Climbdown by IMF in row over bailout cost

Simon English
22 Apr 2009

A furious row erupted between the Treasury and the International Monetary Fund over projections from the world finance watchdog, threatening to throw Alistair Darling's Budget into disarray.

After calls late last night between high-level officials, the Treasury persuaded the IMF to drop a claim that the cost of the UK banking bailout could spiral to £200 billion.

That estimate clashes with Darling's own figure — confirmed in today's Budget — that the losses from the bailout could total £60 billion.

In its half-yearly Financial Stability Report on the state of the world's banks yesterday, the IMF reckoned the financial crisis could end up costing governments worldwide more than $4 trillion.

The UK share of this — what it forecast to be £200 billion — amounts to 13.4% of annual gross domestic product, the second highest after Ireland.

The Treasury insisted the figures were wrong, as they ignored fees paid by the banks into government coffers in return for rescue funds and assumed that all losses from the industry would accrue to government coffers.

A Treasury spokesman said: “The Budget will make prudent provision for potential losses from banking interventions in line with our cautious approach to forecasting public finances.”

After an angry reaction from the Treasury, the IMF pulled the figures which are hugely embarrassing to Darling from its website and conceded the cost of the UK bailout had been incorrectly stated.

Its forecast is now £130 billion — still more than double Darling's figure.

The Washington-based group, presided over by France's former finance minister Dominique Strauss-Kahn, argues that Britain needs to explain how it intends to scale back debts, or face rebellion from the bond markets. The IMF said: “In order to address investor concerns, governments need to clearly communicate the potential costs of financial support packages as part of a sustainable medium-term budget framework.”

Political opponents seized on the original IMF forecast and Tory shadow chancellor George Osborne said: “This couldn't be worse news on the eve of the Budget.”

Bank shares have recovered sharply in the last few weeks, with the large US banks claiming they are presently trading at a profit. But economists say that, even if the Treasury's numbers are more accurate than the IMF's, they are still mere estimates open to change.

In its report the IMF also warned that “the global financial system remains under severe stress as the crisis broadens”, and called for the world's finances to provide a “more stable platform for economic growth”.