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IMF Says Financial Losses May Swell to $945 Billion
Quote
April 8 (Bloomberg) -- The International Monetary Fund said losses
stemming from the U.S. mortgage crisis may approach $1 trillion,
citing a ``collective failure'' to predict the breadth of the crisis.
Falling U.S. house prices and rising delinquencies may lead to $565
billion in mortgage-market losses, the IMF said in its annual Global
Financial Stability report, released today in Washington. Total
losses, including the securities tied to commercial real estate and
loans to consumers and companies, may reach $945 billion, the fund
said.
The forecast signals the worst of the credit crunch may be yet to
come, because banks and securities firms so far have posted $232
billion in asset writedowns and credit losses. Policy makers,
concerned that lenders' deteriorating balance sheets will hobble
economic growth, are pushing companies to raise capital.
``The current turmoil is more than simply a liquidity event,
reflecting deep-seated balance-sheet fragilities and weak capital
bases, which means its effects are likely to be broader, deeper and
more protracted,'' the report said. The fund warned of the risk of ``a
serious funding and confidence crisis that threatens to continue for a
significant period.''
G-7 Ministers Meeting
Today's report comes days before finance ministers and central bank
governors from the IMF's 185 members gather in Washington for spring
meetings of the fund and World Bank. Group of Seven policy makers meet
April 11.
The fund, which predicted a year ago that any ripple effects from a
subprime mortgage crisis would be limited, blamed lax regulations and
a lack of understanding about the risks in structured financial
products for the crisis.
``Everybody has learned a lot,'' Jaime Caruana, the IMF's director of
monetary and capital markets, said at a press conference in
Washington, when asked how the fund underestimated the fallout. ``We
have all to be a little bit humble on the analysis of the crisis,
because it has been a very, very complex crisis.''
Today's IMF estimate exceeds those by other economists, including
analysts at UBS AG, who projected in February that financial firms may
lose $600 billion.
`Contingency Plans'
While financial innovations have brought some benefits, ``the events
of the past eight months have also shown that there are costs,'' the
IMF said. At the same time, the fund urged governments against a rush
to increase regulation, especially changes that ``unduly stifle
innovation or that could exacerbate the effects of the current credit
squeeze.''
Banks should improve disclosure and take writedowns ``as soon as
reasonable estimates of their size can be established,'' the fund
said. It also urged stronger supervision of capital adequacy, and said
policy makers should prepare for further disruptions, the IMF said.
``Authorities may wish to prepare contingency plans for dealing with
large stocks of impaired assets if writedowns lead to disruptive
dynamics and significant negative effects on the real economy,'' the
report said.
The fund added that policy makers should ``stand ready to promptly
address strains within troubled financial institutions.''
Federal Reserve officials prevented a disorderly failure of Bear
Stearns Cos. last month by agreeing to lend against $30 billion of the
company's assets, as part of a takeover agreement with JPMorgan Chase
& Co.
`Most Wrenching'
Former Fed Chairman Alan Greenspan said today that ``the current
credit crisis is the most wrenching in the last half century and
possibly more.''
Canadian Prime Minister Stephen Harper told reporters in Ottawa that
the crisis is ``unique'' because of the difficulty in figuring out who
owns what investments and how they work.
The fund noted in the report that while ``risks to financial stability
remain elevated'' worldwide, emerging market economies ``have been
broadly resilient.'' Still, the lender highlighted the risk of faster
inflation should the subprime rout cause the dollar's slump to
accelerate.
``Further downward pressure on the dollar, particularly if it'' comes
``from subprime or similar shocks, could boost liquidity and lead to
an intensification of inflationary pressures in some emerging
markets,'' the fund said.
IMF Managing Director Dominique Strauss-Kahn, who took office in
November, has conceded that the fund wasn't as vocal as it could have
been about the risks that a subprime collapse posed for the global
financial system.
14 Banks
In April 2007, the fund said there was little risk of a ``serious
systemic threat.'' It also said that ``stress-tests conducted by
investment banks show that, even under scenarios of nationwide house
price declines that are historically unprecedented, most investors
with exposure to subprime mortgages through securitization will not
face losses.''
At least 14 banks and securities firms have sought cash from outside
investors in the past year.
Since credit markets seized up in the U.S. in August, the Standard &
Poor's 500 stock index is down about 7 percent, the trade-weighted
dollar index has dropped more than 9 percent and the yield on two-year
U.S. Treasury notes has fallen to 1.88 percent. Home prices tracked by
S&P Case-Shiller have slumped in every month.
``There has been a collective failure to appreciate the extent of
leverage in the financial system and the associated risks of
disorderly unwinding,'' Caruana said today. ``Markets remain under
considerable strain.''
