The essential function of an external balance-sheet rule should be to make sure that actions of the government do not contribute to volatility in the foreign exchange market. Consequently it makes sense to apply the rule to all of the government s foreign assets and all sovereign liabilities denominated in, or indexed to, foreign currencies.
Forward foreign exchange transactions should be recognised, as liabilities, while such things as contingent credit lines, if they are truly available on demand, should be counted as foreign currency assets. In addition, key contingent liabilities should be included. This means that the foreign currency assets and liabilities of financial intermediaries that have access to the safety net--e.g.