By Chris Cermak Apr 21, 2009, 13:58 GMT
Washington - Banks and other lenders around the world must face up to more than 4 trillion dollars in losses related to the ongoing financial crisis, which has spread well beyond its origins in the United States, the International Monetary Fund warned Tuesday.
Released as part of a semiannual financial forecast, the estimate is nearly double what the IMF predicted in January and for the first time includes financial firms' exposure to troubled assets that did not originate in the United States.
Only about one third of the losses predicted by the IMF have been reported by banks to date, and the global lender warned that many governments may yet have to consider nationalizing more financial institutions in order to keep the whole system from collapsing.
'The unprecedented policy response is gradually beginning to restore market confidence but continued, decisive and effective action is needed' to keep the momentum going, Jose Vinals of the IMF's Monetary and Capital Markets Department. 'We should not let this opportunity slip through our fingers.'
At the same time, the IMF warned against 'financial protectionism' by governments - policies that encourage banks to pull out of foreign investments in an effort to boost lending back home.
Investors and banks have been fleeing from emerging economies over the last year as the financial crisis grew in wealthier nations. The IMF said it expects developing countries to face a net outflow of capital in 2009, while emerging banks will likely write down about 1.8 trillion dollars before the crisis is over.
The US housing market remains at the epicentre of the financial crisis. About 2.7 trillion dollars in writedowns will come from mortgage-related assets in the United States, up from 2.2 trillion dollars predicted in January.
But the IMF said assets in Europe and Japan were becoming a growing part of the problem. Europe-originated loans and securities will cause about 1.2 trillion dollars in writedowns and Japan will add another 149 billion dollars to the financial turmoil's price tag.
While the US mortgage market was the first to begin folding in mid-2006, housing bubbles have collapsed in several European countries - a list topped by Britain, Ireland and Spain - as well as parts of Japan over the last year.
IMF economist Peter Dattels warned that Europe was only just starting to recognize the losses coming from troubled assets on its own continent, rather than those originating in the United States. Banks in the US by contrast had already booked about half of the total writedowns the IMF expects.
Globally, the IMF now predicts about 4.1 trillion dollars in losses before the crisis comes to an end. About two-thirds of the writedowns will come from banks, but others exposed include pension funds and insurance companies. The IMF said US pension funds alone may face 200 billion dollars in losses.
While private lending had shown some signs of returning in recent months, the IMF said 'bolder steps' like nationalization might be needed if investors couldn't be encouraged to join government efforts to prop up the financial industry.
Governments in the United States and Europe have already plugged hundreds of billions of dollars into financial institutions, which are going through their worst crisis since the Great Depression. But most administrations have so far resisted taking commanding stakes in banks.
'The current inability to attract private money suggests that the crisis has deepened,' the report said, 'to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares, even if it means taking majority or even complete control of institutions.'
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