IMF Predicts Global Losses to Hit $4 Trillion by 2010

Total losses in the global economic meltdown could reach $4 trillion by 2010, according to a report released today by the International Monetary Fund (IMF).

The IMF's April Global Financial Stability Report (GFSR) Update predicts that loses tied to U.S. assets alone are expected to reach $2.7 trillion, up from $2.2 trillion predicted only three months before. The change from the January's report is attributed to a worsening scenario for economic growth.

The report says aggressive and coordinated steps will be needed to break the downward spiral in the global economy, restore confidence in the financial institutions and normalize conditions in markets. Among these measures, it says that temporary nationalization of some financial institutions may be necessary as part of the restructuring process.

"Without a thorough cleansing of banks' balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalization, risks remain that banks' problems will continue to exert downward pressure on economic activity," the report says.

Recovery Likely to be Slow

Even if more aggressive actions are taken by the United States and other nations to halt the economic slide, the report predicts the process of deleveraging financial markets will be slow and painful, with the economic recovery likely to be protracted. It predicts that credit growth in the United States and Europe will continue to slow and may even contract in the near term and only recover after a number of years.

The IMF says that the current inability of banks and other financial institutions to attract private money suggests the crisis has reached a point where governments need to take bold steps, even if it means taking majority, or even complete, control of institutions. It says that if necessary, temporary government ownership should be done only with the intention of restructuring an institution to return it to the private sector as rapidly as possible.

Banks will need more capital

The report estimates that U.S. banks will require an additional $275 billion to $500 billion over the next two years to achieve adequate capitalization, while European banks will need anywhere from $600 billion to $1.2 trillion, based on the need to offset losses and stricter lending and capitalization requirements.

The full report, including links to an executive summary, is available here on the IMF web site.