23 April 2009

IMF chides US bailout strategy? Maybe.

BEING a donor rather than a creditor nation, America and its Treasury are under no obligation to follow IMF recommendations. Nonetheless, Derek Thompson reckons the IMF approves of the America's handling of the economic crisis so far. After all, the fund advocates tough provisions on firms taking government money and is sensitive to sticky political constraints. But, I thought I read some thinly veiled disapproval in the report on America's plan to remove toxic assets from bank balance sheets.

Among the methods being used so far, the United Kingdom has favored keeping the assets in the banks but providing guarantees that limit the impact of further losses. An alternative is to place the bad assets in a separate asset management company (AMC) (a so-called “bad bank”), an approach that Switzerland has adopted with UBS and that Ireland is also pursuing. This latter approach has the advantage of being relatively transparent and, if the bulk of the bank’s bad assets are transferred to the AMC, leaves the “good bank” with a clean balance sheet. The United States has provided a guarantee against a pool of assets that are either troubled or vulnerable to large losses in the case of Citibank and Bank of America, as well as proposing to establish private/public partnerships to purchase impaired assets from banks. The current proposal has elements to encourage private sector participation, but it is not clear yet whether banks will have enough incentive to actually sell their impaired assets. In general, different approaches can work depending on country circumstances.

That may not sound like fierce disapproval, but in policy speak it's pretty harsh.


No comments: