lead through current debt repricing to an increase in the government's budgeted/forecast interest expenses which would, in 2019 for instance, be approximately EUR 500 million higher than projected. Budgetary risk in Figure 6 shows the change in interest expenses when the amount of debt remains unchanged. Credit risk refers to the risk of loss in the event of the counterparty's insolvency. The gov- ernment's credit risks arise from cash assets, invested liquid assets and derivative con- tracts. Credit risk is measured using receivables at risk. The objective of debt-management related credit risk management is to minimise risks. Foreign exchange risk refers to the risk of financial losses caused by a change in currency exchange rates. In accordance with the current debt management policy, the Finnish Gov- ernment does not assume any foreign exchange risks in its debt management activities. Foreign exchange risk associated with other income and expenses in foreign currencies is managed within the framework of the limitations imposed. 23 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 Figure 6.  Change in net interest expenses when interest rates rise by one percentage point, 2017– 2028, EUR million 0 100 200 300 400 500 600 700 800 900 1000 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Source: State Treasury Government debt management also entails operational, legal and model risks. The pur- pose of debt management is to minimise these risks, which in practice means adequate competence and resourcing, clearly defined processes and internal control, and, in terms of legal risks, having standard documentation practices in place. 4.1.2 Life cycle model (public-private partnership, PPP) Within the Budget, Parliament authorises the Finnish Transport Agency to carry out life cy- cle projects. Such authorisation includes the costs of actual road construction, and the ser- vice fee for road maintenance payable to the road infrastructure company. To this end, Par- liament decides annually on the agreed allocations. In a life cycle model, or a public-pri- vate partnership, PPP, the service provider (road infrastructure company) is responsible for project financing, planning, implementation and maintenance as agreed for a period of approximately 15–25 years. Projects being carried out under a life cycle model for which agreements are currently in effect: −− E18 Muurla−Lohja (EUR 700 million), completed in 2008, agreement in effect until 2029 −− E18 Koskenkylä−Kotka (EUR 650 million), completed in 2014, agreement in effect until 2026 −− E18 Hamina−Vaalimaa (EUR 660 million), completion in 2018, agreement in effect until 2035 24 MINISTRY OF FINANCE PUBLICATION 20B/2017 The life cycle model was also used in the construction of the Järvenpää–Lahti motorway but the agreement is no longer in effect and the project has been paid for in full. The life cycle model has been used to carry out major new road construction projects. It has been suggested that the model should only be used if the cost of project implemen- tation is lower than with direct budget financing. However, there are no comparison data available to prove this. In the case of the life cycle model, the agreement includes financ- ing costs, whereas this is not the case with projects funded from the budget. It is fair to as- sume that based on its good credit rating, the Finnish government could acquire funding on more favourable terms than a private road infrastructure company. The cost-efficiency of project implementation would then rely on the assumption that the project would be carried out more efficiently and with better results than a budget-funded project. No such cost-efficiency has been clearly proven to date, however. Generally speaking, the risks involved in a life cycle model include, besides financing risk, also an increase in building costs, delays and quality issues in construction work, and maintenance quality and cost risk. There were no delays in the completed projects VT4 Jär- venpää−Lahti and E18 Koskenkylä−Kotka, and the construction period was shorter than anticipated. The actual construction works in the E18 Muurla–Lohja motorway project were completed ahead of schedule, but some problems occurred during implementation and efforts to resolve them caused a slight delay in the project's completion. It has been suggested that the model should be improved by focusing more on risk sharing at the tendering stage. It has also been pointed out, however, that it is challenging for the client to identify the correct level of risk allocation because common European financing terms and conditions do not exist. The life cycle model ties up government funds for decades, limiting the opportunities of future governments to start new projects. In the 2018−2021 budget planning period, life cycle projects represent approximately 25−39% of appropriations allocated under key transport network items (31.10.77, 31.10.78 and 31.10.79). It is already apparent that the authorised total for the E18 Muurla–Lohja project will likely be exceeded by roughly EUR 35 million due to actual cost development, whereas the E18 Hamina–Vaalimaa project will probably undercut the authorised total by some EUR 60 million thanks to successful ten- dering. 25 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 Table 3.  Life cycle projects in the Budget, EUR million Life cycle projects: 31.10.79 Authorisation 2008–2021 2022–2026 2027–2036 2008–2035 E18 Muurla-Lohja 700.0 498.9 145.10 91.0 735.0 E18 Koskenkylä−Kotka 650.0 406.8 243.2 0.0 650.0 E18 Hamina−Vaalimaa 660.0 149.0 156.0 295.0 600.0 TOTAL 2,010.0 1,054.7 544.3 386.0 1,985.0 Source: Ministry of Finance 4.1.3 Multiannual government liabilities The table below indicates the government’s multiannual liabilities. The largest item in the State budget economy is government pension liabilities. Table 4.  Government liabilities 2006–2016, EUR billion 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Liabilities / state budget economy* 88.25 93.57 96.13 99.48 103.34 110.43 116.96 115.38 130.40 128.30 126.89 Other multiannual liabilities, appropriations required - - - - - 6.79 8.69 8.95 7.48 6.81 6.26 Government pension liability 79.30 82.70 85.60 88.40 90.60 89.70 92.60 94.00 95.40 95.70 93.00 Appropriations required following the exercise of au- thorisations 8.95 10.87 10.53 11.08 12.74 12.76 14.50 11.28 10.00 9.28 9.62 Liabilities / Off-budget entities - - - - 0.32 0.39 0.53 0.58 0.74 0.92 1.20 Other multiannual liabilities, appropriations required - - - - - 0.05 0.06 0.06 0.07 0.16 0.13 Investment commitments - - - - 0.32 0.34 0.47 0.52 0.67 0.76 1.07 Liabilities / State enterprises - - - - 1.40 1.50 1.50 1.80 1.80 1.60 1.40 Senate Properties’ loans 0.71 0.84 1.08 1.29 1.00 1.06 1.20 1.22 1.35 1.08 1.69 Rental liabilities - - - - 0.27 0.25 0.25 0.26 0.26 0.36 0.38 Leasing liabilities - - - - 0.01 0.01 0.01 0.01 0.01 0.01 0.07 Investment commitments - - - - 0.13 0.15 0.06 0.13 0.14 0.20 0.10 * Includes the capital liabilities presented in Table 5 in addition to the below Source: State Treasury 26 MINISTRY OF FINANCE PUBLICATION 20B/2017 Pension liability means the amount required, including future investment income, to cov- er the costs of pension benefits accumulated. Government pension liabilities indicate the total cost