- The Washington Times - Wednesday, April 22, 2009

Financial institutions in the United States, Western Europe and Japan face credit losses of more than $4 trillion as the global economy continues to deteriorate during its deepest and longest recession in more than 60 years, the International Monetary Fund reported Tuesday.

U.S. financial institutions face asset write-downs totaling $2.7 trillion, nearly double the $1.4 trillion in write-offs that were projected in October, the IMF said in its latest Global Financial Stability report.

“We are in uncharted waters,” said Sara Johnson, an economist at IHS Global Insight. “The $4.1 trillion is unprecedented and reflects the severity of the global economic crisis.”

The gloomy report, released in advance of this weekend’s IMF meeting in Washington, predicted that “the global credit crisis is likely to be deep and long lasting.”

The financial crisis erupted in the United States in August 2007 after the housing price bubble began to deflate and the subprime mortgage-securitization market collapsed. Since then, a broad global recession has engulfed the advanced economies of the United States, Europe and Asia, and inflicted serious economic damage on emerging markets around the world, especially in Eastern Europe.

The report said capital flows to emerging markets have “come to a halt.”

IMF chief economist Olivier Blanchard predicted at a briefing that “it is going to take quite a while until we see a return to capital outflows” to emerging markets, even “if the banking system is slowly repaired in advanced countries.”

As financial institutions see their credit losses soar, they face “further pressure” to “raise capital and shed assets,” the IMF said.

With many global banks unable to replenish their dwindling capital base, governments have been forced to inject capital into the faltering institutions. The U.S. government has mostly injected capital by purchasing preferred-stock shares.

“The current inability to attract private money suggests the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares, even if it means taking majority, or even complete, control of institutions,” the IMF report said.

“The United States faces some of the largest potential costs of financial stabilization,” the IMF estimated.

U.S. banks face total write-downs of $1.6 trillion by the end of next year. That’s more than double the $737 billion in estimated credit losses for banks in Britain and the euro countries. Japanese banks face $129 billion in write-downs.

So far, U.S. banks have taken about half the total write-downs they face.

The IMF expects banks to bear $2.5 trillion of the $4.1 trillion in projected credit losses from loans and securities. Pension funds, insurance companies, hedge funds and other nonbank financial institutions face credit losses totaling $1.6 trillion, including an estimated $250 billion in losses for U.S. mortgage-financing giants Fannie Mae and Freddie Mac.

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