The title is a personal comment on this IMF report , facts and comments on the report are also available on wsj.com

GLOBAL FINANCIAL CRISIS

Further Action Needed to Reinforce Signs of Market Recovery: IMF

By Peter Dattels and Laura Kodres
IMF Monetary and Capital Markets Department

April 21, 2009

Credit losses have continued to grow; most being borne by banks

An unprecedented policy response to the global economic crisis—including the recent expansion of resources for international institutions and the IMF’s enhanced lending framework—is gradually beginning to restore market confidence, the IMF said.

But in its semiannual Global Financial Stability Report (GFSR), released April 21, the IMF warned that the challenges to restoring financial stability remain significant.

"Continued decisive and effective action is needed to preserve and strengthen these first signs of improvement, and to help provide a more stable and resilient platform for sustained global growth," José Viñals, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department, said.

In particular, emerging market risks have risen the most in the past six months,

The credit deterioration is taking an increasing toll on bank balance sheets, with the IMF emphasizing the need to cleanse them of impaired assets. Writedowns continue to mount as the collapse of economic activity leaves companies and individuals increasingly unable to repay borrowings. Banks will have to rebuild capital as a result of credit losses.

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 percent, 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 percent, 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.

The estimates of needed injections are based on the roughly $2.8 trillion losses that banks will incur from the start of the crisis through 2010 and reflect losses already taken and bank earnings this year and next that can be used to bolster capital

The latest GFSR extends its writedown estimates to include losses on loans and related securities that were originated in Europe and Japan (see table), which will total approximately $1.3 trillion.( Comment i did not manage to copy the picture properly See IMF site or Wall Street Journal for picture )

The Fund estimates that potential writedowns, including about $1 trillion already taken, could be nearly $4.1 trillion on some $58 trillion of assets originated in the United States, Europe, and Japan (although the owners of these assets can be anywhere in the world). The assumptions used to make these broader estimates are subject to significant uncertainty. The estimates could be lower depending upon policy actions and more favorable outcomes than assumed.

Banks will likely bear about two-thirds of the $4.1 trillion in writedowns, which together with their exposure to emerging markets, is about $2.8 trillion in actual and potential writedowns. Writedowns will also be borne by other financial institutions, including pension funds and insurance companies, the GFSR said.

Emerging markets feel the impact

As institutions reduce assets during a period of deleveraging, international capital flows to emerging markets have been curtailed. The effects have been harsh in some cases. The retrenchment from cross-border markets is outpacing the overall deleveraging process. On balance, emerging markets could experience net outflows of private capital in 2009, with but slim chances of recovery in 2010 and 2011. Banks in countries which were dependent on such cross border flows have suffered greatly, but the effects are also being felt by companies in many emerging market.

Within emerging markets, eastern European economies have been the hardest hit. The linkages between western Europe and emerging European banking systems make the region particularly vulnerable.

In response to the widespread nature of the crisis, the IMF overhauled its lending framework and, at its summit in London on April 2, the Group of Twenty industrial and emerging market countries supported a large expansion of the Fund’s resources—from $250 billion to $750 billion. The changes in the IMF’s lending framework include more emphasis on crisis prevention, facilitating larger and more frontloaded financing, and further streamlining conditions attached to IMF loans.

Since the approval of the IMF’s reforms, external credit and credit default swap spreads (essentially the price of insuring repayment) on emerging market sovereign debt have tightened as markets have become reassured that sizeable external resources will be made available as needed.

Further government help

Overall, further decisive and effective policy actions will be needed to stabilize the international financial system. The global response to date has been rapid, but often piecemeal and insufficient to bolster public confidence. In particular, the global banking system needs to be cleansed of its impaired assets. Supervisors must determine whether a bank is viable. Banks that are viable but have insufficient capital will need to receive capital infusions. If such infusions are unavailable from private sources, then public money will have to be used.

In some cases, partial, or even total, government ownership will be required to assure adequate capitalization and an effective restructuring plan. A government should aim to ensure that banks can return to private ownership as expeditiously as possible. Banks that are not viable should be resolved promptly.

Financial policies must work constructively with other macroeconomic policies—both are needed to short-circuit the adverse feedback loop between the financial system and the economy through which deteriorating financial conditions lower economic activity, which in turn makes it harder for companies and individuals to repay borrowings, with an adverse impact on financial conditions. It is essential to stabilize the financial system—without which a robust and sustained economic recovery will be difficult to attain.

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Emerging markets are being hit hard as global economic crisis causes sharp drop in export demand, threatens decade of performance gains (photo: Newscom)

Global Leaders to Assess Response to World Recession

April 20, 2009

Finance ministers and central bank governors from around the world gather in Washington April 24-26 to assess the global response to the world financial crisis and attempts to recover from the

IMF-World Bank Meetings to focus on crisis response to global recession

Finance to follow up on successful G-20 summit

IMF head warns of impact of crisis on world's poorest

Finance ministers and central bank governors from around the world gather in Washington April 24-26 to assess the global response to the world financial crisis and attempts to recover from the deepest recession since the 1930s.

