World Busines and Finance news

Governments planning to withdraw financial-market support should first exit programs that guarantee bank liabilities and coordinate their moves with other countries to keep a level playing field, the International Monetary Fund said.

Bank-debt guarantees are potentially costly for public finances as governments assume credit risk, the lender said today in portions of its bi-annual Global Financial Stability Report. Extending such measures in some countries while unwinding them in others could favor some banks at the expense of others, disrupting capital flows, it said.

The Washington-based IMF, which has rescued economies from Pakistan to Hungary in the past year, is advising officials around the world not to withdraw economic stimulus programs too soon as they chart a path to sustainable growth.

“We are not indicating that central banks and governments withdraw at the moment,” Laura Kodres, a division chief in the IMF’s monetary and capital markets department, said today at a news conference in Washington. “They should have a well- defined and transparent strategy for when the time comes, the time when confidence is fully returned and removing the various interventions will not destabilize markets.”

IMF Managing Director Dominique Strauss-Kahn will carry the message this week to Pittsburgh, where leaders from the Group of 20 industrial and emerging nations meet to discuss financial regulation and policies to support a global recovery.

Bank Stakes

Governments may need to hold assets bought to help banks improve their balance sheets for some time, as their goal should be to generate the highest possible return, according to the IMF. The lender also saw a potential positive effect from selling public stakes in banks, which “would normally signal an improved financial position for banks.”

“Once financial stability has been established, priority should be given to exiting from those that have a significant distortionary impact on financial markets or involve considerable contingent liabilities for the government,” the IMF wrote. “Based on these criteria, it would be reasonable to unwind government guarantee on bank debt earlier than disposing of impaired assets acquired by the public sector.”

U.S. Treasury Secretary Timothy Geithner said this month that the government is moving to withdraw some of its support for financial markets and cautioned that the recovery will have “more than the usual ups and downs.”

As central banks seek to unwind interventions, “both the timing and the modalities of removing liquidity from the system are crucial to preserving price stability in the transition to the post-crisis period,” the IMF report said. “It is yet unclear how the technical aspects of removing liquidity will interact with normal monetary policy decisions regarding the interest rate.”

Monetary-Policy Tools

Central banks’ tools include issuing bills, running liquidity-draining repurchase agreements, auctioning fixed-term deposits and “remunerating excess reserves american family insurance.” The latter measure is possibly a “useful monetary policy” that would raise the overnight lending rate, the IMF said.

Central bankers should prepare “credible plans” for the timing and methods of ending interventions “so as to be able to withdraw the monetary stimulus in a timely manner if inflation expectations begin to rise,” the IMF said.

Policy makers must make it clear “that starting the exit process does not necessarily mean a rapid withdrawal or policy support.”

For governments as well as for central banks, communicating the start, pace and duration of an exit strategy will be key, the report said.

Securitization Markets

The IMF also wrote that “restarting the private-label securitization markets, especially in the United States, is critical to limiting the real sector fallout from the credit crisis.”

While central bank and government support has helped stabilize the securitization industry, it “may have also slowed the market’s recovery by substituting for traditional buyers of securitization products,” the IMF report said.

The Federal Reserve in August extended by three to six months an emergency program aimed at restarting credit markets. The Term Asset-Backed Securities Loan Facility, with a capacity of as much as $1 trillion, will expire June 30 for newly issued commercial mortgage-backed securities, instead of Dec. 31, the Fed and U.S. Treasury said last month.

The IMF said that while TALF and other government programs have shown “some success,” the initiatives “are creating dilemmas for central bank exit strategies, so authorities should strive to move private-label securitization toward a sounder footing.”

ECB Program

The fund wrote that the European Central Bank’s 60 billion euro covered bond purchase program, announced in May, “has been helpful, as new European issuance has perked up and spreads narrowed.”

The ECB has cut its key rate to a record low of 1 percent and started buying as much as 60 billion euros of covered bonds to stimulate bank lending and boost investments and consumption. ECB Executive Board member Juergen Stark said on Sept. 15 that the Frankfurt-based bank is “well prepared to phase out” unconventional measures.

In its list of policy recommendations for reviving the securitization market, the IMF said compensation for securitizers should have a strong link to the longer-run performance of the assets.

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