The IMF has called on European governments to guarantee bank lending to companies in order to support the region’s economic recovery.
The plan would put taxpayers on the hook for loans that go bad, loans that banks are either unable to make currently or are too risky to make.
In its Global Financial Stability Report released Wednesday the Fund says over six years since Lehman Brothers failed, banks accounting for 40% of total assets held in all banks globally — a number that’s in the trillions of dollars — are still unable to provide enough credit to the global economy to support a recovery.
Bank loans allow companies to invest in new technology, take on more staff or purchase competitors in order to grow their businesses and help boost the economy more generally. Small firms in particular rely on bank lending as they are too small to access bond markets, where larger firms have been able to get access to a plentiful supply of cheap funds.
The problems are particularly concentrated in Europe. The report finds that whereas the US has already seen a substantial improvement in the amount of bank lending, “real credit growth is already lagging behind the average recovery path in past banking crises in the euro area and the United Kingdom.”
These concerns have already prompted the European Central Bank (ECB) to announce a plan to buy private sector assets from Europe’s banks, giving those banks more cash to boost lending across the region. However, the IMF offers an interesting addition to improve the effectiveness of their plan — governments could directly or indirectly guarantee lending. The report says:
Targeted fiscal support (guarantees by pan-European agencies) would further encourage this type of market-based funding.
What this means is that bank lending across Europe in the aftermath of the Great Recession has fallen significantly behind where is has been at similar stages in past financial crises. In order for Europe to recover, its banks are going to have to change their business models in favour of lending to people and businesses rather than investing money in stocks and bonds.
Unfortunately, the countries most in need of these funds in the vulnerable Euro Area are those that are still plagued by high unemployment, distressed loans (where the borrowers are struggling to meet repayments or are already behind on them) and government spending cuts. This creates an uncertain environment into which banks have proven unwilling to lend.
So, as the chart below shows, lending to countries like Greece has been contracting sharply:
In his opening remarks José Viñals, director of the monetary and capital markets department at the IMF, said:
The good news is that banks are much safer now, having increased their capital levels and liquidity. However, this GFSR finds that many banks do not have the financial muscle to provide enough credit to vigorously support the recovery.
The IMF is in effect asking European governments to issue taxpayer guarantees in order to overcome the banks’ reluctance to lend to vulnerable states. This is unlikely to please German policymakers who have been campaigning vigorously to avoid German taxpayers having to shoulder more responsibility for the future of the euro.
The IMF’s message to them is this — you may not have a choice.