IMF Issues Gloomy Assessment of Markets

News Press: IMF Issues Gloomy Assessment of Markets

The International Monetary Fund on Tuesday said the global credit crisis, despite some recent improvement, remains a significant threat to economic growth.

Despite “unprecedented intervention” by central banks such as the Federal Reserve, “financial markets remain under considerable strain, now compounded” by a slowing economy, low levels of capital at financial companies and widespread efforts to unload debt, the fund said.

The U.S. mortgage and credit crises could cause almost $1 trillion in financial losses, the IMF said in an update to its Global Financial Stability Report, with $565 billion of those losses stemming from the residential mortgage market and related securities, and the rest from the commercial real estate, consumer credit and corporate debt markets. That estimate is toward the higher end of estimates by many Wall Street economists, who have pegged the costs of the residential mortgage meltdown at $400 billion to $600 billion.The IMF’s figure includes $200 billion in losses that banks have already announced, plus an additional $80 billion the banks have yet to write down, IMF officials said during a briefing. The rest is held by other financial institutions, such as hedge funds and pension funds, the officials said.

Credit markets have stabilized since last month, IMF officials said, when Bear Stearns Cos., the fifth-largest U.S. investment bank, was acquired by JPMorgan Chase & Co. at a fire-sale price. But now, a weakening U.S. economy is placing “additional pressure on banks’ balance sheets, which may limit their capacity to lend,” Caruana said. Caruana urged banks to seek additional capital so they can continue to lend and “avoid a credit contraction in the broader economy.” Caruana said investments earlier this year by government-run investment funds in large U.S. and European banks “have helped, but more may be needed to restore their lending capacity.”

The IMF is developing a voluntary code of best practices for the funds, which have sparked some concerns in the United States and Europe because they are government-run. Critics fear they could invest for noncommercial reasons, such as to obtain sensitive technologies.

While some sovereign fund managers, such as China’s, have criticized the IMF’s efforts, Caruana said the code could “help … to mitigate some of the concerns” about sovereign funds.

“We think that it is very important to keep the financial system open and competitive,” Caruana said.

Government regulation and supervision of the financial sector, along with private sector risk management, “all lagged behind the rapid innovation” of banks and securities firms, which resulted in “excessive risk-taking, weak underwriting … and asset price inflation,” the IMF said in its report.

Among other steps, the IMF recommended streamlining regulation of the financial sector to avoid subjecting banks and other financial firms to multiple supervisors.

With IMF gloomy report, market was supposed to tank. However the market did held on to plethora of bad news, waiting for earning season to kick in. Alcoa starts the season with 54% drop in profits…Sign of bad things to come…