Credit Crisis – IMF forecasts losses of nearly US$1 trillion
The latest Global Financial Stability Report, which was released last night by the International Monetary Fund, makes for sobering reading. The Washington based organisation believes that the credit crisis is spreading beyond the US subprime market to prime residential and commercial real estate markets, consumer credit and low to high grade corporate credit markets. The IMF forecasts potential writedowns and losses from the crisis of approximately US$945 billion from United States originated debt. It expects the composition to be as follows: The IMF concludes that the events of the past six months have demonstrated the fragility of the global financial system and raised fundamental questions about the effectiveness of the response by private and public sector institutions. The Financial Stability Report identifies the following failures: The Report notes that “Notwithstanding unprecedented intervention by major central banks, financial markets remain under considerable strain, now compounded by a more worrisome macroeconomic environment, weakly capitalised institutions and broad based deleveraging”. The IMF believes that banks have the biggest exposure to the credit crisis. IMF forecasts – Potential writedowns & losses US$ billion 440-550 105-130 90-160 40-140 110-200 The IMF report confirms Milford’s view that a conservative approach towards investment markets should be maintained as there is no sign of the international credit crisis abating in the short term.
- $565 billion from US subprime and prime residential loans
- $240 billion on commercial real estate securities
- $120 billion on corporate loans
- $20 billion from consumer loans.
1) A collective failure to appreciate the extent of leverage taken on by a wide range of institutions
2) Private sector risk management, disclosure, financial sector supervision and regulation have all been deficient
3) The effectiveness of transferring risks off balance sheets was overestimated. There is now enormous pressures on bank balance sheets as these risks have materialised.
Banks
Insurance Companies
Pensions and savings schemes
Government sponsered enterprises
Other (hedge funds etc)
Potential bank writedowns and losses of approximately US$500 billion are enormous when compared with total US commercial bank shareholder funds of US$1,148 billion, although some of these losses will be incurred by non-US banks.
Brian Gaynor, 9 April 2008
