IMF: Toxic asset fallout could reach $4T

Fund sees more global write-downs as new types of assets deteriorate and economic conditions remain stressed.

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WASHINGTON (CNN) -- The International Monetary Fund has raised its estimate of the amount of toxic assets that banks and financial institutions will have to dispose of or write down to $4 trillion.

The IMF released information from its latest "Global Financial Stability Report" (GFSR) Tuesday saying its estimates for global write-downs has increased from $2.7 trillion in January to $4 trillion partly as a result of including more types of assets that have been depreciating.

Previous estimates had only included U.S. originated assets. Also contributing to the new estimates is what the IMF calls "the worsening base-case scenario for economic growth," a projection that the recovery will be painful and slow.

Two-thirds of the $4 trillion in losses will likely fall on banks, although the IMF says that non-bank financial institutions like insurance companies and pension funds have also been hit hard by declines in asset prices on both equities and bonds.

"Shrinking economic activity has put further pressure on banks' balance sheets as asset values continue to degrade, threatening their capital adequacy and further discouraging fresh lending," according to the GSFR.

Cross border international lending has intensified the crisis in some emerging market countries, says the IMF, which expects net private capital flows to emerging market countries to be negative in 2009, while at the same time 2009 refinancing needs for the emerging markets are expected to be about $1.2 trillion.

"The global financial system remains under severe stress as the crisis broadens to include households, corporations, and the banking sectors in both advanced and emerging market countries," the IMF said.

The IMF also worries that political support for additional aid to the financial system is waning as the public is becoming disillusioned by what it perceives as abuses of taxpayer funds.

The report notes a real risk that governments will be reluctant to allocate enough resources to solve the problem. The result, according to the IMF, is uncertainty that could hold back the private sector from "constructively engaging" to help the system dig itself out of the ongoing financial crisis.

On the brighter side, the IMF said that the response by policy makers is gradually beginning to restore confidence in the markets.

"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," Jos Vials, financial counselor and director of the IMF's Monetary and Capital Markets Department, said.

The report notes that more capital will be needed as well as more coordination between governments. To top of page

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