With the global economic downturn deepening and confidence in the financial system still elusive, the International Monetary Fund estimates that banks and other financial institutions face aggregate losses of $4.1 trillion in the value of their holdings as a result of the crisis, The New York Times reported.
In its global financial stability report, released Tuesday, the fund estimated that financial institutions would have to write down an estimated $2.7 trillion in loans and securities originating in the United States from 2007 to 2010. That estimate is up from $2.2 trillion in the fund’s report in January, and $1.4 trillion last October.
The financial crisis “is likely to be deep and long lasting,” the report said, noting that global financial stability has deteriorated further since its October report, especially in emerging markets, particularly in Europe, where banks face more write-downs and may require fresh equity, even as businesses seek to refinance debt.
The authorities “have been proactive in responding to the crisis,” the fund said, but “policies are being challenged by the scale of resources required.”
The fund also cast doubt on recent market optimism, noting that in spite of “some improvements in short-term liquidity conditions and the opening of some term funding markets, other measures of instability have deteriorated to record or near-record levels.”
The report has become a closely watched barometer of the severity of the crisis, in which the fund has taken a leading role, dispensing more than
$55 billion in loans. Leaders of Group of 20 nations agreed in London this month to provide about $1 trillion in new funding for the organization. Among European countries, Hungary, Serbia, Romania, Iceland, Ukraine, Belarus and Latvia have all sought loans from the fund since the start of the crisis.
On Tuesday, Colombia became the second Latin American country to seek aid, requesting $10.4 billion. On Friday, the fund approved a $47 billion line of credit for Mexico, making it the first country to qualify for a lending facility for strong-performing emerging economies.
Underscoring the degree to which credit-related losses have spread beyond the United States, losses in loans and securities originating in Europe are now estimated at $1.12 trillion. Japan remains comparatively insulated, with projected losses of $149 billion. Until this report, the fund had not tried to calculate the potential losses from “toxic assets”
outside the United States.
Banks are expected to shoulder about two-thirds of the write-downs, the fund estimated, though other institutions, like pension funds and insurance companies, also face heavy losses.
Banks have raised about $900 billion in fresh capital since the crisis began, the fund said, but that is far outweighed by $2.8 trillion in credit-related losses. The fund estimates that the banks have already taken about one-third, or $1 trillion, of those write-downs.
The report also illustrates the uneven pace of the response to the crisis. The fund estimates that in the United States, for example, banks reported $510 billion in write-downs by the end of 2008 and face an additional $550 billion in 2009 and 2010. In the euro zone, banks reported just $154 billion in write-downs by the end of last year and still face $750 billion. British banks are in somewhat better shape: having written down $110 billion, they face $200 billion more, the fund said.
