IMF sees $2.2 trillion in US losses

Bloomberg

Bank losses worldwide from toxic U.S.-originated assets may reach $2.2 trillion, the IMF said in a report released Wednesday, more than the $1.4 trillion that the fund predicted in October. World growth will be 0.5 percent this year, the weakest postwar pace, the fund said in a separate report.

The reports signal that writedowns and losses at banks totaling $1.1 trillion so far are only half of what’s to come and that contractions may deepen. Losses on that scale would leave banks needing at least $500 billion in fresh capital to restore confidence in their balance sheets, the IMF said.

"Unless stronger financial strains and uncertainties are ... addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth," the IMF said.

The IMF’s latest forecast revises its estimate of world growth down from 2.2 percent in November.

U.S. gross domestic product will contract 1.6 percent, Japan’s will shrink 2.6 percent and the euro area will decline 2 percent in 2009, the IMF said. The fund in November foresaw a 0.7 percent U.S. contraction, with declines of 0.2 percent in Japan and 0.5 percent in the euro zone.

Record contraction in UK
Leading the Group of Seven nations in contraction this year will be Britain, which the IMF predicted would slide 2.8 percent, compared with the fund’s forecast in November of 1.3 percent.

Global growth this year will come to a "virtual standstill," said Olivier Blanchard, the IMF’s chief economist, in a press conference. "We need stronger policy on the financial front."

Advanced and developing countries need to be "even more supportive" of demand, with lower interest rates and fiscal stimulus, the IMF said. The fund urged "timely" passage of fiscal aid, saying "any delays will likely worsen growth prospects."

The IMF said "the restructuring process might involve the use of a publicly owned ’bad bank’ to remove distressed assets from the balance sheets of institutions." Governments should "move expeditiously toward recapitalization" and disposal of bad debt, the IMF said. The fund said that banks needed at least $500 billion of new cash "just to prevent their capital position from deteriorating further."

Hedge funds may have halved in size in the last three months of 2008, the fund said, dragged down by a combination of asset-price declines and investors withdrawing their money. Such a decline was "a particular concern for those markets in which hedge funds provided a significant proportion of market trading liquidity," the IMF said.

"Downside risks continue to dominate, as the scale and scope of the current crisis have taken the global economy into uncharted waters," the report said. "A sustained economic recovery will not be possible until the financial sector’s functionality is restored and credit markets are unclogged."

China’s economy will likely expand 6.7 percent this year, the IMF said, reducing its estimate for the world’s fastest-growing major economy from 8.5 percent in November. Russia will contract 0.7 percent this year, compared with a 3.5 percent expansion the IMF predicted in November, the report showed.