- Press Releases
- Media Coverage
- Events
- News Room
- Press Materials
IMF gloom over 'fragile' markets and global risk, FT
Washington, July 30 2008
Interfax - Global financial markets are "fragile" and indicators of systemic risk remain "elevated" almost a year into the credit crisis, the Financial Times writes referring to the Inter-national Monetary Fund.
The fund warned credit growth in the US could fall further as a result of continuing financial system stress and warned that emerging markets would be tested as global financing conditions tightened and policymakers tackled rising inflation.
The IMF noted that house prices had softened in a number of European economies including the UK, raising the possibility of further problems in those markets.
The assessment came in the July update to the global financial stability re-port, led by Jaime Caruana, former Bank of Spain governor.
Mr Caruana warned the year-long financial crisis was starting to squeeze lending, "leading to a negative feedback loop between the financial system and the broader economy" as reduced household spending slowed the real economy and prompted further lending cuts in deteriorating credit conditions.
If US house price declines began to level off, that "would remove a key component of the feedback loop", he said. However, he warned "a bottom for the housing market is not yet visible".
The IMF said while likely losses on US subprime mortgages had "largely been acknowledged" in writedowns, financial institutions faced a second wave of losses on other loans. Credit quality "across many loan classes has begun to deteriorate with declining house prices and slowing economic growth".
With mounting inflationary pressure, the fund said, "policy trade-offs between inflation, growth and financial stability are . . . increasingly important".
The IMF reaffirmed its earlier, contentious estimate that total losses in this cycle could total $945bn (?600bn, ?474bn) - a number that combines mark-to-market losses on subprime-related securities and estimates of likely losses on loans.
Relative to April, when the fund published its last stability report, it said "systemic strains in funding markets continue" and the "low level of risk appetite remains unchanged". Interbank lending rates "remain elevated", while "long-term funding costs have risen" for financial institutions.
The IMF said financial institutions globally had written off about $400bn since the crisis began last August and that while they had raised substantial amounts of capital, the losses had "exceeded capital raised". Banks also faced problems maintaining their earnings, weakening stock prices and making it more difficult to raise capital.
The fund said policy interventions - mostly by the US Treasury and the Federal Reserve - had so far succeeded in containing systemic risk. But it said the authorities in the US in particular had had to intervene further to preserve financial stability.
It, in effect, endorsed the need for the US to shore up Fannie Mae and Freddie Mac in the short term - saying their failure would have systemic consequences - but said "the policy challenge now is to find a clear and permanent solution" for the troubled government sponsored mortgage groups.