IMF Warns Of ‘Elevated’ Risks To Global Financial System

Source : The Business Times, April 9, 2008

Report highlights concern over impact of financial turmoil on major economies

RISKS to the stability of the international financial system remain ‘elevated’ in the wake of the US sub-prime mortgage crisis, the International Monetary Fund (IMF) warned yesterday in a report that also flagged growing concern over the impact of financial system turmoil on the major economies.

The report was issued as the Group of Seven finance ministers and central bank governors prepare to meet in Washington on Friday to discuss new policy responses to the crisis.

In its latest Global Financial Stability Report, the IMF urges policymakers to ‘take immediate steps to mitigate the risks of an even more wrenching adjustment’ in financial markets.

It underlined the systemic risks that are looming as a result of ‘deteriorating credit quality, a drop in the valuations of structured credit products and a lack of market liquidity accompanying broad de-leveraging in the financial system’.

The forceful tone of the document reflects the more central role the IMF is assuming in global monetary and financial affairs under its recently appointed managing director, Dominique Strauss-Kahn.

It is likely to come as a shock to stock, bond and currency markets that have regained some semblance of stability in recent weeks as the impact of the sub-prime crisis has appeared to recede.

Problems are ’spreading beyond the US sub-prime market to prime residential and commercial real estate markets, consumer credit and to corporate credit markets’, according to the report. The US remains the ‘epicentre’ of the crisis but ‘industrialised countries with inflated house price levels relative to fundamentals or stretched corporate or household balance sheets are also at risk’, it says.

The report strikes a chilling note too about the dangers of an economic slowdown. It warns that damage to the capital base of financial institutions, coupled with continuing uncertainty about the size and location of bank losses, will ‘weigh heavily on household borrowing, business investment and asset prices, in turn feeding back into employment, output growth and balance sheets’.

The impact could be more severe than in previous credit cycles because of the huge amount of securitisation and leveraging built into the financial system, the report says. ‘It is now clear that current turmoil is more than simply a liquidity event’ and reflects ‘deep-seated balance sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted’.

Emerging market countries have been ‘broadly resilient’ so far to the spreading financial system crisis, but with debt markets reeling under the impact of turbulence in advanced countries and funding costs rising, ‘further shocks to investors’ risk appetite for emerging market assets cannot be ruled out’.

Countries with current account deficits and reliant upon foreign debt are especially vulnerable, the IMF says.

It suggests that falling house prices and rising delinquencies on mortgage payments could lead to aggregate losses of around US$565 billion in the US residential mortgage and related securities markets. And if losses on commercial real estate, consumer credit and corporate loans are added, the total rises to US$945 billion, which points to ‘added stress on bank capital and further write-downs’.

Macro-economic policy will have to be the first line of defence ‘to contain downside risks to the US and other leading economies impacted by the crisis’, the IMF says.

Central banks need to ‘reflect further on the role that monetary policy may have played in fostering a lack of credit discipline and to improve their instruments for relieving liquidity stress in today’s more global financial system’.

The challenge will be to control systemic instability ‘in ways that minimise both moral hazard and potential fiscal costs’, the IMF says. And compensation structures that contributed to the credit explosion also need addressing.

JLL, Aussie Firm In Tie-Up To Manage Malls

Source : The Business Times, April 9, 2008

JV will tap regional market with focus on China, India

JONES Lang LaSalle has teamed up with Australia’s Colonial First State Property Management to launch a retail property management venture, the first of its kind in Asia.

The 50:50 company, Sandalwood, will aim to tap into a growing market for retail malls in particular, with China and India being the prime areas of focus.

The Singapore-based firm will help developers and landlords in the development and management of shopping centres, with its existing ambit covering around 40 malls in the region. It will also provide consultancy and leasing services.

Between 2006 and 2012, an estimated 1,000 malls are being built in the region, according to Jones Lang LaSalle.

