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Business

IMF estimates cost of global crisis at over $4 trillion

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Latest update : 2009-04-21

The International Monetary Fund has increased its estimate of the cost of the global financial crisis, putting it at over 4 trillion dollars in writedowns on soured credit. Two-thirds of the losses originate in the United States.

AFP - The International Monetary Fund Tuesday raised its estimate of the cost of the global financial crisis to more than four trillion dollars in 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. European losses were estimated at 1.193 trillion dollars and Japanese losses at 149 billion dollars.

This 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.

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 Global Financial Stability Report (GFSR).

The IMF's previous estimate, in January, had only taken into account US-originated assets and projected a loss of 2.200 trillion dollars. No estimate had been given for European and Japanese assets.

"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.

For the combined losses, the IMF projected that banks will bear 2.470 trillion dollars, or 61 percent of the total, and that they still need to acknowledge two-thirds of them.

"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.

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."

"Credit deterioration could substantially deepen for European banks in particular, including through their exposure to emerging Europe," it said.

The IMF economists calculated that recapitalization of banking systems would require 275 billion dollars in the United States and 600 billion dollars in Europe.

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

"These rough estimates, based on our scenarios, suggest that in addition to offsetting losses, the additional need for capital derives from the more stringent leverage and higher capital ratios markets are now demanding, based on the uncertainty surrounding asset valuations and the quality of capital."

Date created : 2009-04-21

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