of the government's pension commitment to former and present employees in- cluded in the government pension system. Besides the expected return on investment, other factors affecting pension liabilities in- clude the life expectancy of the insured, the retirement age and the number of people retiring due to disability. In practice, pension liability changes annually: those employed continue to earn more pension, new people retire, and people entitled to pension die. At the end of 2016, government pension liabilities totalled approximately EUR 93 billion and the funding rate was 20%. Government pensions paid out amounted to approximately EUR 4.5 billion in 2016. Pensions are paid out of appropriations reserved in each year's budget. Every year, the amount recognised as revenue in the budget by the State Pension Fund accounts for 40% of the year's pension expenses. Approximately EUR 1.8 billion was transferred into the budget in 2016. Considering that contributions in 2016 totalled roughly EUR 1.5 billion, the Fund’s net contributions came to approximately EUR 300 million. The income of the State Pension Fund consists of employer and employee pension con- tributions on the one hand and of investment income on the other. The funding system for the government pension expenses is exposed to risks arising from unexpected chang- es in the wage bill on the one hand and in investment assets and return on investment on the other. The development of pension expenditure also involves uncertainties. While a decrease in the wage bill would weaken the Fund’s income base, from the government perspective it would not only reduce direct labour costs, but also curb the growth of pen- sion liabilities. In concrete terms, the realisation of risks would increase the need for direct budget financing for the payment of pensions if the Fund was unable to comply with the current practice of recognising 40% of the government pension expenditure as income in the budget. At the end of 2016, the State Pension Fund’s investments had a market value of EUR 18.8 billion. Equity investments account for 45% of these, fixed income investments 46% and other investments 9%. The risk level guidelines in investment activities are governed by the allocation limits set by the Ministry of Finance as well as by the investment plan, in- vestment limits and risk management plan annually approved by the Board of Directors of the State Pension Fund. Responsibility for arranging operational risk management in in- vestment activities resides with investment management. Portfolio stress testing is report- ed to the Fund’s risk management committee and the government on a quarterly basis. 27 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 Other multiannual liabilities amounted to approximately EUR 6.3 billion in 2016. These include i.a. rental agreements for government agencies and universities, compensation payable under government accident and motor vehicle insurances, and agreements and contracts related to basic transport infrastructure management. This information has only been included in the government's annual report since 2011. An authorisation to commit to an investment, an acquisition or a subsidy may be granted in the budget. When such authorisations are exercised, appropriations are required in the budget. The ceiling for these appropriations is the maximum amount of the authorisation. Appropriations based on authorisations granted in the budget year or earlier increased in the 2000s and reached a peak of EUR 14.5 billion in 2012. In 2016, the appropriations re- quired due to authorisations had decreased to just over EUR 9 billion. The multiannual liabilities of off-budget entities and State-owned enterprises are relative- ly small. The biggest item is the State Pension Fund's investment commitments (binding commitments which have not been paid out yet, but for which there are existing agree- ments), which amounted to roughly EUR 1 billion in 2016. Senate Properties finances its real estate investments through loans from the State Treas- ury. Senate Properties is a State-owned enterprise and the government answers for the loans taken out by Senate Properties earlier from financial institutions. The Act on State Treasury (305/1991) was amended in 2014 such that the State Treasury is permitted to manage Senate Properties' borrowing in conjunction with the government's current bor- rowing. Funding through the State Treasury keeps Senate's own financing expenditure lower. New loans taken out by Senate Properties through the State Treasury amounted to EUR 530 million in 2016. Loan repayments during the year totalled EUR 535 million. Net borrowing thus came to EUR 5 million. Government liabilities for the loans of Senate Properties stood at EUR 1,689.6 million at the end of 2016. Government loans accounted for EUR 866.8 million and loans from finan- cial institutions for EUR 830.3 million. Senate Properties has a high equity ratio, 62% in the financial statements for 2016, and its income financing is strong. Senate Properties hedges against interest rate risk in accordance with the relevant risk policy prepared by its Board of Directors. 28 MINISTRY OF FINANCE PUBLICATION 20B/2017 4.2 Contingent government liabilities This Chapter addresses so-called off-balance sheet liabilities, which include government guarantees, other multiannual liabilities and capital liabilities. Government guarantees have been issued i.a. to Finnvera, students, state enterprises, the European Financial Stabi- lisation Facility, and the Bank of Finland. Guarantees are also provided by off-budget enti- ties. 4.2.1 Government guarantees9 Growth of the government guarantee portfolio has levelled off and the portfolio increased by EUR 1.7 billion in 2016. According to the (preliminary) final central government ac- counts, the maximum government guarantees available totalled nearly EUR 63 billion at the end of 2016. Guarantees in effect accounted for approximately EUR 46 billion10 of the maximum. The largest liabilities relate to Finnvera’s export financing and the activities of the National Housing Fund. Figure 7.  Development of government guarantees, EUR billion 9 Government guarantee refers to a legal commitment by the state to assume liability for the debt of another par- ty. Meanwhile, government collateral is a legal commitment to compensate for the losses arising from certain activities. 10 The maximum amount of government guarantees refers to the maximum amount based in law and approved by Parliament. Guarantees in effect refers to the amount by which the government is actually encumbered. As a rule, the maximum amount of guarantees and guarantees in effect are the same. 0 5 10 15 20 25 30 35 40 45 50 2010 2011 2012 2013 2014 2015 2016 Other Government Funds (mainly the National Housing Fund) Bank of Finland EFSF Student loans Finnvera Source: Ministry of Finland, State Treasury 29 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 Table 5.  