Global financial crisis to cost $4 trillion: IMF

WASHINGTON (AFP) – The International Monetary Fund 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 4.054 trillion dollars includes 2.712 trillion dollars in losses in US-originated assets.

Losses on European-originated assets were estimated at 1.193 trillion dollars and those of Japanese-originated assets at 149 billion dollars.

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 2.200 trillion dollars was based exclusively on US-originated assets, as had been the October 2008 GFSR estimate of 1.4 trillion dollars.

“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 2.470 trillion dollars, or 61 percent, 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 stabilization” 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 normalize 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 recapitalized to pre-crisis levels, 275 billion dollars would be needed in the United States and 600 billion dollars in Europe.

To return to mid-1990s levels, the amounts would rise to 500 billion dollars in the US and 1.2 trillion dollars in Europe.

The IMF said it was not opposed to the nationalization 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.