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December 8, 2022

IMF: Meltdown losses of USD 4 trillion, higher risks in Eastern Europe

Emerging market economies, particularly those in Eastern Europe, will need USD 1.8 trillion in refinancing next year.

The International Monetary Fund (IMF) has warned that potential losses from the credit crunch could reach USD 4 trillion and damage the financial system for years to come, BBC News reported.

In its latest Global Stability Report, made public yesterday, the IMF says that even if urgent action is taken to clean up the banking system, the process will be “slow and painful”, delaying economic recovery.

The Fund also underlined that banks may need USD 1.7 trillion in additional capital. But it warned that political support for further bank bail-outs is waning.

One year ago, the IMF estimated that total losses from the credit crunch would be USD 1 trillion, which has been exceeded, showing how rapidly the financial meltdown has escalated. The IMF now says that banks are likely to lose USD 2.7 trillion, but other financial institutions such as insurance companies and pension funds are also now coming under strain.

The report also says that emerging market economies, more specifically, those in Eastern Europe, which will need USD 1.8 trillion in refinancing next year, will be hard-hit by the collapse of cross-border lending, and it predicts that there will be no net private lending at all to developing countries this year.

“The retrenchment from foreign markets is now outpacing the overall deleveraging process, with a sharp decline of cross-border funding intensifying the crisis in several emerging market countries.

“Indeed, the withdrawal of foreign investors and banks together with the collapse in export markets create funding pressures in emerging market economies that require urgent attention. The refinancing needs of emerging markets are large, estimated at some USD 1.8 trillion in 2009, with the bulk coming from corporates, including financial institutions,” the report says. The report comes as the IMF and World Bank are beginning their spring meeting in Washington, after receiving a promise of USD 750bn in fresh funds agreed at the G20 summit.

The document says that the banking system has not yet been stabilised, despite the billions of dollars spent by governments. But it warns that they may be “a real risk that governments will be reluctant to allocate enough resources to solve the problem” because the public has become “disillusioned by what it perceives as abuse of taxpayer funds”.

This is the situation especially in the US, where Congress appears reluctant to allocate additional bail-out funds above the USD 700 bln approved last autumn despite the inclusion of another USD 750 bln in Obama’s latest budget proposal.

The US Treasury has instead proposed a private-public partnership to buy up troubled assets underwritten by loans from the Federal Reserve. But the IMF comments that “uncertainty about political reactions may undermine the likelihood that the the private sector will constructively engage in finding orderly solution to financial stress.”

Deeper recession

The IMF says that restoring the banking system so that it functions normally is likely to take several years, and this will make the recession longer and deeper than usual. But it warns that if policies are unclear or not implemented forcefully and promptly, “the recovery process is even more delayed and the costs, in terms of taxpayer money and economic activity, are even greater.” It says that the worldwide recession has deepened the financial crisis. “Systemic risks remain high and the adverse feedback loop between the financial system and the real economy has yet to be arrested, despite the wide range of policy actions and some limited improvement in market functioning.

“Further effective government action – particularly geared toward cleansing balance sheets and strengthening institutions – will be required to stabilise the global financial system and to provide the foundation for a sustainable economic recovery.”

On Wednesday, the IMF will present its world economic forecast. It is expected to be the gloomiest for 60 years, with the world falling into a global recession, and an even sharper decline in output in the rich countries.

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