IMF warns crisis damage will climb to $4.1 trillion

Hugo Duncan
21.04.09

The International Monetary Fund tonight warned that the global financial crisis was far from over, and losses by banks and other institutions will soar to a staggering $4.1 trillion by the end of 2010.

It said banks around the world will shoulder $2.8 billion of the writedowns, with insurers, pension funds and other financial institutions taking the rest of the pain. British banks have already written off $110 billion but face another $200 billion of losses before the end of next year, according to the IMF Global Financial Stability Report.

This compares with $550 billion of further losses expected at US banks, on top of the $510 billion already taken, and another $750 billion in the eurozone beyond the $154 billion lost so far.

Modest levels of profits will not return until after the end of next year. The grim warning came as shares on both sides of the Atlantic fell for another day as the recent rally came crashing to an end.

The FTSE 100 index was down 72.36 at 3918.50 in London and the Dow Jones Industrial Average sank 35.92 to 7805.81 in New York.

It also made disturbing reading for Gordon Brown and his Chancellor Alistair Darling on the eve of the Budget.

“Stabilising the financial system remains a key priority and, although progress has been made, further policy efforts will be required,” said the IMF report.

“Without a thorough cleansing of banks' balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalisation, risks remain that banks' problems will continue to exert downward pressure on economic activity.”

The financial crisis escalated dramatically last autumn with the collapse of Lehman Brothers and the government rescues of Merrill Lynch and AIG in the US and Royal Bank of Scotland and Halifax owner HBOS in the UK.

The IMF warned that without further government action banks will cut lending in the coming months and worsen the most severe global slump since the Second World War.

The IMF estimated banks could need additional capital of between $275 billion to $500 billion in the US, about $125 billion to $250 billion in Britain, and about $375 billion to $725 billion in the euro area. It added: “Temporary government ownership may thus be necessary, but only with the intention of restructuring the institution to return it to the private sector as rapidly as possible.”

Banks worldwide have so far raised $900 billion in capital, about half of it through government rescue loans. The UK taxpayer owns or partly owns five banks and building societies following state bailouts of Northern Rock, Lloyds Banking Group, RBS, Bradford & Bingley and the Dunfermline.