Global Sub-Prime Losses Hit A Trillion: IMF

Source : TODAY, Thursday, April 10, 2008

The International Monetary Fund estimates worldwide losses stemming from the sub-prime mortgage crisis in the United States could reach US$945 billion ($1.3 trillion) as the impact spreads globally.

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

Combined with other categories of loans originating in the US and securities issued in the country that are related to commercial real estate, the consumer credit market and corporations “increases aggregate potential losses to about US$945 billion”.

“The crisis is spreading beyond the US sub-prime 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 its Global Financial Stability Report. While the US remains the epicentre, “financial institutions in other countries have also been affected”.

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 sub-prime, or high-risk, home loans.

The staggering estimate represents roughly US$142 per person worldwide and 4 per cent of the $23.21 trillion credit market.

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

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

The unusually precise and harsh report comes ahead of the IMF and the World Bank spring meetings this weekend in Washington.

The IMF, whose core mission is to promote global financial stability, 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.

“It is now clear that the current turmoil is more than simply a liquidity event, reflecting deep-seated balance sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted.” - AFP