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Global losses from US crisis could hit US$945bn: IMF

The IMF said on Tuesday that worldwide losses stemming from the US subprime mortgage crisis could hit US$945 billion as the impact spreads in the global economy.

The IMF, in a particularly stark report, said that falling US housing prices and rising delinquencies on the residential mortgage market could lead to losses of US$565 billion.

That, combined with other categories of loans originated and securities issued in the US related to commercial real estate, the consumer credit market and corporations, “increases aggregate potential losses to about US$945 billion,” it said.

“The crisis is spreading beyond the US subprime market ­— namely to the prime residential and commercial real estate markets, consumer credit, and the low to high-grade corporate credit markets,” the IMF said in releasing its semiannual Global Financial Stability Report.

While the US remains the epicenter, “financial institutions in other countries have also been affected, reflecting the same overly benign global financial conditions and to varying degrees — weaknesses in risk management systems and prudential supervision.”

It was the first time the multilateral institution has made an official estimate of the global losses suffered by banks and other financial institutions in the credit squeeze that began eight months ago in the US amid rising defaults on subprime, or high-risk, home loans.

The staggering US$945 billion estimate of losses, made last month, represents roughly US$142 per person worldwide and represents 4 percent of the US$23.21 trillion credit market.

The IMF said that global banks likely would shoulder about half of the losses — at US$440 billion to US$510 billion.

Last month, ratings agency Standard & Poor’s estimated global banking firms would likely write off US$285 billion in various securities linked to US subprime real estate, with more than half the losses already recognized. Some analysts have put the figure higher for the subprime market and related losses.

“Leading indicators point to a tightening of credit conditions across many economic activities,” Jaime Caruana, head of the IMF’s Monetary and Capital Markets Department, said at a news conference.

Caruana said the losses “suggest a potentially large impact on US economic growth” and that Europe may also see tightening conditions and slowing credit growth under the global financial strain.

The IMF released its biannual World Economic Outlook yesterday and has said it would slash half a percentage point off its forecast of this year’s global economic growth, to 3.7 percent.

The Global Financial Stability Report cautioned that loss estimates were imperfect and could go higher.

The unusually precise and harsh report comes ahead of the IMF and the World Bank spring meetings on Saturday and on Sunday in Washington.

The IMF said there was “a collective failure to appreciate the extent of leverage taken on by a wide range of institutions — banks, monoline insurers, government-sponsored entities, hedge funds — and the associated risks of a disorderly unwinding.
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