Government liabilities 2006–2016, EUR billion 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Finnvera* 7.25 7.20 10.52 13.40 12.75 14.02 14.81 14.58 17.46 22.64** 22.60 Export guarantee and special guar- antee activities, total liabilities 5.07 4.98 8.29 9.67 8.93 10.37 11.20 11.00 12.60 16.28 15.3 Domestic liability portfolio 2.18 2.22 2.22 2.65 2.79 2.77 2.68 2.53 2.32 2.25 2.23 Government guarantees on loans - - - 1.09 1.03 0.89 0.92 1.06 2.55 3.94 4.85 Student loans 1.31 1.31 1.31 1.33 1.36 1.41 1.49 1.58 1.77 2.01 2.33 EFSF 0 0 0 0 0 2.10 5.13 6.23 6.61 6.23 6.28 Bank of Finland 3.99 3.75 3.86 3.80 3.89 3.89 4.07 7.66 7.921 0.46 0.61 Government funds 5.40 5.60 5.70 6.30 7.91 9.15 10.20 11.17 11.84 12.31 13.10 National Housing Fund 5.40 5.60 5.70 6.30 7.85 9.08 10.15 11.12 11.80 12.26 13.06 Development Fund of Agriculture and Forestry - - - - 0.01 0.02 0.02 0.03 0.03 0.04 0.04 National Export Guarantee Fun - - - - 0.05 0.04 0.03 0.03 0.00 0.00 0.00 Other 0.25 0.23 0.35 1.16 0.28 0.63 0.84 0.45 0.34 0.59 1.05 TOTAL 18.19 18.09 21.73 25.98 26.18 31.20 36.54 41.67 38.62 44.24 45.97 * * The figures for Finnvera have been updated in respect of 2009–2005 to correspond to Appendix 12 to the final central government accounts. The government guarantee granted for the EMTN loan programme also covers interest swaps and currency swaps. Derivative contracts are conclud- ed within the framework of the standard international ISDA Master Agreement and a Credit Support Annex (CSA) related to the collateral arrange- ment and serving to reduce credit risk is also incorporated into the agreement. The figures for Finnvera include liabilities in effect. Any overlapping liabilities among the different guarantees have been eliminated. Unlike in the equivalent documents for 2015 and 2016, government guarantees for derivative contracts have been excluded from the figures for Finnvera in this report. The liabilities related to export guarantees and guarantees on borrowing are not cumulative such that they could be realised in the combined full amount. The risk related to the repayment of export credit granted by Finnish Export Credit, which is part of Finnvera Group, is covered by an export guarantee granted by the parent company Finnvera plc. The govern- ment’s liability for this guarantee is 95% as a rule. Where debt guaranteed by the government has been applied towards financing export credit, the government’s liability is not doubled. **** The 2015 figure for Finnvera furthermore adjusted as follows: the figure is EUR 1,010 million lower than reported in the 2015 financial state- ments. The adjustment is due to change in manner of reporting, Appendix 12. Sources: Ministry of Economic Affairs and Employment, Ministry of Justice, State Treasury 1 Until 2014, this figure represents the maximum amount available at the time and not the amount in effect at the time due to the Bank of Finland only starting to report the amounts in effect in 2015. Export financing by Finnvera plc There are three types of public export financing instruments in Finland: government ex- port guarantees, interest equalisation, and export and ship credits. Export financing is pro- vided through Finnvera, a specialised financing company owned by the State of Finland, and its wholly owned subsidiary Finnish Export Credit. Finnvera also provides financing to SMEs in Finland. 11 The government grants authorisations as a means of regulating the scope of public ex- port financing activities. In its programme, the current Government set the objective of aligning the elements of export financing and the level of financing at least with those of 11 Liabilities with regard to domestic financing have not increased in step with those relating to export financing. The statutory portfolio of liabilities subject to an obligation to cover credit and guarantee losses in domestic fi- nancing totalled c. EUR 2.6 billion at year-end 2016. 30 MINISTRY OF FINANCE PUBLICATION 20B/2017 key competitor countries. The authorisations related to the export financing system have indeed been increased on several occasions over the past few years and twice in 2016, in April and again in December. In 2016, the following increases in the maximum authorisa- tions for export financing were approved by Parliament: −− the combined maximum authorisation to Finnvera plc for export guarantees and hedging arrangements was raised to EUR 27 billion; −− the maximum authorisation to Finnish Export Credit for export and ship credit was raised to EUR 22 billion; −− the interest equalisation authorisation was likewise raised to EUR 22 billion; −− the guarantee authorisation for special risk-taking was raised to EUR 5 billion; −− the maximum authorisation to Finnvera for government guarantees on funding was raised to EUR 15 billion; and −− the maximum authorisation for any loan arrangement granted to Finnvera by the government was raised to EUR 3 billion. Over the same time frame, total government liabilities related to export financing have in- creased rapidly. In 2005, total liabilities amounted to just under EUR 5 billion; by the end of 2016, total liabilities related to export guarantees and associated hedging arrangements had ballooned to EUR 18.4 billion12. Guarantees on Finnvera’s funding were further in ef- fect to the amount of EUR 4.9 billion13 at the end of 2016. The aforementioned increases in the maximum authorisations for export financing would suggest that this intense rise in the government’s liabilities will persist in the coming years despite there being no increase in Finnvera’s total liabilities in 2016. A number of factors may result in the realisation of the liabilities related to export guarantees and guarantees for Finnvera’s funding. However, these liabilities are not accreting in the sense that they could be realised in the combined full amount. The risk related to the repayment of export credit granted by Finnish Export Credit, which is part of Finnvera Group, is covered by an export guarantee granted by the parent company Finnvera plc. The government’s liability for this guarantee is 95% as a rule. Where debt guaranteed by the government has been applied towards financing export credit, the government’s liability is not doubled. 12 The figure includes liabilities in effect and liabilities for tenders. Any overlapping liabilities have been eliminat- ed. The statutory total amount of liabilities (maximum liability EUR 27.0 billion) stood at EUR 14.4 billion at year- end 2016. 13 The government guarantee also covers the interest and currency swaps associated with loans. As at 31 De- cember 2016, the nominal value of these swaps was roughly EUR 4.9 billion. Derivative contracts are concluded within the framework of the standard international ISDA Master Agreement and a Credit Support Annex (CSA) related to the collateral arrangement and serving to reduce credit risk is also incorporated into the agreement. According to the company, the CSA limits counterparty risk to approximately EUR 5 million per counterparty. Finnvera states that ten counterparties could thus expose it to a guarantee liability of roughly EUR 50 million. In the event of dissolution, hedging contracts may of course also be advantageous to the government. 