The IMF has come out with its latest forecast for the financial crisis, pegging total losses at $4.1 trillion.
That’s up significantly from the IMF’s estimate a quarter ago, and it’s an even more dire forecast than Nouriel Roubini’s.
FT: The IMF estimated that total writedowns on US assets would reach $2,700bn, up from the $2,100bn estimate it made in January and almost double what it forecast in October last year. Including loans originated in Japan and Europe, the writedowns would hit $4,100bn, it added.
Banks will bear about two thirds of the losses, it said, with insurance companies, pension funds, hedge funds and others taking the rest.
The organisation argued in its latest Global Financial Stability Report that the response to the crisis has been reactive and piecemeal.
The IMF’s answer? More capital injections.
IMF: With mounting writedowns depleting the equity of banks, investors have been concerned about the size of capital cushions and future profitability. As a result, banks have been finding it difficult to raise private capital. The report uses two scenarios to estimate the amount of capital necessary to restore banks’ buffers to levels that the market believes would permit banks to operate in today’s environment.
Under one scenario, capital injections totaling $875 billion would be necessary for banks located in the United States and Europe using a common measure of leverage— tangible common equity (TCE) to tangible assets (TA)—of 4 per cent, the level prevailing before the crisis. Estimated equity requirements for banks in the United States by the end of 2010 are about $275 billion; for the euro area, $375 billion; for the United Kingdom, $125 billion; and for banks in other advanced economies in Europe outside the euro area, about $100 billion.
At a somewhat more demanding TCE/TA ratio of 6 per cent, the amount of needed capital rises accordingly. Banks would not necessarily have to raise all of this amount. Some of this capital could come from the conversion of preferred shares to common equity or from the implicit guarantees of some governments to cover bank losses on some sets of assets.
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