The finance chiefs, convening for the Spring Meetings of the International Monetary Fund (IMF) and World Bank, come together at a critical time for the global economy, which—even with strong policy implementation—is not expected to reach the bottom until later this year, with growth picking up slowly in 2010.

The meeting of the IMF and World Bank follows the summit of the Group of Twenty (G-20) industrialized and emerging market economies that took place in London on April 2 to agree further action to combat the global crisis.

Tracking the response

The IMF has been asked by the G-20 to monitor action taken by countries to counter the crisis and assess whether it is sufficient. Many governments have slashed interest rates and initiated fiscal stimulus packages to revive their economies.

IMF Managing Director Dominique Strauss-Kahn has said that top priority now should be to clean up the banking sector, which lies at the heart of the crisis. "We all understand the stakes. 2009 will almost certainly be an awful year—we expect global growth to enter deeply negative territory," he told an April 16 briefing at the Washington National Press Club.

"This is a truly global crisis, and nobody is escaping. It originated in advanced economies, and spread like wildfire across the world. Emerging markets are being hit hard, facing the double punch of a sharp drop in export demand and a sudden stop in capital inflows, and this threatens to undo the impressive gains in growth and convergence achieved over the past decade or so. Of possibly even greater concern, the crisis has also arrived on the shores of low-income countries, and threatens to cast millions back into poverty—the human consequences here could be absolutely devastating."

Latest forecasts

Ahead of the meetings, the IMF will release two important reports that will assess the state of the world economy and the capital markets. The IMF’s Global Financial Stability Report will be released on April 21 and the latest World Economic Outlook on April 22.

According to the IMF, governments need to restore confidence and trust in the financial system by dealing aggressively with uncertainty surrounding distressed assets on bank balance sheets and recapitalizing viable financial institutions, using public money as necessary, and erring on the side of strong actions. Central banks should continue to provide ample liquidity through low policy rates and unconventional monetary policy measures. Sizeable fiscal stimulus should support economies as long as private demand remains depressed, but more sustained fiscal support is needed in 2010.

Research by the IMF released on April 16 suggests that two features of the current recession—its association with deep financial crisis and its highly synchronized nature—mean it is likely to be unusually severe, followed by a slow recovery.

Boosting IMF lending

To counter the fallout of the crisis on emerging markets and developing countries the G-20 has agreed to triple the IMF’s resources to $750 billion and to double money for concessional lending to low-income countries.

The IMF is already putting the money to work, agreeing to a $47 billion precautionary credit line to Mexico, under a newly created instrument for strongly performing economies that need insurance against the crisis, and is also scheduled to consider a request by Poland for a credit line of $20.5 billion. Colombia has also applied for a credit line of $10.4 billion.

Several countries have given or pledged money to the IMF to boost its resources, including Japan and the European Union, and the IMF will be discussing with other potential contributors.

Identifying future risks

Meetings of both the Group of Seven industrialized countries and the G-20 will be convened on April 24, ahead of the Saturday session of the IMF’s policy-setting guidance body, the International Monetary and Financial Committee (IMFC), chaired by Youssef Boutros-Ghali, the Minister of Finance of Egypt.

Among other things, the committee is expected to be interested in measures being taken to prevent crises and to spot emerging ones earlier. Steps are being taken by the IMF to enhance analysis of risks and linkages between the real economy and the financial sector. The IMF is also working on the development of an early-warning exercise—joint with the Financial Stability Board—and revamping the Financial Sector Assessment Programs, which look at country financial sectors.

Cushioning the impact on world’s poorest

Low-income countries will be at the top of the agenda on Sunday when the Development Committee meets. After first striking the advanced economies and then emerging markets, a third wave of the global financial crisis has begun to hit the world’s poorest and most vulnerable countries, threatening to undermine recent economic gains and to create a humanitarian crisis. The IMF is stepping up lending to low-income countries to help them get through the crisis.

Amid concern that the world is falling behind on development targets, the IMF and World Bank will issue a report on April 24 on progress achieved toward the UN’s Millennium Development Goals. Antoinette Sayeh, the head of the IMF’s African Department, will also brief journalists on the impact of the crisis on Africa.

Improving IMF governance

A top priority for the Fund’s legitimacy and effectiveness is the completion of outstanding governance reforms. The IMF will push to promptly ratify quota and voice reforms agreed in April 2008 and then launch the next phase, including further rebalancing of country representation by January 2011. Quotas largely determine a country’s voting power in the 185-member international institution.

Once implemented, the 2008 reform will bring members’ quota shares closer to their evolving position in the world economy:

• 54 members will receive an increase in their quotas, some of the largest gains going to China, Korea, India, Brazil, and Mexico.
• The increase in quota shares for these 54 countries is 4.9 percentage points.

In total, 135 countries will see an increase in voting share of 5.4 percentage points due to the combined effects of the increase in quotas and basic votes.

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