31 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 Finnvera's activities involve risks such as credit and guarantee risks, financing, interest and currency risks, and operational risks. Finnvera's Board of Directors confirms the principles of risk management, the policies to be observed, and the guidelines for risk-taking. Finn- vera's risk appetite is determined so that its equity and other risk buffers are deemed ade- quate relative to the level of risk taken. Finnvera uses the statistical model VaR (Value at Risk) to assess its credit risks. The credit risk model is based on an assessment of the probability of default, the loss given default, and the exposure at default. In export guarantee activities, the probabilities of default are derived from the ratings of credit institutions while the losses given default are estimat- ed on an empirical basis. Risks associated with individual counterparties and clusters are hedged, to some extent, through reinsurance. The VaR model seeks to estimate the proba- bility that losses from the liability portfolio will not exceed a given euro amount. The mod- el indicates that with a probability of 99% losses on the total liability portfolio calculated at year-end 2016 will not exceed EUR 1.3 billion. When only liabilities drawn by 31 Dec 2016 are included in the liability portfolio, the VaR figure falls to EUR 578 million. Anoth- er risk indicator estimated expected loss, or average annual losses. Annual income should cover expected loss. Finnvera estimates that expected loss on liabilities drawn stood at EUR 50 million at year-end 2016. As the export financing provider, Finnish Export Credit commits to pre-agreed terms of credit (incl. Commercial Interest Reference Rates, CIRR14) over a long delivery time. Cus- tomers may nonetheless be given alternatives with respect to loan withdrawal, terms of interest and currency due to the competitive situation. Such flexibility offered to custom- ers means that financing and interest rate risks are associated with Finnvera’s funding. According to its policy, Finnvera primarily covers financing risk with a prefunded liquidi- ty buffer. In addition, the company’s financing risk is covered by the credit line included in the Budget, the maximum authorisation of which Parliament raised to EUR 3 million at the end of 2016. The interest risk associated with fixed-rate export credits is transferred to the State with interest equalisation agreements. If the interest rate is set at a very low level (CIRR excluding margin) in accordance with the OECD export credit agreement, for com- petitive reasons, the State may be exposed to a significant interest rate risk depending on the terms and conditions of the transaction and the market conditions. The State of Finland incurs significant financial liabilities from Finnvera's activities. Any losses arising from Finnvera's export financing activities may be covered from two funds. Losses from export guarantee activities are primarily covered from the reserve for export credit guarantee and special guarantee operations in Finnvera's balance sheet, which at 14 The CIRR interest is based on the return on long-term government bonds, plus a fixed margin. 32 MINISTRY OF FINANCE PUBLICATION 20B/2017 the end of 2016 amounted to EUR 668 million.15 Losses are secondarily covered from an off-budget fund, the National Export Guarantee Fund, which has an equity of roughly EUR 666 million. If the reserves are insufficient, Finnvera's losses will ultimately be covered from the State Budget. From Finnvera's risk management perspective, the strong focus in export financing on three sectors may turn out to be problematic. Taken together, the telecommunica-tions, shipbuilding and forest industry sectors represent 88% of corporate liabilities. This ex- poses the company's risk management to so-called model risk, if the realisation of corpo- rate liabilities correlate more strongly than anticipated16. This issue was also raised in the international evaluation of Finnvera’s export financing completed early in the year. Fin- nvera’s three largest customers account for 35% of the company’s credit risk (i.e. EUR 5.3 billion), its ten largest for 61% (i.e. EUR 9.2 billion) and its twenty largest for 82% (i.e. EUR 12 billion). Presuming that the company’s largest customer were to go bankrupt and the company could collect on only 43% of its claim, this would drain the entire loss buffer in Finnvera’s export financing reserves. From the perspective of financial and market risk (such as interest rate and currency risk) management, the pressure to provide financing at very competitive rates and with various options is also problematic. Loan pricing should be market-based, meaning that all market risks are transparently priced and included in the cost of the loan (i.e. a margin on top of the CIRR and a fee/premium). Similarly, limiting the options offered to customers would fa- cilitate risk hedging. The opportunities for providing market-based export credit are gen- erally limited by competitive factors, as Finnvera strives to offer terms similar to those of public export financing institutions in competitor countries. A key consideration in terms of risk management is indeed to work towards modification of OECD credit loan agree- ment terms modified to achieve greater consis¬tency with market terms. Liabilities associated with financial assistance programmes in the euro area (euro crisis management) Finland's total liabilities arising from the euro crisis that began in 2010 amounted to roughly EUR 9.5 billion at the end of 2016. These consist of a bilateral loan to Greece, guar- antees given for fundraising to the European Financial Stability Facility (EFSF) and capital contributions paid into the European Stability Mechanism (ESM). With Cyprus exiting the 15 This provides cover also against losses in domestic financing. In accordance with the obligation to cover credit and losses, the government has undertaken to make primary compensation for 35–80% of losses from SME fi- nancing. Any losses beyond this government compensation will be covered from Finnvera’s domestic opera- tions fund, which at year-end 2016 held EUR 155 million, and from other equity (EUR 384 million). 16 Any development with a significant impact on the profitability of shipping companies may result in the realisa- tion of the liabilities. This might be, for example, the creation of excess capacity in the market or a major decline in demand. it is very difficult to model this type of risk. 33 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 financial assistance programme in spring 2016, the only financial assistance programme remaining under way concerns Greece. Table 6.  