To contact the reporters on this story: Christopher Swann in
Washington at cswann1@bloomberg.net
Quote
April 8 (Bloomberg) -- The International Monetary Fund said losses
stemming from the U.S. mortgage crisis may approach $1 trillion,
citing a ``collective failure'' to predict the breadth of the crisis.
Falling U.S. house prices and rising delinquencies may lead to $565
billion in mortgage-market losses, the IMF said in its annual Global
Financial Stability report, released today in Washington. Total
losses, including the securities tied to commercial real estate and
loans to consumers and companies, may reach $945 billion, the fund
said.
The forecast signals the worst of the credit crunch may be yet to
come, because banks and securities firms so far have posted $232
billion in asset writedowns and credit losses. Policy makers,
concerned that lenders' deteriorating balance sheets will hobble
economic growth, are pushing companies to raise capital.
``The current turmoil is more than simply a liquidity event,
reflecting deep-seated balance-sheet fragilities and weak capital
bases, which means its effects are likely to be broader, deeper and
more protracted,'' the report said. The fund warned of the risk of ``a
serious funding and confidence crisis that threatens to continue for a
significant period.''
G-7 Ministers Meeting
Today's report comes days before finance ministers and central bank
governors from the IMF's 185 members gather in Washington for spring
meetings of the fund and World Bank. Group of Seven policy makers meet
April 11.
The fund, which predicted a year ago that any ripple effects from a
subprime mortgage crisis would be limited, blamed lax regulations and
a lack of understanding about the risks in structured financial
products for the crisis.
``Everybody has learned a lot,'' Jaime Caruana, the IMF's director of
monetary and capital markets, said at a press conference in
Washington, when asked how the fund underestimated the fallout. ``We
have all to be a little bit humble on the analysis of the crisis,
because it has been a very, very complex crisis.''
Today's IMF estimate exceeds those by other economists, including
analysts at UBS AG, who projected in February that financial firms may
lose $600 billion.
`Contingency Plans'
While financial innovations have brought some benefits, ``the events
of the past eight months have also shown that there are costs,'' the
IMF said. At the same time, the fund urged governments against a rush
to increase regulation, especially changes that ``unduly stifle
innovation or that could exacerbate the effects of the current credit
squeeze.''
Banks should improve disclosure and take writedowns ``as soon as
reasonable estimates of their size can be established,'' the fund
said. It also urged stronger supervision of capital adequacy, and said
policy makers should prepare for further disruptions, the IMF said.
``Authorities may wish to prepare contingency plans for dealing with
large stocks of impaired assets if writedowns lead to disruptive
dynamics and significant negative effects on the real economy,'' the
report said.
The fund added that policy makers should ``stand ready to promptly
address strains within troubled financial institutions.''
Federal Reserve officials prevented a disorderly failure of Bear
Stearns Cos. last month by agreeing to lend against $30 billion of the
company's assets, as part of a takeover agreement with JPMorgan Chase
& Co.
`Most Wrenching'
Former Fed Chairman Alan Greenspan said today that ``the current
credit crisis is the most wrenching in the last half century and
possibly more.''
Canadian Prime Minister Stephen Harper told reporters in Ottawa that
the crisis is ``unique'' because of the difficulty in figuring out who
owns what investments and how they work.
The fund noted in the report that while ``risks to financial stability
remain elevated'' worldwide, emerging market economies ``have been
broadly resilient.'' Still, the lender highlighted the risk of faster
inflation should the subprime rout cause the dollar's slump to
accelerate.
``Further downward pressure on the dollar, particularly if it'' comes
``from subprime or similar shocks, could boost liquidity and lead to
an intensification of inflationary pressures in some emerging
markets,'' the fund said.
IMF Managing Director Dominique Strauss-Kahn, who took office in
November, has conceded that the fund wasn't as vocal as it could have
been about the risks that a subprime collapse posed for the global
financial system.
14 Banks
In April 2007, the fund said there was little risk of a ``serious
systemic threat.'' It also said that ``stress-tests conducted by
investment banks show that, even under scenarios of nationwide house
price declines that are historically unprecedented, most investors
with exposure to subprime mortgages through securitization will not
face losses.''
At least 14 banks and securities firms have sought cash from outside
investors in the past year.
Since credit markets seized up in the U.S. in August, the Standard &
Poor's 500 stock index is down about 7 percent, the trade-weighted
dollar index has dropped more than 9 percent and the yield on two-year
U.S. Treasury notes has fallen to 1.88 percent. Home prices tracked by
S&P Case-Shiller have slumped in every month.
``There has been a collective failure to appreciate the extent of
leverage in the financial system and the associated risks of
disorderly unwinding,'' Caruana said today. ``Markets remain under
considerable strain.''
To contact the reporters on this story: Christopher Swann in
Washington at cswann1@bloomberg.net
