There’s no end to gloomy economic news. The International Monetary Fund (IMF) has warned that global recovery efforts are being undermined by the presence of “toxic” assets on banks’ balance sheets. IMF managing director Dominique Strauss-Kahn said in an interview to French radio that this undercuts stimulus efforts by various governments.
“I’m worried, because the plans that are being put in place are headed in the right direction, but don’t go far enough,” he said.
The IMF chief did not say it all: A clean-up of banks is the first task that governments need to address. Unless that is done, trust and, in turn, confidence cannot be restored. Stand-alone stimuli stand no chance in the current economic climate.
Yet, governments worldwide got into a sequencing problem: they rushed to launch economic and financial stimuli without cleaning bank balance sheets and recapitalizing them. Now, after committing huge sums to stimulus packages, they find their hands tied in spending more money on efforts to restore the health of their financial institutions.