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IMF warns of near-trillion-dollar loss

The IMF blames a "collective failure" of oversight for the market turmoil and urges investment and commercial banks to boost confidence by coming clean on their full exposure to the financial crisis.
DPA | By DPA, Washington
UPDATED ON APR 09, 2008 11:22 PM IST

Financial institutions could suffer losses as high as $945 billion from the ongoing credit crisis, according to a gloomy forecast by the International Monetary Fund on Tuesday that far exceeded banks' existing writedowns and economists' estimates.

The IMF blamed a "collective failure" of oversight for the market turmoil and urged investment and commercial banks to boost confidence by coming clean on their full exposure to the financial crisis.

The Washington-based lender said losses from already falling housing prices in the United States and the resulting subprime mortgage market crisis would total $565 billion.

But that figure could reach nearly $1 trillion as the crisis spreads to other credit sectors, including commercial real estate, corporate loans and other consumer loans, the IMF said in its Global Financial Stability Report.

The report was released in the run-up to a series of annual spring meetings this weekend between members of the IMF and its lending partner the World Bank.

Banks have so far reported upwards of 200 billion dollars in writedowns as the value of mortgage-backed securities has dropped dramatically since mid-2007.

Economists had in recent weeks forecast that total world losses could rise to $600 billion.

The IMF said banks should disclose all looming writedowns as soon as possible, while increasing overall transparency and correcting excessive risk strategies that sparked the current market turmoil.

The credit crisis - sparked by a record number of defaults by subprime mortgage holders in the United States - was the result of an antiquated system of financial regulation and a "collective failure to appreciate the extent of leverage taken on by a wide range of institutions," the report said.

Since at least 2005, the IMF has warned of the potential fallout from rapidly inflating US home prices for world financial markets.

While a series of measures by the US central bank, the Federal Reserve, to boost liquidity had helped stabilize market conditions for the moment, the IMF said risks to financial stability had "increased sharply" since its last survey released in October.

"What began being a credit shock in the subprime market is now starting to spread to a broader range of assets, and that is bringing additional pressure on the balance sheets of some of the financial institutions," said Jaime Caruana, director of the IMF's Monetary and Capital Markets Department.

Governments meanwhile should boost their supervisory role to ensure excessive risks are not taken by investors in the future. Finance ministers from the Group of Seven industrial nations will meet in Washington Friday to discuss fresh measures to boost market confidence.

Thomas Mirow, state secretary at the German Finance Ministry, said he expected a "substantial" and unified response to the financial turmoil to come out of Friday's meeting.

The Fed, in a series of unprecedented moves often coordinated with other central banks, has made available more than $400 billion in Treasury securities to struggling investment banks through a variety of lending facilities.

The US central bank also bankrolled the sale of Bear Stearns to JPMorgan Chase to prevent the fifth-largest US investment bank from declaring bankruptcy.

Caruana said the Fed's efforts to inject liquidity into the market, including the bailing out of Bear Stearns, had "reduced the probability of a tail event in the financial system, and has stabilized markets".

But the IMF report also warned of an even greater "wrenching adjustment" of credit markets if action is not taken immediately in the private sector to bolster confidence in financial markets.

Much of that action should revolve around new disclosure, transparency and regulatory practices by investment banks and other institutions, which until now had taken on excessive risks and left themselves open to the kind of "unwinding" now being experienced.

The IMF said the financial crisis was also being compounded by a wider economic slowdown. The lender last week dropped its global growth forecast for 2008 to 3.7 percent, down from 4.9 percent in 2007.

Growth in the US, which sits at the epicentre of the current crisis, will only be 0.5 percent in 2008, the IMF said. Many economists say the US economy has entered a recession.

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