Business | Economy
IMF sees risk of global financial contagion
Senior official says crisis could wipe $800 billion of value from books of financial institutions.
- Reuters
- Published: 00:10 March 19, 2008
Washington: A mounting global credit crisis could result in financial "contagion" that could wipe $800 billion of value from the books of US and global financial institutions, a senior International Monetary Fund official said on Monday.
Anoop Singh, IMF director for the Western Hemisphere Department, including the US and Latin America, cited a high likelihood of a US recession and said he sees losses from the US subprime mortgage market crisis resulting in widening losses for European banks.
"This is clearly a period of exceptional uncertainty," Singh told a conference in Brazil. A copy of his speech was made available in Washington.
"The distribution of risks for the US outlook is wide and skewed clearly toward the downside, and the probability of additional shocks leading to a US recession is quite high," he said.
"All in all, current estimates suggest that the global financial system could be facing losses of close to $800 billion spread across banks, insurance companies, hedge funds and pension funds, although some analysts are projecting much higher losses," he said.
Singh said the US housing crisis was starting to spread beyond the subprime mortgage market to other real estate areas.
Ground zero
He said the US housing crisis was the "ground zero" for the current financial market turmoil, with an asset price bubble in the process of deflating, adding that it will likely be "a protracted process."
"We know from past experiences that output effects from housing price bursts last about twice as long as those from, say, a bursting equity price bubble," he said.
There is growing concern that housing prices abroad - many of which have been rising even more than US prices - might "deflate abruptly," with potential financial implications, Singh said.
"At this point, we expect banks' subprime-related losses to mount further to around $230 billion worldwide, with about half of that amount residing in the US banking system and the remainder mostly in Europe," he said.
An additional $100 billion in losses may arise from bank holdings of other financial assets, including commercial mortgages and credit card debts, he said.
"However, losses could mount much further as an economic downturn brings with it a widening deterioration of credit across a broad range of household and corporate credit," Singh said.
He spoke a day after the US Federal Reserve announced emergency measures to stem the fast-spreading credit market seizure, pouring funds into cash-starved Wall Street firms.
The Fed cut the discount rate it charges on direct loans to banks to 3.25 per cent from 3.50 per cent and set up a new programme to provide cash to a wider range of big financial firms previously unable to borrow directly from the central bank.
Latin America
Turning to Latin America, Singh said the region was "holding up pretty well" amid the market turmoil, with no substantial exposure to US subprime-related credit products.
Still, he warned that global banks affected by the credit turmoil may be forced to downsize or draw on capital or liquidity from their subsidiaries in regions, including in Latin America.
"Our sense, however, is that the external environment should not put exceptional pressure on Latin American sovereigns, at least not in the near term," Singh said.
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