NEWS | Wednesday, 09 March 2008

Sub-prime crisis to cost close to $1 trillion - IMF

If the $232 billion figure in bank losses on write-downs in the sub-prime mortgage market may have seemed astounding, the new forecasts published by the International Monetary Fund (IMF) are not far from shocking, as a report it issued estimates that the total cost of the credit crisis may come close to the $1 trillion mark.
Releasing its annual Global Financial Stability report Tuesday, the IMF said that a “collective figure” aiming to predict the extent of the crisis might amount to $945 billion, once taking into account losses incurred by estate agencies, company and consumer loans. In the meantime, companies are being pushed to raise capital as bank losses are expected to totter economic growth.
“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. “Despite unprecedented intervention by major central banks, financial markets remain under considerable strain, now compounded by a more worrisome macroeconomic environment, weakly capitalised institutions, and broad-based deleveraging,” it added.
While on one hand the IMF criticised the financial sector for lack of regulation and for “lagging behind the rapid innovation and shifts in business models, leaving scope for excessive risk-taking”, on the other hand it recommended a slow and cautious regulation process, since if done hurriedly, it could stifle innovation and in turn worsen the situation.
The fund advocated a more restrictive approach when allowing banks to write down bad debts, as such safety measures would increase capital and therefore protect financial institutions against losses.
In conclusion, the IMF called on central banks to be more aware of excessive asset prices, such as house price bubbles, when setting interest rates.