Today, the IMF issued a report entitled “Crisis-Related Measures in the Financial System and Sovereign Balance Sheet Risks.” The report recognizes that it is still too early for governments to withdraw official support from the financial sector, but provides guidelines for governments “to consider in moving towards an eventual exit from financial sector support.” The report asserts that government support to the financial markets has only had a limited impact on fiscal deficits but has increased governments’ risk exposures significantly, noting that “the ultimate cost of the interventions to the taxpayer will depend on what governments do from now on” and urges governments to “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.”
Since central banks and other public sector institutions have provided support to address the crisis, the report “calls for [a] 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.” The IMF report also identifies and outlines the top priorities for disposing of assets assumed during the crisis from central bank and government balance sheets.
Central bank priorities should include the following:
- Identifying new risks “and balance sheet mismatches, and revising management practices to take these into account.”
- Disposing of credit risk related to “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.”
- Modifying the terms of access to lending and liquidity facilities as changes in market conditions occur.
Government measures should include the following:
- Clarifying the overall framework “for managing assets, either through asset management companies or a decentralized approach.”
- Providing “clear and transparent rules for participation in asset management—including for buying and selling, valuation, and operational autonomy.”
- Proving insulation “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 debt refinancing as a means to increasing maturity where cost-effective.
- Maintaining a level playing field between institutions to ensure fair competition.
The report notes that transitioning “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.” Due to the high level of uncertainty, undoubtedly risk assessments will have to be made an integral part of a government's exit strategy. In addition, “[a]ccurate valuation of assets and liabilities” will be crucial to understanding and appreciating “the impact of the financial support on fiscal solvency.” The report, in this regard also “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.” According to the study, governments must acknowledge “the worst” and utilize such information when making policy decisions.
The report also notes that reversing central bank and government interventions should be done in a manner that preserves taxpayers’ money and maximize the return to the taxpayer, including:
- Maintaining “central bank independence by closing lending facilities and removing support for specific credit markets.”
- Strengthening the regulatory framework by having the central bank and the government return “to their core responsibilities for monetary policy and budgets respectively.”
- Reviving and reinstating “the role of the private sector in the financial system, with private investors bearing the risk and rewards for their action.”
Also critical to global recovery will be transparency and accountability in government actions and policy coordination of exit strategies across countries. The IMF will further evaluate measures to unwind the stimulus and dispose of assets assumed during the crisis with policymakers next month at the IMF-World Bank Annual Meetings in Istanbul.
As part of the IMF’s ongoing efforts to help governments and central banks address issues related to the financial crisis, the IMF will host a high-level conference in Washington, DC on October 29, 2009, with government and central bank officials, as well as academics and private sector participants “to discuss the complex policy implications of unwinding public interventions in the financial system.”