Liabilities associated with financial assistance programmes in the euro area (31 Dec 2016), EUR billion Country Bilateral loans EFSF loans ESM loans IMF EFSM loans Total Finland’s calculated share Greece 52.9 130.9 31.7 12.9 - 228.4 4.2 Cyprus - - 6.3 1.0 - 7.3 0.1 Portugal - 26.0 - 16.3 24.3 66.6 1.0 Ireland (4.8)** 17.7 - 4.8 22.5 49.8 0.7 Spain - - 34.7 - - 34.7 0.6 *Finland's calculated share of the financial assistance given. The figure is different from Finland's guarantee and capital liabilities. The figures do not include interest on the EFSF/ESM programmes. **The United Kingdom, Sweden and Denmark made a bilateral loan to Ireland amounting to a total of EUR 4.8 billion. Source: Ministry of Finance, European Stability Mechanism ESM, International Monetary Fund IMF Bilateral loan to Greece As part of Greece's first programme, Finland granted Greece a bilateral loan of EUR 1.005 billion in 2010–2011. The loan was granted under an intergovernmental loan agreement. The loan repayment period is 2020–2041, and the rate of interest is the 3-month Euribor + 50 basis points. Greece will pay annual interest on the loan. Cumulative interest and com- missions at the end of 2016 totalled EUR 71.7 million. The interest rate was lowered and the repayment period extended on three occasions in 2011–2012. The loan was condition- al on a commitment by the Greek government to make economic policy reforms, whose implementation is supervised by the European Commission in cooperation with the Euro- pean Central Bank. European Financial Stability Facility (EFSF) EFSF is a limited liability company founded by the euro area member states in Luxem- bourg in 2010 to serve as a temporary crisis resolution mechanism by providing financial assistance to euro area member states. Fund raising by the EFSF is backed by guarantees of the euro area member states. The guarantee also covers interest and over-guarantee. The maximum amount of the EFSF funding programme approved in February 2012 is EUR 241 billion, used to provide financial assistance to Greece, Ireland and Portugal. No new financial assistance has been provided by the EFSF since 30 June 2013. The total amount of funds raised may exceed the specified maximum as the EFSF interest rates rises, until Greece begins its loan amortisation in 2023. 34 MINISTRY OF FINANCE PUBLICATION 20B/2017 Finland's share of guarantees in the funds raised by the EFSF, including interest and over-guarantee, was approximately EUR 6.28 billion on 31 December 2016. On 31 December 2016, the nominal-value loan receivables of the EFSF from Greece amounted to approximately EUR 130.9 billion, from Ireland EUR 17.7 billion, and from Por- tugal EUR 26 billion. Portugal and Ireland have exited the financial assistance programme and made a successful return to the bond market. Greece's EFSF programme expired on 30 June 2015. EFSF financial assistance totalling EUR 13.7 billion was undisbursed for Greece's second programme. The EFSF funding programme approved in February 2012 totalled EUR 241 billion, of which a loan principal of approximately EUR 185.1 billion or approximately EUR 204.4 bil- lion including net interest, was in use in December 2016 for the funding of financial assis- tance programmes of Greece, Ireland and Portugal. Finland's share of the used principal and net interest was approximately EUR 3.94 billion, and with over-guarantees approxi- mately EUR 6.28 billion. From the end of June 2016, Finland's guarantee liabilities fell by approximately EUR 110 million. The fluctuation in the guarantee liabilities is primarily due to the schedules of EFSF bond maturities and issuances. The lending terms of the EFSF programmes for Greece, Ireland and Portugal were eased during the programme period. In 2011–2012, the countries were given a grace period of 10 years. The weighted average maturities were furthermore extended to 21 years for Ireland and Portugal and to 32.5 years for Greece. The interest rate was lowered to match the EFSF’s funding expenses. In 2012, an agreement was made to capitalise the interest on Greece's EFSF loans for a period of 10 years. New funding is required to cover this capital- isation. Changes in the lending terms mean that the EFSF will require funding for longer and the need for funding will only start to diminish when loan repayment begins. Conse- quently the EFSF will continue to need guarantees on its funding. European Stability Mechanism (ESM) The purpose of the European Stability Mechanism (ESM) is to safeguard financial stability within the euro area using funds raised from the markets. The ESM is a permanent stabili- ty mechanism acting as an international financial institution, backed up by its own paid- in capital. The maximum lending capacity of the ESM is EUR 500 billion. The EUR 704.8 billion subscribed capital of the ESM consists of EUR 80.55 billion in paid-in capital and a maximum of EUR 624.3 billion in callable capital. The ESM shareholder contribution key is based on the ECB capital subscription. Finland's capital subscription to the ESM is approximately EUR 12.58 billion, with paid-in capital accounting for approximately EUR 1.44 billion and callable capital for approximate- 35 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 ly EUR 11.14 billion. The Finnish government used approximately EUR 1.44 billion worth of funds from the 2012 Budget to capitalise the ESM. Participation in the ESM also entails a commitment by the government to contribute EUR 11.14 billion in callable capital in the event of the insolvency of the ESM, or if the reserve fund and paid-in capital are insuf- ficient to cover losses. The need to contribute callable capital in the future depends on whether new financial assistance programmes will be approved, and to what extent the euro area is able to restore stability in the near future. The commitment to contribute call- able capital may account for up to 5% of Finland's GDP. Paid-in capital of EUR 1.44 billion accounts for less than 1% of GDP. This is not a contingent liability; instead, it is regarded as a government asset. At the end of 2016, the ESM’s lending capacity amounted to EUR 500 billion with approx- imately EUR 72.7 billion being used. A total of EUR 127 billion of the overall capacity was tied up in the programmes of Spain, Cyprus and Greece. The available capacity stood at EUR 373 billion in December. The financial assistance programme granted to Greece in summer 2015 is the only ESM programme currently under way. The programme is capped at EUR 86 billion. At the end of December 2016, ESM loans to Greece totalled EUR 31.7 billion. Tranches of the remaining EUR 54.3 billion may be made available until 21 August 2018 in step with Greece’s fulfilment of the conditions of the programme. The size of the tranches will be determined in the context of each mid-term evaluation. Cyprus successfully completed its adjustment programme in March 2016 and returned to the financial markets. The country’s banking sector was successfully stabilised during the programme. The sum of EUR 9 billion was set aside for Cyprus in the ESM and the sum of EUR 6.3 billion was disbursed. At the end of 2016, ESM’s loan to Spain totalled EUR 34.7 billion. Spain Spain made a vol- untary early repayment of EUR 1 billion of financial assistance in November 2016. In total, Spain has repaid EUR 6.6 billion of the financial assistance of EUR 41.3 billion disbursed to it, EUR 6.3 billion of it ahead of schedule. Management of risks related to the euro area stability mechanisms The financial impacts, liabilities and risks associated with financial assistance pro-grammes are assessed from Finland's perspective before programme approval. Fi-nancial assistance programmes require a unanimous decision of the euro area coun-tries. After the start of a programme, there are also other factors limiting the risk involved. All decisions and ac- tions affecting the nominal value of the loan require a unanimous decision. Under Article 125 of the Treaty on the Functioning of the European Union, a Member State shall not be liable for the commitments of another member state. Accordingly, it is not possible to re- cord losses by cutting the nominal value of a loan. In risk assessment, consideration may 36 MINISTRY OF FINANCE PUBLICATION 20B/2017 