| Click for the Finfacts Ireland Portal Homepage |

Finfacts Business News Centre

 Irish Economy
 EU Economy
 US Economy
 UK Economy
 Global Economy
 Asia Economy


How to use our RSS feed

Web Finfacts

See Search Box lower down this column for searches of Finfacts news pages. Where there may be the odd special character missing from an older page, it's a problem that developed when Interactive Tools upgraded to a new content management system.


Finfacts is Ireland's leading business information site and you are in its business news section.

We provide access to live business television and business related videos from: Bloomberg TV; The Wall Street Journal; CNBC and the Financial Times. Click image:


Finfacts Homepage

Irish Share Prices

Euribor Daily Rates

Irish Economy

Global Income Per Capita

Global Cost of Living

Irish Tax 2008

Climate Change Reports

Global News

Bloomberg News

CNN Money

Cnet Tech News


Irish Independent

Irish Times

Irish Examiner

New York Times

Financial Times

Technology News




Content Management by interactivetools.com.

News : Global Economy Last Updated: Nov 28, 2010 - 5:10:03 AM

IMF says governments need a plan to dispose of the crisis assets; Ireland/Denmark unique in guaranteeing existing bank debt
By Finfacts Team
Sep 16, 2009 - 2:30:58 AM

Email this article
 Printer friendly page

The median across 12 advanced countries of government-guaranteed debt issued by banks is about 6% of GDP. Ireland is the outlier with a sovereign exposure of 55% of GDP.

A study published by the IMF says governments, having propped up the financial system during the global crisis, now need a plan to dispose of the assets they took over and reduce their greatly enlarged risk exposures. Ireland and Denmark were unique in guaranteeing existing bank debt - - significantly larger than new debt - - prior to the start of guarantee programs.

It's likely that the majority of Irish people erroneously believe that the State bank guarantee announced at the end of September 2008, only covers deposits.

The IMF study says it will take time to dispose of assets, and it says it is certainly too early to withdraw some forms of support. But governments should have a well-defined strategy for, initially, managing the assets and risks they took on, and then gradually winding them down.

The IMF paper, Crisis-Related Measures in the Financial System and Sovereign Balance Sheet Risks, issued on Tuesday, provides a practical overview of the principles and actions governments need to consider in moving towards an eventual exit from financial sector support.

The study points out that, contrary to popular opinion, government support to the financial sector has so far had only a limited impact on fiscal deficits. Other stimulus measures have been far more important. But the interventions mean that governments’ risk exposures have risen sharply.

“Guarantees may be called, announced lending facilities may be used, loans may not be repaid, and assets may not retain their value,” the study says. This means that the ultimate cost of the interventions to the taxpayer will depend on what governments do from now on. Governments must strike a delicate balance between continuing to support the financial sector for as long as is needed and saving money by closing off access to the measures now available.

Broad approach

Since not only governments, but also central banks and other public sector institutions such as sovereign wealth funds, combined to support the financial sector, the risks facing the state must be confronted with a broad framework - - the sovereign balance sheet. The authors call for strategic management of the assets and liabilities of all relevant components of the public sector, including the central bank and other public financial institutions, and of associated off-balance sheet risks, mainly the guarantees.

"Now we’ve got to get from a statement of desired targets to spelling out the nuts and bolts of how to get there," said Adrienne Cheasty, Senior Advisor in the IMF’s Fiscal Affairs Department.

Ways of eventually unwinding the stimulus and disposing of assets taken over during the crisis are likely to be discussed by policymakers at the IMF-World Bank Annual Meetings in Istanbul in early October.

“I do think the time is right for policymakers to develop their exit strategies – because failure to clarify and formulate these plans will risk undermining confidence and the recovery process itself,” said Dominique Strauss-Kahn, managing director of the IMF, in the Sixth Annual Bundesbank Lecture in Berlin on September 4th.

Plans boost credibility

The advantage of setting out how financial support will be managed and eventually unwound, and the communication of this to other policy makers and the financial markets, is the predictability it conveys to all actors in the process. The IMF paper breaks down the top priorities for managing central bank and government balance sheets.

For central banks, these include:

  • Taking stock of new risks, and balance sheet mismatches, and revising management practices to take these into account.
  • Shedding credit riskfrom direct lending to the private sector, either by shrinking the balance sheet or by transferring risky assets to the government, so that these can be managed as part of the budgetary process.
  • Adjusting the terms of accessto central bank lending and liquidity facilities as market conditions change, with the goal of protecting the central bank balance sheet.

For governments, priorities include:

  • Clarifying theframework for managing assets, either through asset management companies or a decentralized approach.
  • Setting out clear and transparent rules for participation in asset management—including for buying and selling, valuation, and operational autonomy.
  • Insulating themselves from the cost of guarantees,by charging appropriate fees for guarantees to help set the right incentives, and making budget provisions to pay for these, .
  • Considering debtrefinancing to increase maturity where cost-effective.
  • Maintaining a level playing field between institutions to ensure fair competition.

Manage expectations, disclose risks

Getting from a phase of large interventions and stimulus to an unwinding phase will require governments to be clear in deciding their deficit and debt targets, in order to establish timetables for returning to a more normal state of affairs, according to the study. The trajectory of deficits and debt over time will in turn define governments’ financing needs and inform the management of their assets and liabilities.

Given the high level of uncertainty, risk assessments will have to be a central part of the strategy.. They will need to take into account various potential costs and shocks as well as different assumptions about the prices and recovery rates for the assets.

