Expensive crisis
April 21, 2009
In its Global Financial Stability Report, the International Monetary Fund (IMF) said US institutions were about half way through their needed write-downs, while their European counterparts are still lagging. Banks will bear about two-thirds of the write-downs, which are coming on $58 trillion of debt originated in the United States, Europe and Japan, the IMF said.
In its report, the IMF said financial institutions in the United States suffered the worst with losses totalling $2.7 trillion. That estimate is nearly double the IMF's original projection six months ago. The IMF estimates that Europe-originated loans and securities will cause $1.2 trillion in write-downs, with Japan adding another almost $150 billion.
Pension funds hard hit
In total, the IMF now expects about $4.1 trillion in losses worldwide before the financial crisis comes to an end. While banks will account for about two-thirds of figure, pension funds and insurance companies were also exposed. The IMF warned that US pension funds alone may face $200 billion in losses.
The IMF said that the current inability of banks to attract private money means that the crisis has deepened, and that governments may need to take bolder steps, including taking a major share or control of institutions.
Governments act to keep banks going
US and European governments, including Germany, have already plugged hundreds of billions of dollars into financial institutions. The German government, for the first time since World War II, passed a law early in April that will allow it to take over the troubled mortgage lender Hypo Real Estate.
The IMF said banks have only reported about one-third of the losses it has forecast, prompting the global lender to warn that many governments may need to nationalize more financial institutions. The IMF warns against protectionist measures though which would encourage banks to pull out of pull foreign investments.
The financial crisis began when the US mortgage market began collapsing in mid-2006. Since then, housing bubbles have collapsed in several European countries, particularly in Britain, Ireland and Spain. Japan's housing market started to become shaky last year.