be given to the fact that, historically speaking, insolvency among developed economies is extremely rare The main vehicle for managing liability risk is the conditionality of financial assis¬tance, specified in detail after the approval of a financial assistance programme. Financial assis- tance is conditional to implementing agreed reforms designed to rehabilitate the econ- omy and society; progress made with such reforms is monitored and assessed regularly. These reviews are carried out by the commission and the ECB, in cooperation with the IMF where necessary. A representative of the ESM also takes part in the evaluation. Disburse- ment of loan tranches during the programme is conditional on beneficiary country meet- ing the agreed mid-term financial reform objectives (conditionality). A financial assistance programme ordinarily has a duration of three years. After the close of the programme, the country in question will remain in post-programme monitoring until 75% of the financial assistance it was granted has been repaid. The risk of the country failing to repay its EFSF, EFSM and ESM loans is assessed in connection with semi-annual reporting, which is part of the post-programme monitoring. The low interest rates reduces the interest expenditure arising from the assistance loans given to the programme countries; this decreases the risk associated with repay¬ment. In 2016, the interest rate on the EFSF and ESM loans ranged from appr. 1% to 1.35% and the loan period was 20–30 years. The inexpensive loans and the reforms the programme coun- tries are required to implement will improve their competitiveness and the sustainabili- ty of public finances, particularly in the medium to long term. This will make them better equipped to repay their loans and will decrease Finland's liability risk. The ESM's preferred creditor status, immediately after the IMF, limits the risks to which the ESM and thereby the euro area countries are subject. Bilateral and EFSF loans do not have a similar status. Under the ESM agreement, any losses would be covered firstly from the reserve fund and, if the fund is insufficient, from paid-in capital. A return, which can be placed in the reserve fund, also accrues on the ESM's paid-in share capital of EUR 80.55 billion. If these are not sufficient, losses will be covered from the callable capital. If paid-in capital has been used to cover losses, a simple majority decision may be made to restore the paid-in capital to its previous level. Based on the guarantees given, Finland may have to make payments to the EFSF if a ben- eficiary country fails to repay the financial assistance or its interest to the EFSF. In such a case, Finland would have to pay the EFSF an amount representing its share of guarantees required by the EFSF in order to make payments to its financiers in keeping with its com- mitments. Moreover, the EFSF's diversified funding strategy involves operational risks and 37 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 counterparty and market risks which may to some extent materialise regardless of the beneficiary's solvency. Finland has received collateral payments to limit the risks associated with financial assis- tance provided under the second programme for Greece and the programme for Spain. The value of the collateral arrangement represents 40% of Finland's calculated share of the loan. The market value of the accumulated collateral is approximately EUR 0.3 billion in Spain's programme and approximately EUR 0.93 billion in Greece's programme. All told, the market value of collateral given to Finland stood at approximately EUR 1.23 billion on 31 December 2016. The collateral payments, made in euro, have been invested in govern- ment bonds in euro countries with high credit ratings (Finland, the Netherlands, Austria and France). Assessment of risks related to the euro area stability mechanisms There are a number of ways to assess the risks for Finland arising from the management of the debt crisis within the euro area. One way is to calculate the total liabilities for Finland of different financial instruments and assess the potential of these to jeopardise the sus- tainability of Finland's public finances if, in extreme conditions, Finland was required to an- swer for all of its liabilities. Another way of assessing the risks related to Finland's liabilities is to make assumptions, based on existing market information, as to the liabilities and the probability of default by existing and potential beneficiary countries, as well as to the expected value of finan- cial losses in the case of receivables being restructured. Simplified assumptions, such as the following, must be made to calculate the expected value of a potential financial loss: (1) the probability of default by existing and potential future crisis states is assumed to be 30%, and (2) in the event of insolvency, the write-down on EFSF funding is 40% and for the ESM it is 10%. Due to its preferred creditor status, the IMF has not been forced to write down receivables from crisis funding provided to emerging economies. In the case of the ESM, the write-down could be set on a formulaic basis at 10%. Furthermore, (3) in addition to the current EFSF programmes for Ireland, Portugal and Greece, total financial assistance is assumed to include the ESM's entire capacity, totalling EUR 700 billion. Based on these assumptions, the expected value of potential financial losses from Fin- land's liabilities in the EFSF and ESM's crisis funding would come to approxi-mately EUR 700 million. If the probability assumption for insolvency rises to 50%, the expected val- ue of potential financial losses from Finland's liabilities would rise to EUR 1.2 billion. This risk assessment is simplified and indicative only, and involves a great deal of uncertainty. For example, the assumed probabilities of insolvency may underestimate or overestimate the risks. The expected write-down rate also affects the probability calculation. A change 38 MINISTRY OF FINANCE PUBLICATION 20B/2017 in one affects the other. Moreover, potential losses do not materialise all at once but over a long period of time. The risks related to Greece’s programme are limited by the repay- ments on its loans which do not start until 2020 in respect of the first programme, 2023 in respect of the second and 2034 in respect of the third. Moreover, Greece can service its debt quite affordably because the interest on the loan matches the cost of funding of the ESM and EFSF. Off-budget central government funds The central government currently has eleven off-budget funds. By far the most significant in terms of liabilities is the National Housing Fund. Government guarantees are also held by the Development Fund of Agriculture and Forestry, the National Emergency Supply Fund and the State Guarantee Fund. National Housing Fund Interest subsidies on loans granted by financial institutions for government-supported housing production and for major renovations, as well as investment grants to special groups related to subsidised loans, are paid from the National Housing Fund. Other Fund expenses include housing production start-up assistance, municipal engineering aid, cer- tain building repair grants, assistance for housing area development, financing for devel- opment projects and various support measures for rental housing corporations in finan- cial difficulties. The Fund is furthermore responsible for providing deficiency guarantees for subsidised loans, government guarantees for owner-occupied housing loans, guaran- tees for preferred loans associated with Arava loans, and expenses arising from guarantee loans and loan receivable recovery in rental housing corporations. The Fund also uses its assets for loan amortisation and interest payments as necessary. At present, the Fund has no debts. The Fund's revenue consists of Arava loan repayments and interest along with various payments associated with government guarantees. Figure 8 below illustrates the develop- ment of the housing loan guarantee portfolio. 