“Sovereign balance-sheet-risk management allows for a comprehensive systemic risk management and better monitoring of the interconnections and transmission channels of sovereign risks,” said Udaibir Das, chief of the Sovereign Assets and Liabilities Division in the IMF’s Monetary and Capital Markets Department. “This framework is, by construction, the most consistent operational approach for ensuring sovereign creditworthiness”

Accurate valuation of assets and liabilities is crucial for understanding the impact of the financial support on fiscal solvency, the IMF said. The paper discourages any aggressive deviation away from the use of mark-to-market accounting, which allows for price discovery through the “fair value” granted the asset in a liquid market. As a rule, it is better for governments to “know the worst” and use full information when making policy decisions, according to the study.

The IMF study also points out that transparency and accountability will be key to maintaining confidence. Several countries, including Australia, Brazil, Indonesia, Pakistan and others, publish full statements of fiscal risks, including all guarantees provided by the government and in some cases estimates of potential losses.

Plans for unwinding help preserve taxpayers’ money

The paper outlines a few key criteria for successfully reversing central bank and government interventions, such as:

  • Selling-off assets in such a way to maximize the return for the taxpayer, and avoid guarantees being claimed.
  • Preserving central bank independence by closing lending facilities and removing support for specific credit markets.
  • Returning the central bank and the government to their core responsibilities for monetary policy and budgets respectively, and strengthening the regulatory framework.
  • Restoring the role of the private sector in the financial system, with private investors bearing the risk and rewards for their action.

Policy coordination

Also critical to the global recovery will be policy coordination of the unwinding both within and across countries. The key purpose of international policy coordination will be to keep everyone informed and maintain confidence in the market, the IMF said.

The IMF study stressed that there is no one-size-fits-all approach for countries to divest themselves of the assets and liabilities acquired during the crisis, and there are a number of complex issues surrounding timing and sequencing. That said, some practical guidelines may help:

  • Redundant or ineffective facilities can be closed first, though it is important to choose these carefully.
  • A gradual approach is likely to be required, to test whether financial stabilization can be sustained without support, and to avoid abrupt valuation changes.
  • Access to support should be made increasingly less attractive, and risks transferred to the private sector, by raising interest rates and guarantee fees over time.
  • Past crises have shown that central to any plan is a clear communications strategy by the government outlining its intentions, which helps all players, including financial markets, know what to expect.

As part of its ongoing work to help governments and central banks tackle these issues, the IMF will host a high-level conference to discuss the complex policy implications of unwinding public interventions in the financial system. The meeting will be held on October 29th in Washington, DC and will include government and central bank officials, as well as academics and private sector participants.

A recent article in the September issue of the IMF’s Finance & Development magazine discussed a number of the related macro-policy issues surrounding global economic recovery.

Related Articles
Related Articles

© Copyright 2007 by Finfacts.com

Top of Page

Global Economy
Latest Headlines
Strong Swiss franc gloom deepens for exporters
Global investors shift focus to China; EM outflows surge to $1tn in 13 months
Global oil glut will continue into 2016
Stable growth momentum in OECD area but slowing expected in China
Prices for major food commodities in July lowest since September 2009
Global manufacturing in July weakest level in two years
US, China and UK lead top 25 target countries for foreign direct investment
Budget surpluses rare in developed countries from 1980s; Italy, France, Greece had none in 60 and 40 years
Singapore, London and Shanghai top cities for new FDI projects in 2014; Dublin in 11th place
Exchange rates shuffle as Dublin ranked 49th most expensive city; Paris at 46; Berlin at 105
Western consumer groups under pressure in China and India
Developing countries facing “structural slowdown” likely to last for years
OECD BEPS Tax Project: Amazon books UK sales in UK; Australia proposes up to 100% in penalties
Emerging Markets Index falls to 12-month low in May as manufacturing contracts
US and world economies slowing in 2015 — OECD
Global manufacturing production rose slightly in May; Trade flows weak
GDP growth in OECD area slowed to 0.3% in the first quarter of 2015
Only one quarter of workers worldwide have stable employment contracts
Automatic Exchange of Tax Information: OECD says countries won't be able to game system
Gates Foundation loses in Swiss family's shares coup
Minimum wage levels in OECD countries
Brent oil benchmark over $68 a barrel - up almost 50% in 2015
Global growth slows and manufacturing dips to 21-month low
Family-controlled firms dominate European business
Top 10 of world’s 250 largest consumer products companies account for 30% of sales
Nine of world's 20 fastest growing economies in Africa
Globalisation maybe stalling as trade growth remains weak
Global growth prospects uneven across major economies says IMF
Emerging markets growth lowest since 2009; Global growth at 30-year average
China's economic rebalancing hitting Latin American economies
New York, London, HK & Singapore top global financial centres index; Dublin recovers
Global growth in modest expansion from low oil prices/ monetary easing says OECD
Composite leading indicators point to positive change in growth momentum in the Eurozone
Global labour market trends portend paradise for some but uncertainty for many workers
Vienna remains top of World Quality of Living Rankings in 2015; Dublin at 34
Zurich and Geneva overtake Singapore to become world's most expensive cities
HSBC Switzerland and Falciani: How it happened
Global economic power to continue shift from advanced economies
Global food price index falls in January; Cereal output set for record
Global debt has risen $57tn or 17% of world GDP since 2007