The Obama administration’s plans to stabilise the financial system lack “essential details” and have left the markets uncertain about how it intends to recapitalise the teetering US banking sector, says the International Monetary Fund.
The IMF report, which comes out days before the administration plans to unveil the mechanism of its public-private funding vehicle for removing toxic assets from bank balance sheets, adds to the pressure on Tim Geithner, US Treasury secretary, to provide greater clarity on the bail-out plan.
“Critical details concerning the valuation of distressed assets remain unclear,” says the IMF report, which was released in advance of next month’s summit of the Group of 20 countries in London. “The plan also does not address how severely undercapitalised or insolvent banks will be resolved . . . greater clarity on all these issues will be critical to ensure the plan’s effectiveness.”
Mr Geithner, whose first attempt last month to spell out his guidelines for dealing with toxic assets was given a thumbs down by the markets, will next week put flesh on those plans. On Wednesday, Barack Obama, president, defended Mr Geithner amid calls for his resignation saying he was “making all the right moves in terms of playing a bad hand”. In its report, the IMF forecasts the global economy will decline by 1 per cent in 2009 – its first contraction in 60 years. The fund, whose own role is likely to be expanded at the G20 summit next month with proposals for a doubling of its shareholder capital to $500bn (€365bn, £344bn), says the global economy is unlikely to turn round until governments achieve a “decisive breakthrough” in resolving the financial crisis.
“To break the negative feedback loop, it is ex-tremely critical to resolve the uncertainty concerning the balance sheets of financial institutions,” it says. “Systematic and proactive approaches have started to supplant ad hoc interventions but financial sector policies still lack coherence and credibility. Greater international policy co-ordination is crucial for restoring market trust.”
Mr Geithner may draw some comfort from the IMF’s recommendation of using market mechanisms properly to evaluate troubled assets, which is at the heart of his plan. But the fund urges governments to consider temporary nationalisation of failing banks, an option Mr Geithner has ruled out. It says the approach with the best record would involve three steps: toxic assets should be removed from bank balance sheets and transferred to a publicly owned asset management company; viable banks should be recapitalised; insolvent institutions should be closed or temporarily nationalised.
The report also chides governments for falling short of the IMF’s recommendation of achieving a fiscal stimulus equivalent to two per cent of aggregate global GDP. Last week, Lawrence Summers, Mr Obama’s senior economic adviser, called on governments around the world to co-ordinate attempts to boost demand at the G20 meeting in a plea that was met with lukewarm reception among many governments in Europe.
The IMF, which estimates that the G20 has so far delivered an aggregate 1.8 per cent stimulus, also recommends governments provide further demand boosts in 2010. “Given the likely protracted nature of the downturn countries with fiscal room should plan to sustain stimulus in 2010.”
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