‘This is our most significant investment in our retail business in the region,’ Jones Lang LaSalle chief executive officer (Regional Business Lines & Corporate Solutions) John Forrest explained.

‘Retail is also quite a specialist thing. With shopping centres it’s much more of a living entity, and a key driver for why we wanted to bring in Colonial, with its depth of experience in managing malls.’

Colonial First State Property is one of Australia’s largest property development, management and leasing specialists, having undertaken more than 25 large shopping centre developments since it was launched in 1983.

It currently manages 36 centres on behalf of third party clients across Australia.

According to Mr Forrest, the joint venture will initially focus on Singapore, Hong Kong, China, Macau, Taiwan, Indonesia and India as its key markets.

No details were given on the capital that both firms have injected into the venture.

Around 740 staff from both the companies will move into Sandalwood. The venture officially launches on June 1.

One of Sandalwood’s first major projects will be a shopping mall in Ningbo, China. According to Mr Forrest, Singapore is a market where the joint venture would like to take on a major project that would become a flagship.

He also expects China and India to account for a large percentage of their project work, with retail space in these markets growing amid rising middle class incomes and potent spending power.

According to Jones Lang LaSalle’s latest Retailer Sentiment Survey, the region is experiencing robust growth and optimism.

In all, 76 per cent of respondents in the poll said that they anticipate higher growth in turnover in 2008. Nine out of 10 survey respondents said that they plan to expand their retail operations.

Cities such as Hong Kong have been enjoying a prolonged retail rebound on the heels of strong economic growth and consumer confidence.

January retail sales were more than 23 per cent higher than the same period a year ago, totalling HK$25.7 billion (S$4.5 billion).

However, economists are expecting more modest growth for the rest of the year as inflation begins to bite and consumers wait on the sidelines amid global economic uncertainty.

Although Hong Kong saw its gross domestic product grow by 6.3 per cent in 2007, the government has cited a slowdown in the US and Europe as a possible dampener, with growth this year expected to be in the region of 4 per cent.

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

Fed Now Looking At Long, Deep Recession

Source : REUTERS, Thursday, April 10, 2008




US central bank considering how to bolster lending power: Report

WASHINGTON - WORRIES about a deep recession - not a shallow one - drove the United States Federal Reserve to slash a key interest rate last month, according to the minutes of the Fed’s meeting.

Even as the Fed battled in an almost unprecedented fashion to stem a widening credit and housing slump, some members fretted over the possibility of a ‘prolonged and severe’ economic downturn.

It was in that environment that they voted to cut the Fed’s most important interest rate by three-quarters of a percentage point to 2.25 per cent. That action capped the most aggressive Fed intervention in a quarter-century.

Some Fed policymakers thought that such a widening recession could not be ruled out given the ‘further restriction of credit availability and ongoing weakness in the housing market’, according to the minutes made public on Tuesday.

Yesterday, the Wall Street Journal reported that the Fed was looking at contingency plans for bolstering its lending power in case other measures to unfreeze the credit markets fail.

Nothing is imminent since the Fed still has room on its balance sheet for additional lending.

One option would be to have the Treasury borrow more money than it needs to fund the government and keep the proceeds on deposits at the Fed, the report said.

Other options include issuing debts in the Fed’s name, with the proceeds used to make loans or purchase other assets; and, asking Congress for immediate authority for the Fed to pay interest on commercial bank reserves rather than wait until a 2006 law permits it in 2011, the Journal said.

The Fed has been urgently moving to prevent the trio of economic woes - housing, credit and financial - from plunging the US into a deep recession.

On the other hand, with soaring energy prices and high food costs, policymakers realise that they cannot afford to let inflation get out of control either.

Some Fed officials were ‘concerned that inflation expectations could potentially become unhinged’, according to the minutes.

If people, investors and businesses expect prices to rise sharply, they will act in ways that will make inflation worse.

Still, many economists believe the Fed will lower rates again at its next scheduled meeting on April 29 to 30, in light of the latest employment data showing the economy lost jobs for the third month in a row in March.

