Governments Need Plan to Dispose of Crisis Assets, Shed Risk: IMF

• Author: Jacqueline Deslauriers
• Position: IMF Survey online

This will take time, and 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 September 15, 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...