Jump to content
House Price Crash Forum
Sign in to follow this  

Imf: Credit Crunch Losses To Hit $1trn

Recommended Posts


Global financial markets "continue to be fragile, and indicators of systemic risk remain elevated", according to the IMF's latest Global Financial Stability Report.

Even though the fund's economists recently revised their estimates for world growth slightly higher, the IMF warns deteriorating credit conditions for consumers and banks may prolong a period of sluggish growth.

The fund's downbeat review of financial prospects is driven by pessimism about the US housing slump. "At the moment, a bottom for the housing market is not visible. Stemming the decline in the US housing market is necessary for market stabilisation as this would help both households and financial institutions to recover.

"The growing concern is that, with delinquencies and foreclosures in the US housing market rising sharply, and house prices continuing to fall, loan deterioration is becoming more widespread."

Some $1trn (£502bn) in losses will be suffered by the banking system as a result of the sub-prime and wider mortgage crises, says the IMF. "Credit risks remain elevated" and the banks need to raise more capital.

Around $469bn of losses have been acknowledged by financial institutions since the credit crunch started almost a year ago; roughly $345bn of new capital has been raised. The IMF reported banks' balance sheets are under "renewed stress" and bank share prices have "fallen sharply", calling into question their ability to raise fresh equity funding.

This figure just seems to get bigger and bigger.


On Friday it was reported that analysts from UBS AG, Europe’s second largest bank, were predicting total industry losses from the ongoing credit crunch would reach $600 billion, with banks and brokers accounting for $350 billion of these losses. MarketWatch’s Steve Goldstein said earlier today that financial firms have been forced to write-down approximately $160 billion since the crisis began last summer. Goldstein wrote that, according to UBS strategist Geraud Charpin’s note to clients:


2007 may come to associated with the start of the "big" credit crunch. 2008 has begun with a number of "unresolved" items. Hope of an early resolution seems to be fading. In the words of Lily Tomlin, the American comedian: "Things are going to get a lot worse before they are going to get worse."

The total level of sub-prime losses is still far from clear. Based on current trading levels of ABS indices, estimates of losses range between US$ 150 and 400 billion, not all of which has been written off to date.

Interest rates on large volumes of sub-prime mortgages – estimated at around US$ 900 billion are due to reset by end 2008. Interest rates and repayments will rise significantly. The impact on delinquencies and losses are unknown. The rate reset freeze plan (which has not been in the news since being announced) and its impact are also still unclear.

As America’s mortgage markets began unravelling, economists initially pointed to sub-prime mortgages issued to low-income, minority and urban borrowers. Closer analysis reveals risky mortgages in nearly every corner of the USA. Analysis by The Wall Street Journal indicates that from 2004 to 2006, when home prices peaked in many parts of the country, more than 2,500 banks, thrifts, credit unions and mortgage companies made a combined US$1.5 trillion in high-interest-rate, high risk loans. The potential losses on these loans are unknown.

There are also emerging concerns in the US$915 billion credit card debt markets. Credit card providers are all boosting loan loss provisions. There is anecdotal evidence that cash strapped mortgagors are using credit cards to make mortgage payments. Analysts expect credit card delinquencies to increase if consumers unable to use home-equity lines of credit to pay off their credit card debt start running up higher card debt. A number of banks have begun to boost reserves against anticipated losses.

Financial institutions have already incurred losses of over US$100 billion. A substantial volume of assets is likely to return onto bank balance sheets as off-balance sheet structures and hedge funds are forced to sell. The total amount to be re-intermediated by banks may be in the range of US$1 to 2 trillion. This will make substantial depends on bank liquidity and capital.

There are already signs that the major banks are hoarding liquidity in anticipation of the return of assets. They will also inevitably have to raise substantial amounts of capital. In the second half of 2007 commercial and investment banks raised US$83 billion in equity. This was an increase of more than 20% on the corresponding period in 2006.


This forecast, that Wall Street credit-crunch-related losses could eventually total $460 billion, is mind-numbing. Consider that less than two weeks ago, the markets staged a rally on the comparatively cheery S&P forecast that a subprime bottom was in sight, that the total damage would be a mere $285 billion, and most of the rest of the hits (writedowns at major firms so far have been $150 billion) would be at smaller banks (implication: no one cares all that much if they die).

By contrast, equities appear to have shrugged off the Goldman piece. That to me says we have not reached a bottom in stock prices. One of the features of a bottom is that pretty much all bad news is taken seriously, and good news is ignored. The market is not only perking up on good news, it is often selectively reading news reports and focusing on good bits.

Back to the Goldman piece. One of the reasons the total is so high is that Goldman included Fannie and Freddie in the $460 billion damage (anyone who has access to the report is encouraged to comment if they estimated their losses separately. But even if you are generous and attribute 1/3 of the $460 billion to the GSEs, that still leaves over $300 billion to come out of the securities industry's hide in total.

Where is the money??? If it's like energy and you can't get rid of it who's got the cash?

Share this post

Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 399 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.