The IMF: It"s Too Early To Stop Bail-Out Efforts

The International Monetary Fund believes it is too early for governments to terminate bail-out efforts focused on their ailing financial sectors, but authorities need to coordinate their strategies on how to step back from their interventions, which the IMF deems efficient in countering the crisis.

According to the IMF"s semi-annual Global Financial Stability Report, to which a preview has been released this week, two conditions are essential for restoring confidence in the financial institutions and markets. The first is that "Governments will need to coordinate exit strategies, taking into account that recovery paths among countries may differ, and clearly communicate their strategies."

Secondly, "Clear communication about unwinding strategies -- not only when to start the process, but also how the entire process is designed (pace, duration, etc.) -- is imperative to retain market stability and manage expectations, especially regarding inflation," the Report indicates.

Coordination especially on banking guarantees will prevent some countries from lagging behind and will also facilitate a smooth transition to the post-crisis environment.

"Let me emphasize that we are not advocating that central banks or governments withdraw at the moment, but rather that they should have a well-defined and transparent strategy for when the time comes," said Laura Kodres, Division Chief at the IMF"s Monetary and Capital Markets Department. "Disengagement of crisis interventions in the financial system by central banks and governments should be guided by the return of lasting confidence in the health of financial institutions and markets," she added.

Policy-makers must give markets a clear idea of what they should expect, so that to avoid any potential return to instability, the IMF recommends. Central banks should focus on avoiding over-liquidity in the banking system, as such over-liquidity is necessary during a crisis, but not after the crisis is over, when it may generate inflation.

The IMF Report is also focusing on evaluating the effectiveness of the public intervention measures taken after the start of the crisis in the summer of 2007. The conclusion is that, while interventions could not prevent the global lending crunch, specialized markets reacted well, one example being housing loans.

The full IMF Global Financial Stability Report will be released on 30 September.