According to the report ‘Back to the future’ published by PricewaterhouseCoopers (PwC), 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 report said 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.
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.
According to the report, 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. Similarly, exit routes will necessarily differ too.
Jon Sibson, partner and UK government and public sector leader PricewaterhouseCoopers, 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.
“It involves rebuilding public finances and, above all, restoring businesses and consumers’ trust and confidence in both government and financial services. 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.”
John Hitchins, partner and UK banking leader, PricewaterhouseCoopers, said: “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.”
