IMF estimates cost of global financial crisis at US$4 trillion

WASHINGTON – The International Monetary Fund on Tuesday raised its estimate of losses from the global financial and economic crisis to more than four trillion dollars due to writedowns on soured credit.

The IMF said the total estimated cost of US$4,054 trillion includes US$2,712 trillion in losses in US-originated assets.Losses on European-originated assets were estimated at US$1,193 trillion and those of Japanese-originated assets at US$149 billion.The total cost represents what was needed and would be needed by financial institutions because of the deterioration in credit, in particular in the plunge in the value of equities backing credit, such as mortgage loans, as the global economy suffers the worst contraction in six decades.The estimate, which covers the period from the beginning of the financial crisis in mid-2007 to 2010, was published in the IMF’s latest semi-annual Global Financial Stability Report (GFSR).The IMF’s previous update in January of a projected loss of US$2,2 trillion was based exclusively on US-originated assets, as had been the October 2008 GFSR estimate of US$1,4 trillion.’The global financial system remains under severe stress as the crisis broadens to include households, corporations, and the banking sectors in both advanced and emerging market countries,’ the IMF said.’Shrinking economic activity has put further pressure on banks’ balance sheets as asset values continue to degrade, threatening their capital adequacy and further discouraging fresh lending,’ the 185-nation institution said.The IMF projected that banks will bear US$2,470 trillion, or 61 per cent, of the total losses and said that two-thirds of them have yet to be declared.’Loss recognition is incomplete and capital is insufficient under a recession scenario,’ the IMF said.’Other financial institutions including pension funds and insurance companies also have significant credit exposures,’ it added.US pension funds alone may have to write down ‘at least’ 200 billion dollars on their credit exposures, in addition to their losses in equity assets, the IMF said.Pointing to ‘early signs of stabilisation’ in the global financial system, the Washington-based institution said that ‘further decisive and effective policy actions and international coordination are needed to sustain this improvement, to restore public confidence in financial institutions, and to normalise conditions in markets.’’Policy actions have prevented an even deeper crisis, but the limited market improvement to date has been insufficient to prevent the onset of the adverse feedback loop with the real economy,’ it said.’Credit deterioration could substantially deepen for European banks in particular, including through their exposure to emerging Europe.’The IMF economists calculated that for banking systems to be recapitalised to pre-crisis levels, US$275 billion would be needed in the United States and US$600 billion in Europe.To return to mid-1990s levels, the amounts would rise to US$500 billion in the United States and US$1,2 trillion in Europe.The IMF said it was not opposed to the nationalisation of troubled banks, as evidenced by its financial rescue of Iceland after the government seized three banks in October.Due to some banks’ ‘current inability to attract private money… temporary government ownership may thus be necessary, but only with the intention of restructuring the institution to return it to the private sector as rapidly as possible,’ the GFSR said.The IMF said British banks would be hit slightly more softly by the economic crisis than it previously reported, after correcting data published earlier Tuesday.Late on Monday the IMF said its statement earlier predicting that the crisis would cost Britain’s banks 13,4 per cent of gross domestic product – or around £200 billion – by the end of the year was mistaken.’We have corrected the figure in the table from 13,4 per cent to 9,2 per cent,’ IMF spokesman Andreas Adriano told AFP, without confirming what the cost could be in real terms.That revision would put the loss at closer to £132 billion. -Nampa-AFP