22 April 2009

Global toxic assets could reach $5.7 trillion:IMF~AAP


Bank writedowns associated with so-called "toxic assets" clogging up the global financial system could eventually reach $US4 trillion ($5.73 trillion), the International Monetary Fund says.

This is nearly double the amount the IMF predicted in January.

With this in mind, the IMF warns in its latest Global Financial Stability Report that costs to taxpayers could be greater if governments do not continue with policies to restore confidence in the financial system.

The IMF estimates writedowns on US-originated assets since the outbreak of the crisis will increase to $US2.7 trillion from its previous forecast of $US2.2 trillion.

This, it says, is largely as a result of the worsening base-case scenario for economic growth.

"In this GSFR, estimates for writedowns have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $US4 trillion," it said.

It said while there had been some improvements in interbank money markets over the last few months, funding strains were persisting and banks' access to longer-term funding had diminished.

"While in many jurisdictions banks can now issue government-guaranteed, longer-term debt, their funding gap remains large," it said.

"As a result, many corporations are unable to obtain bank-supplied working capital and some are having difficulty raising longer-term debt, except at much more elevated yields."

Australia's major banks failed to pass on in full this month's 25-basis-point cut in the official interest rate, blaming higher wholesale funding costs.

The IMF says that despite unprecedented initiatives to stop the downward spiral in advanced economies, further policy action would be required to relieve the uncertainties in financial markets that were undermining the prospects for an economic recovery.

However, it said political support for such action appeared to be waning as the public was becoming disillusioned by what it perceived as abuse of taxpayers' funds.

"There is a real risk that governments will be reluctant to allocate enough resources to solve the problem," it said.

It said that without a thorough cleansing of impaired assets on bank balance sheets, accompanied by restructuring and, where needed, recapitalisation, risks remained that problems being experienced by banks would continue to exert downward pressure on economic activity.

A recent IMF analysis showed that past episodes of financial crisis have shown that restoring the banking system to normal operation takes several years, and that recessions tend to be deeper and longer lasting when associated with a financial crisis.

"This same experience shows that when policies are unclear and implemented forcefully and promptly, or are not aimed at the underlying problem, the recovery process is even more delayed and the costs, both in terms of taxpayer money amd economic activity, are even greater," it said.

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