IMF forecasts 1.4 trillion dollars in financial losses (2nd Roundup)

By Chris Cermak Oct 7, 2008, 16:06 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, also called for more government intervention and a coordinated international response to a crisis that has threatened to plunge the US and European economies into a severe recession.

The financial watchdog warned that the rate of US mortgage defaults that sparked the 'unprecedented' financial crisis has not reached 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.

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.

The forecast was raised after September witnessed some of the worst turmoil to date in the year-long credit crisis.

The bankruptcy of US giant Lehman Brothers Holdings Inc, as well as a series of bail-outs and acquisitions of other investment banks and commercial lenders, sparked a crisis of confidence in financial institutions, restricted the availability of credit and sent global stocks plummeting.

Banks and lenders will 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. The financial sector will only begin showing signs of recovery in late 2009, the IMF said.

The IMF warned that the ongoing crisis represented a 'critical threat' to the wider global economy as consumers and banks' access to credit has very nearly come to a halt.

Private efforts to raise capital and emerge from the crisis will not be enough and governments in the worst-hit countries - mainly the United States and Europe - must 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, lead author of the IMF's Global Financial Stability Report, told reporters.

Taking troubled mortgage assets off of banks' balance sheets was part of that necessary government aid. The IMF report suggested a buy-up of as much as 2 trillion dollars in mortgage securities - half in the US and half in Europe - would be necessary to bring credit flows back to normal levels, but stopped short of calling on governments to do so.

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.

Caruana did say 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 and other companies in a bid to keep credit flowing through the economy.

Emerging economies will not be insulated from the financial crisis in industrial nations, as governments can no longer rely on capital flowing into poorer countries, the IMF warned.