Governments likely to retain stakes in financial institutions for 5-7 years, according to PricewaterhouseCoopers LLP
Seven-year horizon likely before governments can release stakes in banks says PwCLondon, 12 NOV 2009 -- A report released today by PricewaterhouseCoopers LLP (PwC), ‘Back to the future,’ expects that Governments around the world that have intervened to support Financial Institutions (FI) in response to the global financial crisis will need to prepare for long term involvement and ownership. The complexity of individual FI situations, difficult market conditions and an unattractive disposal environment combine to make the possibility of governments’ exiting their stakes in the private sector in the short term highly unlikely.
Jan Sturesson, Global Government Leader PricewaterhouseCoopers LLP, commented:
“Realistically, for many Governments it will take years to dispose of their stakes in financial institutions. It is not unreasonable to expect that it will take two to three years to sell major stakes, but up to five to seven years before Governments are able to fully divest of their stakes and related guarantees. In the medium term dealing with debt on such an unprecedented scale and avoiding both a long term drag on economic recovery and reduced freedom and discretion over future policy requires credible, sustainable plans to address the fiscal gap.”
Jeremy Scott, Global Financial Services Chairman, PricewaterhouseCoopers LLP, added:
“Governments need to accept, given the limited likelihood of a quick extraction from the sector, that their main focus needs to be on the positive role they can play given they are ‘inside the tent’. With governments retaining stakes in FIs for some considerable time they have three key public policy challenges to navigate, they must: be seen to be ‘good owners’ focusing on wider social and economic objectives as well as narrow financial goals; rebuild the confidence and trust that are essential for the financial system to function efficiently; and they must put in place credible plans to address fiscal deficits.
Jan Sturesson, Global Government Leader PricewaterhouseCoopers LLP, commented:
“Governments have a fiscal mountain to climb as they deal with the double whammy of state bailouts and recession and the consequences of the financial crisis extending beyond banking and capital markets boundaries to the insurance, savings and automotive sectors. Against this backdrop, the PwC report suggests that the ongoing interconnectedness of government and private sector has a number of ramifications. The interconnectedness is not only about shoring up financial institutions that are now reliant on state support and the banking sector as a whole which is now considered weak, moreover, there is a huge role to play in helping to close the fiscal divide and restoring businesses and consumers’ trust and confidence in both government and financial services.”
While the timing of governments’ exits is inherently difficult to predict particularly given market conditions, the challenge of valuing assets and market volatility, the report highlights examples of state involvement that has been successful.
Based on the experience of bailing out banks in countries such as Sweden, Norway and Japan and recent bank privatisations in Central and Eastern Europe, current expectations for early sales of large government stakes are misplaced. The key lesson from past privatisations is that the FIs or non-bank firm needs to be cleaned up prior to sale, how governments deal with toxic or troubled assets and where governments have not already nationalised troubled banks, they need to create mechanisms for dealing with non-performing assets, which might include ‘bad banks’ or other asset securitisation vehicles so that when a bank is returned to the private sector it is in sound financial health.
Government responses from around the world have been different depending on its particular involvement. In terms of whether credit lines are provided, liability guarantees offered, FI debt and toxic assets purchased and/or whether there was partial or complete equity ownership; therefore the precise exit route to take will need to be worked through.
Jan Sturesson, Global Government Leader PricewaterhouseCoopers LLP, commented; “To date governments’ have focused on stabilising particular institutions or have encouraged certain market activities but have not addressed the removal of troubled assets from the banks or the creation of functioning market and pricing mechanisms for these assets. It is essential that dealing with these troubled assets is addressed. In doing so governments will be able to take a longer term approach and undertake an activist investor position, thereby focusing not just on the financial return on an investment but also on the social return on investment.”
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