All told, the US has lost 232,000 jobs in just three months.

US$945b: IMF’s Estimate Of Losses From Sub-Prime Crisis

Source : The Business Times, April 10, 2008

Banks will bear roughly half of the losses, the Fund says in a report

It’s going to be an almost trillion-dollar meltdown. That’s the message on the likely magnitude of the US sub-prime-related crisis from the International Monetary Fund (IMF). In its Global Financial Stability Report released in Washington yesterday, the IMF points out that the crisis is spreading beyond the US sub-prime market, to the prime residential and commercial real estate markets, consumer credit and the corporate debt markets.

Headquarters Of The IMF

The IMF loss estimates are in line with those put out by some private economists who have closely tracked the crisis, such as George Magnus of UBS, although others, such as New York University professor Nouriel Roubini, cite US$1 trillion as a minimum loss figure, with the maximum going as high as US$2.7 trillion in the worst case.

According to the IMF, of the US$945 billion of total losses, US$565 billion will be due to residential mortgage debt, US$240 billion will come from commercial real estate debt, US$120 billion from corporate debt and US$20 billion from consumer credit debt.

US$720 billion, or about 76 per cent of the total losses, will come from securitised debt - that is, debt that has been packaged into tradable securities.

Banks will bear roughly half of the sub-prime mortgage-related losses, with insurance companies, pension funds, money market funds, hedge funds and other institutional investors accounting for the rest. Globally, banks are estimated to have US$740 billion of net sub-prime exposure, 53 per cent of which is held by US banks and 41 per cent by European banks. Asian (including Japanese) banks hold about 5 per cent.

The IMF estimates potential losses of US$144 billion for US banks and US$121 billion for European banks. Losses of Asian banks are likely to be less than one-tenth of losses in Europe, it says.

It points out that most sub-prime-related losses appear to have been reported already, noting that through mid-March 2008, banks had reported US$190 billion in losses on US mortgage market exposure. However, it adds that much of that represents mark-to-market losses (losses arising from loans being valued at low prevailing market prices) and some could yet be recoverable in the future.

Still, the IMF says that US banks and government-sponsored enterprises could report a further US$49 billion in additional writedowns, while European banks could report as much as US$43 billion.

Nonbank financial institutions, including insurance companies, may yet also report sizeable additional writedowns.

However, the IMF urges that loss estimates should be treated with caution, because:

They depend on the quality of disclosure, and are sometimes based on estimates of exposures;

Aggregate losses are highly sensitive to bank exposures to different types of loans, which are again estimates. Different tranches of securities are also valued differently;

The timing of loss recognition is uncertain and the norms vary across countries; and

Loss estimates could be lowered by remedial measures such as the modification of mortgage loan terms.

On the ripple effects of the crisis, the IMF points out that emerging-market countries have been ‘broadly resilient’ so far. But it adds that some remain vulnerable to a credit pullback, especially where domestic credit growth has been fuelled from external funding and large current account deficits need to be financed.

However, this is not so much the case in Asia, where most countries have current account surpluses. Eastern European countries are the most exposed.

The IMF’s report comes ahead of tomorrow’s meetings of Group of Seven finance ministers. This will be followed by the spring meetings of the IMF and the World Bank, where the sub-prime crisis is expected to top the agenda.

With regard to policy measures, the IMF says ‘the immediate challenge is to reduce the duration and severity of the crisis. Actions that focus on reducing uncertainty and strengthening confidence in mature market financial systems should be the first priority’.

Comparing the magnitude of the US sub-prime crisis to previous financial crises, the IMF points out that in absolute dollar terms, it is slightly larger than Japan’s banking crisis of the 1990s.

But relative to GDP, the losses stemming from the sub-prime crisis would be around 7 per cent, which makes it much smaller than either the Japanese crisis or the Asian financial crisis of 1997/98, where the total losses came to 15 per cent and 35 per cent of GDP, respectively.