Transcript of a IMF's Conference Call on the Publication of the Paper Crisis-Related Measures in the Financial System and Sovereign Balance Sheet Risks

September 17, 2009

With Adrienne Cheasty and Udaibir Das
Tuesday, September 15, 2009, Washington, D.C.

Mr. DIENG: Good morning everyone. I am Ismaila Dieng from the IMF External Relations Department. Welcome to this conference call on the paper Crisis-Related Measures in the Financial System and Sovereign Balance Sheets Risks.

Joining us today, Mrs. Adrienne Cheasty, who is Senior Advisor in our Fiscal Affairs Department, and Udaibir Das, who is Assistant Director in our Monetary and Capital Markets Department. Mrs. Cheasty will start with some brief remarks and they will be both happy to take your questions. So, without further ado, I will hand over to Adrienne for opening remarks.

Ms. CHEASTY: Good morning. Our aim with this paper was to articulate how countries should be thinking about exiting from the unprecedented large public interventions in the financial sector. We are not saying the government should be exiting now. Indeed, a main message of the paper is that governments should probably exit gradually. But we are saying that the time has come for governments to spell out their plans to exit.

The first point is that governments have, in fact, been quite skillful in avoiding interventions which raise fiscal deficits. They lent money, swapped assets, took on risks, but, in fact, have spent relatively little money outright. Hence, if they can ensure that they get repaid for the loans, resell the assets they took over without losing their value, and dismantle the guarantee programs that were set up, they can get out of all this with very little—with relatively little cost. In other words, the ultimate cost to the taxpayer will depend on what governments do from now on, both while they’re managing the assets, debt, and commitments they’ve taken over, and eventually as they wind them down.

A second point of the paper is that a good strategy will have to include not only the government, but also central banks and other public institutions that contributed to financial sector support. And these are actually quite varied: sovereign wealth funds, development banks, pension funds, and so on. We recommend taking a comprehensive sovereign balance sheet approach to designing the strategy, looking not only at government but all components of the state involved in financial sector support. During the crisis the policy responsibilities of different institutions got blurred and it will be very important from now on to re-clarify what institution is supposed to be doing what. With central banks, for instance, what is important is their ability to carry out independent monetary policy and hence, any responsibilities for sectoral support should be transferred back to government budgets.

The paper discusses our strategy in two parts: during the current period when governments and central banks must continue to manage their interventions, and then in the future, how they should begin to exit. So, for now, on the central bank side, they should be taking stock of new risks and mismatches and making sure asset liability management strategies are dealing with these properly. They should be shedding credit risk by handing it back to governments and they should be adjusting charges for facilities and guaranties to reflect improvements in market conditions.

Governments should be clarifying their framework for managing assets. They can do that either through asset management companies or a decentralized approach, but the rules for participation in asset management could be clear and governments should be insulating themselves from the cost of their guarantee programs. They should be assessing whether their debt management strategies need tweaking, for example, by lengthening maturities again and they should be working to restore level playing fields.

Moving to the exit phase, it will be important for governments to announce medium terms fiscal plans as soon as they find feasible. Obviously, there is a lot more uncertainty than usual, so governments will have to do this paying a lot of attention to risk assessments. We recommend that countries issue comprehensive fiscal risk statements.

We also caution about the importance of getting as much information about valuation as possible and we advise against moving away from marking to market where marking to market is possible. As a rule, it is better for governments to know the worst and use full information when they are making their policy decisions.

We stress that there is no one-size-fits-all approach for countries to exit. Instead, we try and offer some general signposts. For example, redundant, ineffective facilities should be identified and closed first. Another gradual approach is likely to be required because we will need to test why financial stabilization can be sustained without support and we will need to avoid abrupt valuation changes. Access to support should be made increasingly less attractive and risks should be gradually transferred to the private sector, and you do this by raising interest rates, guarantee fees, and other charges over time. Past crises have shown that central to any plan is a clear communication strategy by the government outlining its intentions. This is important for all players, including financial markets. They need to know what to expect.

Finally, we do recognize the importance of policy coordination of the unwinding both within and across countries, though we stress that this does not mean that everyone should be exiting at the same time. The key purpose of international policy coordination will be to keep everyone informed and to maintain confidence in the market.

QUESTION: Could you tell me what role you see for the IMF in this unwinding process. It sounds as if you are proposing that the IMF could be kind of like a referee. What is your view?

