Meltdown losses of '$4 trillion' - NCCG.ORG Ning Network Archive 2008-10

By Steve Schifferes
Economics reporter, BBC News

Street sign on Wall Street, New York
Bank losses are even bigger than expected one year ago, the IMF says

The International Monetary Fund (IMF) has warned credit crunch losses could reach $4 trillion (£2.75tn), damaging the financial system for years to come.

It says that even if urgent action is taken to clean up the banking system, the process will be "slow and painful", delaying economic recovery.

Banks may need $1.7 trillion in additional capital, the IMF forecasts.

And it warns that the cost of the bail-out will severely hit UK government finances with its added debt burden.

The power to force banks to raise additional capital rests with national regulators, such as the FSA, not the IMF
Robert Peston
BBC Business Editor

Read Robert's blog

But the IMF corrected its estimate of the cost to the UK of the bail-out from 13.4% of GDP, or £200bn, to 9.4% of GDP, or £130bn.

The Treasury confirmed that the chancellor will be making a "prudent" estimate of the cost of the bail-out in the Budget, but many commentators believe this will be around £60bn, or half the IMF estimate.

The US and Ireland will face even higher government bills for the bail-out, according to IMF estimates.

Rising bill

One year ago, the IMF estimated that total losses from the credit crunch would be $1tn, which has been exceeded, showing how rapidly the financial meltdown has escalated.

The IMF now says that banks are likely to lose $2.7tn, but other financial institutions such as insurance companies and pension funds are also coming under strain.

And it says that emerging market economies, which will need $1.8tn in refinancing next year, will be hard-hit by the collapse of cross-border lending. It predicts that there will be no net private lending at all to developing countries this year.

WHY $4TN LOSS MATTERS
A protestor on Wall Street complains about US government bail-outs
The banks' huge losses have made them reluctant to lend
The lack of lending has pushed the world economy into a deep recession
Government budgets are strained by the cost of the bail-outs, hitting taxpayers

The report comes as the IMF and World Bank are beginning their spring meeting in Washington, after receiving a promise of $750bn in fresh funds agreed at the G20 summit.

Policy response

The IMF's latest Global Stability Report says that the banking system has not yet been stabilised, despite the billions of dollars spent by governments.

But it warns that political support for further bank bail-outs is waning.

It says that there may be "a real risk that governments will be reluctant to allocate enough resources to solve the problem" because the public has become "disillusioned by what it perceives as abuse of taxpayer funds".

The situation is especially difficult in the US, where Congress appears reluctant to allocate additional bail-out funds above the $700bn approved last autumn despite the inclusion of another $750bn in President Obama's latest budget proposal.

Systemic risks remain high and the adverse feedback loop between the financial system and the real economy has yet to be arrested

IMF

The US Treasury has instead proposed a private-public partnership to buy up troubled assets underwritten by loans from the Federal Reserve.

But the IMF comments that "uncertainty about political reactions may undermine the likelihood that the the private sector will constructively engage in finding orderly solution to financial stress".

Deeper recession

The IMF says that restoring the banking system so that it functions normally is likely to take several years, and this will make the recession longer and deeper than usual.

But it warns that if policies are unclear or not implemented forcefully and promptly, "the recovery process is even more delayed and the costs, in terms of taxpayer money and economic activity, are even greater".

It adds that the worldwide recession has deepened the financial crisis.

COST OF REBUILDING BANKS
wall street bull
US banks: $275bn
Eurozone banks: $725bn
UK banks: $250bn
Other European banks: $225bn
Source: IMF, based on 6% capital/assets ratio

"Systemic risks remain high and the adverse feedback loop between the financial system and the real economy has yet to be arrested, despite the wide range of policy actions and some limited improvement in market functioning.

"Further effective government action - particularly geared toward cleansing balance sheets and strengthening institutions - will be required to stabilise the global financial system and to provide the foundation for a sustainable economic recovery."

On Wednesday, the IMF will present its world economic forecast.

It is expected to be the gloomiest for 60 years, with the world falling into a global recession, and an even sharper decline in output in the rich countries.

An earlier version of this story referred to an IMF estimate that the total cost of bailing out the UK banking system would add 13.4%, or about £200bn, to government debt. The IMF has since corrected this figure, and has returned to their earlier estimate that it would cost 9.4% of GDP, or about £130bn.

http://news.bbc.co.uk/2/hi/business/8009734.stm

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