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IMF Issues Warning on Credit Losses

Posted by Larry Doyle on April 8, 2009 7:11 AM |

Forecasted credit losses across the residential mortgage, commercial mortgage, consumer credit, and corporate credit markets have been widely estimated to triple – if not potentially quadruple – in certain sectors. What does that mean in terms of total dollars? The IMF sheds light on these losses in an article this morning in the Financial Times:

The International Monetary Fund is likely to raise its estimate of total credit losses on US assets from $2,200bn to about $2,800bn when it releases its Global Financial Stability report later this month

Those figures equate to an increase of 27% in losses and a total figure of $2.8 trillion, which equates to 20% of GDP!!! Is there any wonder why credit is so constrained in the face of these impending losses? The IMF also sheds further light on these projected losses here in the U.S., as well as in Europe, and globally:

The new estimate, while up significantly from January, will almost certainly be lower than a $3,100bn (€2,350bn, £2,111bn) figure circulating on Tuesday, which contributed to pressure on US bank stocks.

The IMF is also expected to release for the first time an estimate of total losses on European assets, which is likely to exceed $1,000bn. The fund is likely to put total losses globally at slightly above $4,000bn, including some additional losses on Asian assets.

In analyzing these numbers, I am not shocked by the market expectation of a 40% increase (from $2.2 trillion to $3.1 trillion) nor the $1 trillion in expected losses in Europe. HOWEVER, in assessing the expected losses globally, IF we are to believe the $2.8 trillion number in the U.S. and the $1 trillion number in Europe, THEN there is NO way the rest of the world will only have $200 billion+ in losses. Is the IMF intentionally underestimating that figure, knowing that the bulk of their aid will be directed to a number of low-income countries and emerging economies? Additionally, the IMF highlights that:

Most of the increase in the loss estimate for the US relates to relatively traditional forms of credit rather than the more exotic subprime mortgage-backed securities that were long ago heavily written down.

These projected losses are widely followed by global investors and clearly highlight the need for increased capital and debt restructuring. In the face of that, we should also expect to witness ongoing defaults and ultimately the devaluing of these debts via currency devaluations leading to inflation.


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