Mr. DAS: You know that we have been asked by the G8 and the G20 to start analyzing this whole issue of exit from both a policy and an operational point of view. This paper looks at the whole issue of exit from an institutions and principles point of view that could guide countries as they start developing the strategy that Adrienne mentioned. We have not indicated or suggested in the paper about a specific role for the IMF. In fact, what we had mentioned is that there are several aspects of the intervention measures that when they begin to unwind, then they would require the authorities who have intervened to be very cautious about the cross-border spillovers. The Fund will continue, as a part of its analytical and surveillance work, to analyze those, come up with a framework that could further reassure the authorities as well as the markets that this is moving on the right path. Beyond that, we have not come up with anything more concrete as this agenda is very much taking off now as you know.

QUESTION: Have you presented the paper to the G20?

Mr. DAS: The paper was discussed by the Executive Board. I suppose that the traction is building up in terms of analyzing and presenting analysis, which the G20 leaders will look at and take it from there.

QUESTION: It says on page 26: “In past crises, advanced economies recovered 55 percent of cost while emerging markets, recovered only 15 percent.” What does that mean?

Ms. CHEASTY: It means of all of the assets governments took over and then disposed of, the recovery rate on the assets was 55 percent for the advanced countries, but much less for emerging markets.

QUESTION: So, in the U.S. context—I just want to make sure I understand—that would be things like buying a huge stake in General Motors?

Ms. CHEASTY: Yes, exactly. Although the paper does not specifically address non-financial asset takeovers. In the past we were talking only about straight banking crisis, so we do not have the issue of taking over General Motors. But the data that we have do show that after the recovery, which in the past happened to be bank assets, when those were sold off, you tended to realize 55 cents on the dollar.

QUESTION: But it is not things like guarantees and taking hits on those sorts of programs?

Ms. CHEASTY: No, it was—the data available for assets the government took over and then disposed of. These do not involve any payments upfront and so it is not a question of what share would you pay as you recover.

QUESTION: I have two questions. What kind of signs should countries look for and have they—are there those signs there somewhere already, perhaps in the United States? You say in the paper that each country should exit at its own pace, and at the same time you warn about the closed border spillover. I wonder if you could explain a little bit on what you fear. Let us say the United States or Europe exit earlier than the rest. What kind of problems will that have on the other markets?

Mr. DAS: There are two issues involved in the question that you ask and both of them are a little difficult at this stage to really come up with anything very specific, but we have attempted in the paper to suggest that one element that policymakers will have to be very mindful of, apart from having a strategy that is clearly communicated, is to ensure that the preconditions are in place, to ensure an orderly, smooth exit that doesn’t disrupt markets or doesn’t impair the confidence that seems to be building up. And one step that we have indicated there could be in the form of market indicators, and we have given some ideas there, which, incidentally, has been elaborated a little bit more in the Global Financial Stability Report (GFSR) . That could be one set that the policymakers could look at to see whether market confidence is building up, which could indicate that conditions are stabilizing for them to start considering exiting from some types of intervention channels.

The second would be very much that the institutional apparatus in the form of good regulation and supervision is also in place precisely for what you mentioned about potential spillovers into some subcomponents of capital markets. Some of these could be within the countries and some could potentially be spillovers into other countries. I think that there is work that needs to be done there more and the paper has been quite candid to say that that is work that the IMF needs to do and that’s work that country authorities need to do themselves.

QUESTION: What kind of spillover do you fear?

Mr. DAS: When we talk about policy coordination, the issue is not that everybody should unwind simultaneously, but we have to look at, for example, guarantees. Certain types of guarantees would need to be carefully thought through in terms of what effect it will have on different aspects of liquidity, money market, or interbank market.

The second good channel to carefully examine for the spillovers could be the liquidity support that some central banks have provided. Some cover domestic entities, some cover their transactions which are cross-border, so that could be another channel of intervention that needs to be examined. So, liquidity support channel, guarantees, would be two very obvious candidates where there could be spillovers and, therefore, those who intervene need to carefully examine them.

QUESTION: I am trying to gauge when you say that the financial interventions have only had a limited fiscal impact compared to say a fiscal stimulus, are there any kind of numbers on the macro level that you can toss out to provide that comparison?

Ms. Cheasty: The point that we are making in the paper was not a numbers point. It was that government really did not do almost any unrequited spending, like pouring money into banks for unrequited capital injections. There is almost nothing above the line that shows up in the fiscal deficit on the financial intervention side, where stimulus measures, kind of by definition, were directly funded. But let me come back to you on a numbers.

QUESTION: Following up on the earlier question, that spillover risk, can you be more specific? Are you worried about eroding confidence or a functioning of the markets? And, how is the coordination going to ease that risk or is it just a matter of waiting until the markets are strong and to absorb it? I have another question, too. The paper mentions the importance of compensating or rather accounting for quasi-fiscal activities and transferring those to government balance sheets. What types of things are you talking about as quasi-fiscal and what types of things have to be accounted for and how would you expect them to accomplish that?

