IMF Says Financial, Economic Losses May Swell to $945 Billion

The IMF has completely changed its tune, and its latest estimate of mortgage related writedowns is way ahead of recent estimates by the likes of Lehman, and in-fact is now very close to the original estimate given by Nouriel Roubini of NYU last year, even as Prof. Roubini has now increased his own estimate threefold. All this if true, means that the markets especially the stock markets have got way ahead of reality, and the credit crisis is still closer to its beginning rather than to its end. Which means those players who are now seeing a light at the end of the tunnel are possibly seeing the headlight of an approaching freight train......

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IMF Says Financial, Economic Losses May Swell to $945 Billion


By Christopher Swann

April 8 (Bloomberg) -- The International Monetary Fund said financial 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.''

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.

Casting Blame

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.

Today's estimate exceeds those by other economists, including analysts at UBS AG, who projected in February that financial firms may lose $600 billion.

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.

`Contingency Plans'

``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.

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.

Strauss-Kahn