Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh
Chapter 11: Public guarantees on bank bonds: Effectiveness and distortions
The exacerbation of the financial crisis which followed the collapse of Lehman Brothers in October 2008 led the governments of several advanced economies to use unprecedented amounts of state aid to support the financial sector. The immediate aim of this massive intervention was to avoid widespread failures and to restore normal financial intermediation. The financial sector support measures can be divided into three main groups: (i) guarantees on new debt securities; (ii) capital injections; and, (iii) asset purchases and asset guarantees. In most countries guarantees on bank debt turned out to be one of the favourite tools, largely because guarantees do not have an immediate impact on budget deficits since they represent a contingent liability. As can be seen in Figure 11.1, in several countries the volume of ‘indirect support’ through guaranteed issuance (in terms of GDP) was larger than or equal to the amount of ‘direct support’ via capital injections and asset purchases.
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