Friday, July 31, 2009

Rich Nations FAll Short on Bank Recovery Spending

Bob Davis for WSJ

Wealthy industrialized nations have provided less than half of the support they pledged to prop up their financial sectors, according to new data from the International Monetary Fund.

The so-called advanced economies of the Group of 20 have made capital injections of $425 billion in banks and other financial institutions, 42.3% of the amount announced, the IMF said. The countries' treasuries have also spent $333 billion to purchase assets and make loans to financial institutions -- just 18.4% of the amount announced over the past year or so as they sought to address the effects of the global financial crisis.

The IMF said the relatively limited spending suggested the financial crisis hasn't turned out to be as dire as once anticipated. "This outcome appears to reflect a variety of factors including the precautionary nature of initial announcements, indications of increasing stability and improved bank liquidity," said an IMF report.

The IMF warned that the rate of spending could reflect "lags in implementation." If that were to occur, debt levels would rise even more steeply than they have thus far. The G-20 includes industrialized and large developing nations. Among the industrialized nations are Canada, Australia, France, Italy, Germany, Japan, Britain and the U.S.

The new data came as part of a report warning again that debt levels in industrialized nations are rapidly increasing and that governments need to make clear how they will ultimately reduce the debt to more-sustainable levels. Otherwise, the IMF warned, interest rates could rise, undermining the effect of government stimulus spending and weakening an anticipated recovery.

By 2014, debt levels in industrialized G-20 nations are expected to climb to about 119.7% of gross domestic product from 78.8% in 2007, the IMF said. That 40.9-percentage point increase, the steepest since World War II, is the result of stimulus spending aimed at fighting the recession, and increasing payouts for pensions and health care for aging populations. The IMF generally views a 65% debt level as more appropriate for industrialized nations.

The IMF warned that it was too early for nations to start eliminating stimulus spending, and that a new round may be required in 2010.

It urged nations to lay out specific steps to show how they will handle debt in the longer term, to avoid spooking markets. It cited deficit-reduction commitments announced by Germany, Japan and the U.S., but said they weren't sufficient.

"The risk is that if the public starts to worry about medium-term sustainability and an inevitable rise in interest rates, that that will undercut the effectiveness of the stimulus," an IMF official said. "So it's critical that countries now begin to develop and enunciate medium-term and longer-term plans for dealing with the rise in debt."

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