IMF Says Global Losses From Credit Crisis May Hit $4.1 Trillion

By Timothy R. Homan
April 21 (Bloomberg) – Worldwide losses tied to rotten loans and securitized assets may reach $4.1 trillion by the end of 2010 as the recession and credit crisis exact a higher toll on financial institutions, the International Monetary Fund said.
Banks will shoulder about 61 percent of the writedowns, with insurers, pension funds and other nonbanks assuming the rest, the Washington-based lender said in a report released today on the state of the global financial system. The fund projected losses of $2.7 trillion at U.S. financial institutions, an increase from its estimates of $2.2 trillion in January and $1.4 trillion in October.
Without fiscal stimulus and other government action, banks will probably curtail lending in coming months, worsening the most severe global slump in six decades, the IMF said. Even with forceful state policies, “the deleveraging process will be slow and painful”, the fund said.
“Stabilizing the financial system remains a key priority and, although progress is being made, further policy efforts will be required,” the fund said in its report. “Without a thorough cleansing of banks’ balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalization, risks remain that banks’ problems will continue to exert downward pressure on economic activity.”
The $4.1 trillion estimate is the first by the IMF to include loans and securities originating in Europe and Japan. Pension funds and insurance companies are also exposed to such losses.
Credit Losses
Excluding such assets, banks worldwide could suffer credit- related losses of approximately $2.8 trillion from 2007 through 2010, according to the report. The IMF said about $1 trillion of that amount has already been reflected in bank writedowns.
The report said U.S. bank losses at the end last year totaled $510 billion. Additional writedowns of $550 billion are expected through 2010. The projections exclude government- sponsored enterprises.
Bank losses in the euro area this year and next are forecast to climb to $750 billion, from $154 billion at the end of 2008. Losses at European financial institutions are projected to reach $1.2 trillion.
“The accompanying deleveraging and economic contraction are estimated to cause credit growth in the United States, United Kingdom and euro area to contract and even turn negative in the near term and only recover after a number of years,” the report said, adding that credit deterioration for European banks could “substantially deepen” because of their exposure to emerging economies in the region.
Nationalizing Banks
The IMF said nationalizing banks may be necessary in order to attract private investment. “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 report said.
The U.S. has pumped capital into banks through the $700 billion Troubled Asset Relief Program. The Treasury Department estimated last month that $134.5 billion of the TARP hadn’t yet been spent or committed.
Obama administration officials signaled this week there may be no need to request more financial-rescue funds from Congress as several banks plan to return taxpayer money and others are pushed to tap private markets first.
The IMF said that while banks worldwide have raised about $900 billion, additional equity would boost investor confidence and cushion the blow of further losses. The report said the equity wouldn’t necessarily need to come in the form of new capital, meaning restructuring could reduce leverage.
Systemic Risks Elevated
“Confidence in the international financial system remains fractured and systemic risks elevated,” the report said.
The IMF also weighed in on the efficacy of so-called stress tests as they relate to the U.S. Treasury’s Public-Private Investment Program, designed to buy bad assets from banks.
“The findings of the U.S. regulators’ stress tests, including the assessment of impairments of loans and actions needed by banks to achieve satisfactory capital buffers, may prove an important element in banks’ incentives to participate in the program,” the report said.
The IMF urged advanced economies to implement fiscal stimulus programs. “It is clear that stimulative policies are needed now,” the report said.
President Barack Obama in February signed into law a two- year, $787 billion stimulus package designed to jolt the world’s biggest economy out of what may become the longest recession in seven decades. Japanese Prime Minister Taro Aso this month unveiled a $153 billion plan to spur growth.
Stimulus programs announced by the Group of 20 largest industrial and emerging economies now top $2 trillion.