IMF cuts global debt writedown estimate to $3.4 trillion

IMF cuts global debt writedown estimate to $3.4 trillion

Istanbul: The International Monetary Fund on Wednesday lowered its estimate for global writedowns for banks and other financial institutions to $3.4 trillion but warned that loan losses were set to rise as unemployment grew.

In April the IMF estimated in its Global Financial Stability Report that global bank losses could reach $4 trillion but said it cut the figure by $600 billion to reflect rising securities values and new methodology for calculating writedowns.

“Global financial stability has improved, but risks remain elevated and the risk of reversal remains significant," the IMF said. It added that the economic downturn was troughing but the recovery in advanced economies would be extremely slow.

The report said that while banks have enough capital to survive, their earnings are not expected to fully offset writedowns expected over the next 18 months.

It said stronger action was needed to bolster bank capital and earnings capacity to ensure banks could support a recovery.

The Fund said while private-sector credit growth has contracted in big economies, overall borrowing needs have not slowed as quickly because of burgeoning government deficits.

“The likely result is constrained credit availability," it said, adding that continued support by central banks may be required to alleviate this.

Using new methodology to calculate the writedowns, the IMF said bank losses on loans and securities holdings amounted to $1.3 trillion through the first half of 2009, with new writedowns of about $1.5 trillion still needed through the end of 2010.

The report said US institutions were about 60% through their needed writedowns, while their euro area and British counterparts had recognized only 40% of losses.

Deal With It

It said loan losses are expected to account for around two thirds of total writedowns between 2007 and 2010, with housing the hardest hit in the United States and foreign loans the big contributors to loan losses in Britain and the euro area.

The IMF urged authorities to deal with troubled assets still on banks’ books, adding that reassuring stress test results and signs of economic stabilization have eased pressure to deal with the toxic debt.

“Authorities, banks and investors need to persevere with these programs," the IMF said, adding that in countries where banks were undercapitalized, such toxic assets should be ringfenced to reassure markets about future losses.

“Only when this source of uncertainty has been substantially reduced can banks fully participate in providing credit for recovery," the IMF said.

The Fund said financial conditions in emerging markets have improved thanks to strong policies but estimated that companies faced foreign currency debt refinancing needs of $400 billion over the next two years.