39 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 Figure 8.  Development of housing loan guarantee portfolio 2010–2016, EUR billion 0,0 2,0 4,0 6,0 8,0 10,0 12,0 14,0 2010 2011 2012 2013 2014 2015 2016 Rental and right-of-occupancy Owner-occupied Almost the entire guarantee portfolio of off-budget funds consists of housing loan guar- antees for state-subsidised housing production. The Government housing finance guar- antee portfolio stood at EUR 13.06 billion at the end of 2016, an increase of approximately EUR 850 million since 2015. In the past ten years, the housing loan guarantee portfolio has shown rapid growth following the 2008 switchover in the housing loan system from direct loans to subsidised loans and the deficiency guarantees granted for such loans. The National Housing Fund’s guarantees for loans to corporations total EUR 10.99 billion. The majority of the guarantees, approximately EUR 10.2 billion in 2016, are linked to in- terest-subsidised loans granted by financial institutions to rental and right-of-occupancy housing corporations. Subsidised loans and guarantees for rental and right-of-occupancy buildings are available to municipalities, other general government entities and non-prof- it corporations. Subsidised short-term loans and the associated guarantees may also be granted to limited liability companies which only engage in the development, holding and renting of subsidised rental housing. The guarantee applies to the entire subsidised loan, which may cover up to 95% of the costs of land and construction. Guarantees for right-of-occupancy housing cover up to 85% of the costs of land and construction. No separate application is required for the deficiency guarantees related to subsidised loans and these are instead granted automatically when an application for a subsidised loan is approved. Older Arava loans granted directly by the State may be converted into loans granted by other financial institutions and the debt to the State may be fully repaid. A government 40 MINISTRY OF FINANCE PUBLICATION 20B/2017 guarantee is granted for the full amount of these converted loans. The guarantee fee is 0.5% of the loan principal. Government guarantees for rental housing production are also available to entities other than those mentioned above. These guarantees are subject to a guarantee fee of 0.5% of the loan principal. Government guarantees may also be granted to private individuals. This type of guaran- tee accounted for EUR 2.1 billion of the total portfolio in 2016. The portfolio increased by approximately EUR 70 million year on year. Deficiency guarantees for the home loans of private individuals are not subject to pre-approval by the State and the guarantee may be incorporated into the home loan by the lender bank in compliance with the provisions concerning guarantees and the guidelines of the State Treasury. The government guaran- tee is granted in situations where the applicant is unable to provide adequate collateral for the home loan. Banks may grant government guarantees as part of their home loan deci- sions. Customers are not required to apply for the government guarantee separately, nor are there any limitations regarding income or wealth. Customers who request a government guarantee on their home loan will be granted one. The maximum government guaran- tee is 20% (25% in ASP loans) or EUR 50,000 per home. The guarantee is subject to a fee of 2.5% of the guaranteed amount. Guarantee fees are not charged for interest-subsidised loans (ASP loans). When deciding on an application for guarantee compensation, the State Treasury makes a retrospective evaluation of whether the criteria for granting the guaran- tee were met and whether the bank will be paid the compensation. Since the beginning of 2015, guarantees are also available for housing corporation loans to be used for major improvements. The maximum amount of such a guarantee loan is 70% of the approved costs of improvement. The guarantee fee is 2% of the loan principal. No guarantees of this kind were granted in 2015 or 2016. Guarantees were previously granted for low-energy home construction or for home pur- chases to private individuals on the basis of means testing, but since the beginning of 2015 such subsidised loans or guarantees have no longer been granted. All of the guarantees referred to above include terms and conditions, particularly with re- spect to the amount of the guarantee. Furthermore, the government guarantee is second- ary collateral in all home loan guarantees. If the income on realisation is not sufficient to cover the bank's loan receivables, the government will pay the bank a guarantee compen- sation prescribed by law. 41 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 The National Housing Fund is exposed to two main risks: credit loss risk and interest risk. Interest risks on subsidised loans paid from the National Housing Fund have grown follow- ing temporary reductions in the co-payment portion of interest and an annual in average increase of approximately one billion euro of the subsidised loan portfolio since 2010. The reduced interest co-payment, 1%, was discontinued at the end of 2015. The ordinary interest co-payment on government-issued loans is 3.4% and the govern- ment covers expenses in excess of this rate in accordance with descending percentage rates. An interest subsidy over the interest co-payment of 1.7% is paid for rental housing loans subject to extended interest subsidy and approved in the period of 1 August 2016– 31 December 2019. According to the National Housing Fund's estimate, at an interest rate of 5% interest expenditure from the existing subsidised loan portfolio would grow to ap- proximately EUR 1.7 billion during the remaining maturity of the portfolio while at the cur- rent interest rate they would be EUR 33 million. Until now, guarantee fee income has exceeded the credit losses on loans by a factor of ten. About 81% of the principal of the loan portfolio falls into the category of very low risk. At their highest, payment delays affected roughly 4% of the principals in 1994. The volume of delays has again been trending upwards since 2009, however. Between 2000 and 2012 delays remained at below 1.5%, but since 2013 the trend has grown alarming. At pres- ent, loans with delayed repayment represent approximately 1.9% of the total loan portfo- lio and the proportion is expected to show continued growth, largely because the loans repaid early or according to plan are removed from the Arava loan portfolio. This results in the