Ms. CHEASTY: Excuse me for doing things out of sequence. Let me go back to the numbers question and let me read you what is, in fact, a footnote in the paper. I just wanted to be sure not to misquote it. Comparing the site of the financial interventions and the other spending over the past year, while the public debt in advanced countries is projected to increase by nearly 40 percent of GDP between 2007 and 2014, only 4.5 percent of GDP of that derives from the interventions. And so, in other words, partly because of the way that governments were careful in doing the interventions and the direct cost of the financial support so far, if it is managed correctly, you will have been small, relatively small; 4.5 percent of GDP is actually a lot. The footnote is number 4 on page 7 of the paper.

On quasi-fiscal activity, the idea is that the central bank should only be giving straight liquidity support. It should not be giving subsidies to sectors of the economy. It is the government’s role through the budget, through the budgetary process, which is subject to political scrutiny, to decide which sectors should be supported. And so to the extent that central banks have been doing this, they should, when it is feasible, hand that role back to governments.

MR. DAS: One should be concerned both about the potential impact on asset prices as well as in market confidence because not many of these measures, as you know—and the paper is only about intervention measures in the financial sector—were given or were introduced to instill and maintain market confidence. We continue to believe that despite recovery, there are a lot of fragilities and weaknesses still in the system. Banks’ cleanup is still a long way to go and any premature exit without taking into account how the markets will react and will it impair the confidence that has been built, would indeed be to find balance both of looking at some indicators as well as exercising a lot of judgment.

The paper does mention that this would require, that policymakers maintain a continuous dialogue with the private sector, with the market functionaries, to see that the timing is not premature, the sequence is done properly, and it is adequately communicated well ahead of any attempt to get out so that all parties involved are reassured about the process.

QUESTION: You talked about taking a sovereign balance sheet approach to have a good disclosure of the risk exposure for public finances. To what extent do you think that governments’ creditworthiness depends on the central banks’ balance sheets?

Mr. DAS: The whole thesis of the paper is precisely what you just mentioned yourself, that we believe that the entities involved in this crisis, which includes not just a central government balance sheet, but the central bank balance sheet, the balance sheet of some other public enterprises, some investment funds, clearly calls for the government to take, from a balance sheet point of view, a comprehensive approach of all entities in a sovereign sense.

In our view, this becomes very, very critical. It is a good framework because looking at sovereign balance sheet risk management does allow the government to look at the interconnections regardless of which entity has been used to intervene and also then to understand what could be the transmission channels of sovereign risks. This approach by construction is indeed the best way in which countries can safeguard and preserve their sovereign creditworthiness. And more and more of analysts are looking at not just one component of the balance sheet or one entity’s balance sheet, but are looking at these interdependencies among different balance sheets of the sovereign.

Ms. CHEASTY: I think maybe creditworthiness is a little bit too specific a concept in the sense that what is very scary is if you thought the central bank’s ability to carry about monetary policy might be compromised because it has bad assets on its balance sheet or it was undercapitalized, and so one wants to avoid that.

QUESTION: Adrienne, you said at the start if I understood it right, you advise countries to do certain kinds of risk assessments before they embark on unwinding, if that is at least the way I heard it. And then again on this question of whether this is going to cost a lot or this is going to cost a little. So on the one hand, you say it’s only 4-1/2 percent compared to 40 percent of the debt, so that sounds like a little, but then when you—as we were talking before—talk about a recovery rate of 55 percent, of only 55 percent, and that’s in rich countries, and 15 percent in developing countries, that sounds like it’s really quite costly. So, how do you look at that?

Ms. CHEASTY: On the risk assessments first, we are recommending risk assessments because we understand that there is an unusual degree of uncertainty. It’s very hard to ask governments to say what they intend their deficit to be, you know, each year from now on until the debt comes down to the level that they want it to be at. And so we are recommending that they pay even more attention than usual to doing, you know, stress testing, different scenarios. We also recommend that governments issue comprehensive fiscal risk statements.

This is—we are grapping with tools to manage risks in the public sector, making the point that all the action now is on the risk side and not on the actual fiscal deficit side. So what is a tool for managing fiscal risks? And best practice—pragmatic best practice is if countries enumerate their fiscal risks, try and estimate expected costs, and disclose that, usually with the budget as part of the budgetary process, so that policymakers have an understanding of what all the risks are out there. And simply by spelling them out and trying to get a comprehensive picture, it guides policymakers in what actions to take and what actions to avoid. That is our recommendation on the risk side.

On the size, the reason that we are hoping that the cost of the financial interventions can remain relatively low is because so much of this was done through guarantees screens, which, if they are not called, will not have any cost. We are already seeing some of the assets being repaid. They should not be repaid too fast because it is very important not to exit prematurely.

Mr. DIENG: We will bring an end to this conference call. Thank you very much for your participation.


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