IMF forecasts 1.4 trillion dollars in financial losses (Roundup)

By Chris Cermak Oct 7, 2008, 14:35 GMT

Washington - The International Monetary Fund (IMF) warned on Tuesday that US financial sector losses could total 1.4 trillion dollars as the housing crisis at the centre of the turmoil has yet to reach its peak.

The IMF, in its annual financial stability report, warned that the rate of US mortgage defaults that sparked the 'unprecedented' financial crisis has yet to reach its highest level, despite more than a year of homeowners already defaulting on their loans in record numbers.

Banks will go under and financial institutions will face an 'inevitable' restructuring period as even the best-positioned battle to raise the capital needed to bolster their own balance sheets, the report said.

Banks and lenders would need to raise about 675 billion dollars in extra capital and sell off some of their worst hit assets to come out of the crisis intact and would only begin showing signs of recovery in late 2009.

The 1.4-trillion-dollar expected loss was raised from a forecast of just under 1 trillion dollars by the IMF in April. Banks have reported about 580 billion dollars in losses and writedowns to date, with about 40 per cent coming from the crisis spreading to European banks.

Private efforts to raise capital will likely not be enough, and the IMF urged governments in the worst-hit countries - mainly the United States and Europe - to take coordinated action to quell the market instability, set up a better regulatory framework to prevent future collapses and provide surviving banks with the help they need.

'What is needed now is a decisive and coherent international response that is systemic in its nature to ensure that the de- leveraging process remains orderly,' Jaime Caruana, head of the IMF's Monetary and Capital Markets Department, told reporters.

Taking troubled mortgage assets off of banks' balance sheets was part of that necessary government aid.

Caruana welcomed the United States' plan last week to take on 700- billion-dollars worth of those assets - the value of which has plummeted amid the record foreclosure rates - but would not say whether a similar plan was needed for Europe.

Caruana said European countries should improve their coordination to address the fallout from the financial crisis and called for a more 'consistent approach' across the European Union.

The advice comes as European Union finance ministers agreed Tuesday to raise bank savings guarantees from 20,000 euros (27,200 dollars) to at least 50,000 euros across the bloc in a bid to quell the concerns of consumers.

Caruana said harmonizing guarantees in the EU was 'essential' to dampen uncertainty.

The United States raised its own savings guarantees last week from 100,000 dollars to 250,000 dollars. The Federal Reserve in a fresh move Tuesday said it would buy up short-term debt of financial institutions in a bid to keep credit flowing through the economy.

Emerging economies will not be insulated from the financial crisis in industrial nations, the IMF warned.