PricewaterhouseCoopers (PwC) expects that governments around the world, which 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 report, ‘Back to the Future,’ says that 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.
Jon Sibson, partner and UK government and public sector leader, PwC, said: “Realistically, for many governments around the world it will take years to dispose of their stakes in financial institutions. It could easily 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.”
John Hitchins, partner and UK banking leader, PwC 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; they must 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.”
A recent online consumer survey by Opinium Research of over 2000 people, on behalf of PwC, showed that 62% of UK respondents felt that government action had not restored trust in banks. Ensuring that trust is rebuilt is an important plank for the government and will continue to be given the government’s stakes in financial services.
Sibson said: “Governments have a fiscal mountain to climb as they deal with the 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 government’s role is not just about supporting financial institutions that are now reliant on state support. It also involves rebuilding public finances and, above all, 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 have 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. 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, involving a variety of different means of support, ranging from providing credit, guaranteeing liabilities, purchasing toxic assets purchased to partial or complete equity ownership. Exit routes will necessarily differ too.
Sibson concluded: “The aim must be to return the financial system to health, with trust restored, credit flowing normally again and capital more efficiently allocated, while government stakes return to private hands having generated an acceptable return to the taxpayer.”
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