loan portfolio containing a relatively larger proportion of loans made to customers struggling to make the payments specified in the loan terms. Rental housing corporations struggling with payments are typically located in areas of declining population. These same regions tend to have problems with their collateral since the value of the property is insufficient to cover the remaining loans in full or, in the worst case, at all. Until now, credit and collateral risk have mainly applied to the Arava loan portfolio, but it is anticipated that they will also affect interest-subsidised loans in the future. Difficult economic conditions are not the only reason underlying these problems; structural change and especially mi- gration to growth centres are also key contributors. Credit and collateral risks mainly mate- rialise in regions of population decline where a decrease in housing needs coincides with the ageing and devaluation of the housing stock. Another risk-increasing factor is that home loan repayment schedules tend to leave the biggest instalments for the final years, when homes are often also in need of full refurbishment. 42 MINISTRY OF FINANCE PUBLICATION 20B/2017 Student loans The portfolio of government-guaranteed student loans shrank from the mid-1990s to 2005, since when it has gradually grown to EUR 2.3 billion in 2016. In 2016, the amount of guarantee liability receivables being collected through a recovery procedure totalled EUR 131.7 million and loans repayable by the government under its guarantee commitment amounted to EUR 12.9 million (approximately EUR 3,406 per debtor). Guarantee liability receivables and loans repayable by the government have been falling since 2000. Com- pared to 2014, the amounts payable by the government as guarantor decreased by EUR 0.4 million. Annual revenue from recovery procedures has more or less matched annual guarantee liability expenditure. In 2016, revenue amounted to EUR 17.8 million against guarantee liability expenses of EUR 18.4 million. So-called statute-barred receivables to- talled EUR 9.8 million in 2016. Legislation on statute-barred debt was amended in 2008 so that a debt will become statute-barred in 15 years. Other Unemployment Insurance Fund The Unemployment Insurance Fund answers for the expenses arising from earnings-relat- ed unemployment security in cases where responsibility does not fall on the State or indi- vidual unemployment funds. In April 2015, the government granted the Unemployment Insurance Fund a guarantee for a syndicated loan arrangement with banks to cover the Fund’s deficit. The Fund had no need to resort to any loan from the arrangement, however, as it has ob- tained its funding from the bond markets without any government guarantee. Nonethe- less, the Fund applied for renewal of the guarantee for a second two-year term. In April 2017, the Government granted a government guarantee for the Fund’s stand-by credit line of EUR 400 million in in the event of worse than anticipated economic development. The guarantee also covers the interest on the loans. At present, it would appear that the Fund will have no further need to rely on borrowing in the near future. Bank of Finland In February 2016, the Government granted the Bank of Finland a government guarantee equivalent to EUR 3.5 billion in Special Drawing Rights (SDR) against any losses incurred by the central bank from funding to the International Monetary Fund17. No counter guarantee 17 The government guarantee consists of a guarantee of SDR 2.4 billion relating to the application of the IMF member’s quota towards covering any losses incurred by the central bank and a guarantee of SDR 1.1 billion relating to any losses incurred by the central bank from the use of the IMF’s New Arrangements to Borrow (NAB arrangement). 43 MINISTRY OF FINANCE PUBLICATION 20B/2017 OVERVIEW OF CENTRAL GOVERNMENT RISKS AND LIABILITIES, SPRING 2017 was required. On the same occasion, the Government rescinded the earlier government guarantees to the Bank of Finland for the same purpose. No guarantee fee is charged. In addition to the member’s quota and the NAB18 arrangement, Finland has also had in place a bilateral loan agreement with the IMF as a backup. The bilateral loan agreement of EUR 3.76 billion has gone unexercised to date. A government guarantee for the said loan was granted by the Government in December 2012. The bilateral loan agreement expired in February 2017, however. Based on a Government proposal, in February 2017 Parliament gave its consent to renewal of the government guarantee to the Bank of Finland in order to renew the bilateral loan. The Government renewed the guarantee in March. The guarantee liabilities of the State of Finland relating to IMF funding thus consist of the member’s quota, the NAB arrangement and the bilateral loan. All told, these total approx- imately EUR 8.2 billion after the 14th member’s quota review and reduction of the NAB arrangement. Approximately 10% of the funding granted by Finland to the IMF has been used in recent years. Government guarantees associated with the member's quota and the NAB arrange-ment are given in the IMF's accounting currency SDR. Any compensation to the Bank of Finland on the basis of government guarantee would be paid in euros. The euro-denominated val- ue of the guarantee thus depends on the euro exchange rate. The EUR/SDR exchange rate effective at the given time is used to calculate the guarantee liabilities in euros. The IMF financing involves, first and foremost, credit risks associated with the solvency of the eventual beneficiary. To limit these credit risks, debt sustainability analyses are carried out before any financing is granted, various economic policy conditions are attached to lending, and financing is offered in tranches with dis-bursement tied to the implemen- tation of an adjustment programme. Moreover, the position of IMF as the lender of last resort for its member countries gives it a pre-ferred creditor status, which reduces the credit risk of its financing. In its 70 years in existence, the IMF has resorted to debt write- downs mainly in the poorest member countries, as part of more extensive debt relief pro- grammes. Terrafame Oyj In its 2017 supplementary budget, Parliament granted the Government authorisation to grant Terrafame Oyj an absolute guarantee to a maximum amount of EUR 107 million. No counter guarantee is required for this guarantee, which serves as a counter guarantee for environmental guarantees related to waste processing. 18 New Arrangements to Borrow 44 MINISTRY OF FINANCE PUBLICATION 20B/2017 Based on Parliament’s approval the Government granted in February 2017 a government guarantee of EUR 68 million as a counter guarantee for the bank guarantee granted to Terrafame Oy by Danske Bank. The government guarantee covers 80% of the maximum amount of the bank guarantees. The bank guarantees issued pursuant to the agreement on the bank guarantee limit have been restricted for use as a guarantee for the fulfilment of the conditions of the environmental permit required for the mining and metal process- ing activities pursued by Terrafame Oy in Sotkamo and the associated waste processing. The government guarantee is secondary to the tranche of 20% outside the government guarantee, as provided in t