Definition: Debt forgiveness (General government)

Balance of Payments, IMF

When a government creditor entity in one economy formally agrees - via a contractual arrangement - with a debtor entity in another to forgive (extinguish) all, or part, of the obligation of the debtor entity to the creditor, the amount forgiven is treated as a capital transfer from the creditor to the debtor. That is, the balance of payments reflects a reduction of the liability offset by the transfer. Similar treatment is applicable when a government entity's debt is forgiven by agreement with a creditor entity in another economy.
Source:
International Monetary Fund (IMF), "Balance of Payments Manual" (BOP), Fifth Edition, Washington D.C., 1993
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