A $3.4 trillion loss may be perceived as good news when it was previously projected to be $4 trillion. That said, when losses of this magnitude are buried in a mix of financial chicanery and accounting charades, the impact is not lessened but only extended.
The loss to which I refer is the projected global writedowns on a wide array of toxic loans and assets as put forth by the International Monetary Fund. The IMF released the Global Financial Stability Report yesterday. While it is hard for the media not to cover any report that would project these types of losses, this story is not receiving the attention it deserves. What do we learn from this report?
Global financial stability has improved, but risks remain elevated.
Estimated global losses have improved to $3.4 trillion. However, further deterioration in banks’ loans is to come — over half of their writedowns are still to be recognized. (emphasis added)
Policymakers face considerable near-term challenges. These include ensuring sufficient credit growth to support economic recovery; devising appropriate exit strategies; and managing the risks arising from heavy public borrowing.
Other highlighted points include:
1. In regard to financial institutions, the IMF puts forth that bank earnings will NOT be sufficient to cover these writedowns and that banks will need to raise more capital. While securities prices of certain toxic assets have rebounded, the underlying loans on securities, as well as unsecuritized loans, continue to deteriorate. Against that backdrop, bank lending to consumers and businesses will remain under pressure.
2. Private sector credit growth continues to contract while public sector credit demands grow. This phenomena will only lead to further ‘crowding out.’
3. While Asian and Latin American economies appear to be regaining a sense of stability, the emerging economies of eastern Europe remain challenged.
4. Long term interest rates will be under pressure due to the enormous global fiscal deficits. The IMF projects that these long term rates will rise by anywhere from 10 to 60 basis points for every 1% rise in the deficit relative to GDP.
5. Policy changes remain significant. Issues of systemic risk, exit strategies, credit availability, and balance sheet pressures need to be addressed and managed.
6. The IMF provides a thoughtful and comprehensive review of all the challenges facing financial institutions and regulatory agencies in an attempt to restart the securitization of assets.
From origination to securitizing to rating to distributing, this once large corner of our economic landscape has widespread issues. I come away from reading this part of the IMF report with the feeling that the hurdles will be substantial and the time process protracted before any meaningful fully private securitization market regenerates.
7. The IMF gives strong marks to officials for stabilizing markets, but also cautions that the communication along with the actual unwinding of support mechanisms is critically important for long term stability.
What do I make of the IMF report? I repeat what I said the other day: we are running a marathon and, at best, we have only reached the 7-mile mark.
Miles to go….