A seven-year horizon is likely before governments can release stakes in banks says PwC. This is the conclusion reached by PricewaterhouseCoopers (PwC) following a survey conducted by it, the results of which are set out in a report entitled 'Back to the Future'. The report estimates 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.
Josy Steenwinckel, financial services leader at PricewaterhouseCoopers in Belgium, comments: "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 or seven years before governments are able to fully divest of their stakes and related guarantees. In the medium term, credible, sustainable plans are needed to fill budget gaps and to work on reducing debts of such magnitude and to prevent the brakes being put on the economic recovery."
Jeremy Scott, global financial services chairman at PricewaterhouseCoopers LLP, adds: "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 not only on wider social and economic objectives but also on specific 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."
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; there is also 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 in helping FI out of the mire.
The report shows that experience with rescue operations for banks in countries such as Sweden, Norway and Japan and the recent bank privatisations in central and eastern Europe, current expectations of a quick disposal of government stakes is misplaced. The key lesson from past privatisations is that the FI 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 their 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.
Josy Steenwinckel leaves us with these thoughts: "To date governments have focused on stabilising particular institutions or have encouraged certain market activities but have not fully 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."
