FRANKFURT — Moody's Investors Service said that based on a sample of 43 policy banks rated by Moody's in G20 countries, sovereigns face limited contingent liability risks related to potential financial support needed to support the banks' debt obligations.

Some governments incur fiscal costs to support the policy banks' operations, which are typically taken into account in Moody's assessment of the sovereigns' fiscal strength. At the same time, contingent liability risks related to policy banks have been found to be limited for the G20 countries included in the sample.

Moreover, to the extent that governments have the resources to support their policy banks, and such banks allocate resources to productive sectors, policy banks can help sustain sovereign credit quality by smoothing the business cycle and, in the longer term, enhancing economic competitiveness.

In its just-released report titled "Sovereigns — G20: Policy banks pose limited fiscal risk and provide upside from business cycle smoothing for those with fiscal space", Moody’s said sovereigns may incur direct fiscal costs to support the operations of policy banks. In particular, government loans and transfers to or regular capital injections into policy banks may be financed by sovereign debt or a drawdown of assets. Over time, these fiscal costs can build up and weigh on a sovereign's fiscal strength.

On the issue of contingent liability risks, Moody's said that such risks posed by G20 policy banks on their respective sovereigns are limited because: 1) where policy banks are large, the banks tend to be financially robust, or 2) where the policy banks' asset quality and financial strength is weaker, as in Russia, South Africa and Indonesia, the banks are relatively small.

In the case of China, the country's policy banks' debt is sizeable, while asset quality could weaken, given the banks' exposure to financially weak local government financing vehicles. — SG