IMF Executive Board Discusses the Management of Crisis-Related Interventions in the Financial System
September 15 2009
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
As part of the IMF’s work agenda on recovery from the financial crisis, the Executive Board met on Monday, August 31, 2009, to discuss a staff paper "Crisis-Related Measures in the Financial System and Sovereign Balance Sheet Risks." The paper examines the fiscal and financial risk implications of support measures in a sovereign balance sheet framework, making the point that the ultimate fiscal cost will depend on how balance sheets are managed—both in the near-term and as governments develop unwinding strategies. It suggests some key principles for efficient and transparent management of new assets, liabilities, and associated risks, and for moving toward an orderly disengagement.
Executive Board Assessment
Executive Directors welcomed the opportunity to discuss “Crisis-Related Measures in the Financial System and Sovereign Balance Sheet Risks,” which they considered to be a useful and timely contribution. While recognizing that it is still too early to withdraw the substantial support provided by governments and central banks, Directors considered it appropriate to begin reflecting on how enlarged public balance sheets can be managed most effectively and to ensure orderly exits. Against this background, they generally agreed with the staff’s key messages, noting that the management of the fiscal impact and financial risks of public interventions should be comprehensive and transparent, with an unwinding phase that seeks to strike the proper balance between avoiding market disruptions, while maximizing recovery values. However, Directors stressed that the scope, pace, and timing of such exit strategies will be highly dependent on the circumstances found in each country.
Framework and policy mandates
Directors recognized that, while the impact on fiscal deficits from public interventions in the financial sector has so far been limited, some sovereign balance sheets have expanded significantly and risk exposures have risen substantially, compounded by the impact of recession in many countries. They considered that countries should take a comprehensive approach to managing their new assets, liabilities, and off-balance sheet risks and contingent claims—which encompasses all public entities involved in crisis response.
Directors recognized the need to reclarify the policy and operational mandates of public sector entities involved. They stressed the importance of preserving strong central bank financial positions and independence, and indicated that it might be necessary to compensate some public sector entities for losses incurred owing to crisis related interventions. They advised that quasi-fiscal activities should be transferred to the government balance sheet and managed through the budgetary process.
Details of strategy
Directors agreed that, to the extent possible and to protect fiscal solvency, unrequited support should be avoided, recovery rates on assets acquired should be maximized, and measures should be taken to minimize the realization of contingent claims.
Directors stressed that asset management should be undertaken within clearly specified mandates, and that the government should exercise its ownership rights in accordance with best-practice corporate governance rules. Directors recognized the challenges that appropriate valuation of assets present, particularly given impaired or inoperative markets. At the same time, they reiterated the importance of adopting fair value principles, noting that an aggressive shift away from marking-to-market valuation could be counterproductive.
Directors considered that domestic debt management strategies should be reviewed to ensure they are robust to the recent changes in the sovereign balance sheet. They also noted that the development of comprehensive fiscal risk statements would help guide operational frameworks for managing contingent liabilities.
Approach to unwinding
Directors emphasized that, in the expectation that the growth in sovereign balance sheets will take some time to unwind, a clear comprehensive medium-term macroeconomic strategy should be developed as soon as feasible, to anchor asset-liability management to credible paths for deficit and debt reduction.
Directors considered that a strategy for disengagement should be developed that would avoid market disruption, return assets to the private sector, and maximize recovery rates in order to contain costs to taxpayers. They reiterated, however, that the process of disengagement should be tailored to individual country circumstances and should not begin until certain preconditions have been met, including importantly sound financial regulation and supervision, and confidence in financial markets restored. Directors agreed that monitorable indicators can help determine whether these circumstances prevail, mainly by signaling when the interventions should be subject to review.
Directors considered that a phased approach to disengagement would be prudent. This could involve: closing redundant or ineffective facilities first; using market incentives, such as pricing, to make support less attractive as conditions normalize; transferring risks to the private sector, including by removing subsidies to guarantees and liquidity support facilities; and clarifying arrangements for asset disposal, including by developing incentives for private recapitalization.
Importance of coordination and cooperation
Directors emphasized that, in unwinding of financial sector support measures, a clear determination is needed of those aspects where domestic and international coordination and cooperation, including with the private sector, is essential. This would help minimize unintended distortions and scope for cross-border and cross-sector arbitrage, as well as any negative effects on cross-border movement of capital. The Fund has a central role to play in monitoring macro-financial risks and vulnerabilities, tracking the impact of sovereign asset and liability management policies, giving guidance on balance sheet restructuring and macroeconomic unwinding, serving as a forum, and contributing to a clearer global understanding of these complex issues.
Looking ahead, Directors considered that, through its bilateral and multilateral surveillance and continued analytical and technical work, the Fund is uniquely placed to help member countries in understanding and managing the fiscal impact of public interventions in the financial sector in a comprehensive, systematic, and internationally cooperative manner. The Fund will also continue to interact closely with other international bodies, notably the Financial Stability Board.