WASHINGTON (Reuters) - The International Monetary Fund on Tuesday called for more coherent and better coordinated global policies to restore calm to markets and said it now expects worldwide credit losses to reach $1.4 trillion.
“What’s happening in financial markets is quite unprecedented and we are in favor of concerted and coordinated action,” Jaime Caruana, director of the IMF’s monetary and capital markets division, told a news conference.
“We think the policies should be consistent and cross-border,” he said, “When we mean coordination, we don’t mean necessarily that all countries have to apply exactly the same measures,” said Caruana.
He said a coherent strategy was especially necessary when it came to recapitalizing banks, dealing with illiquid assets and extending term financing to meet banks’ funding needs.
As the crisis intensified across Europe on Tuesday and European Union members agreed to increase the minimum level of bank deposit insurance, Caruana said more coordination was needed to contain the spillovers in Europe from one country to another.
In its quarterly assessment of global financial markets, the IMF said declared losses on U.S. loans and securitized assets are likely to reach $1.4 trillion, an increase from its April estimate of $945 billion and last month’s forecast of $1.3 trillion.
In its quarterly assessment of global capital markets, the IMF said global economic activity is slowing as growth in advanced economies decelerates and emerging economies start to lose momentum.
“The risk of a more severe adverse feedback loop between the financial system and the broader economy represents a critical threat,” the IMF said.
Caruana said a purely private-sector resolution to the crisis was not likely and more public funding would be needed to prop up credit and financial markets.
The IMF estimated that major global banks will need an estimated $675 billion in capital over the next five years, and Caruana said that and the sale of illiquid assets “allow the financial system to deleverage in a way that could provide support to growth.”
“The banking system will then be able to provide some credit growth that would help the economy,” he added.
Caruana said financial deleveraging was a necessary — although painful — adjustment process.
“A more resilient financial system will ultimately emerge from restructuring and deleveraging, but market forces are in the meantime resulting in a disorderly, accelerated adjustment process, requiring the use of public balance sheets to restore order,” he said.
The IMF warned of further losses, with significant gaps between reported and estimated write-downs, as the crisis deepens.
It said a further decline in the U.S. housing market and a wider economic slowdown is leading to new loan deterioration. Delinquencies on prime mortgages and commercial real estate are increasing, as well as those for corporate and consumer loans, it noted.
Caruana said sovereign wealth funds can play an important role in stabilizing current market conditions.
“At this very moment where perhaps too much focus is on the short run, I think institutions that are able to look to longer time horizons probably could play important stabilizing role.”
The IMF warned that overall risks to emerging markets, which earlier appeared resilient to the credit turmoil, have risen sharply as appetite for emerging assets has declined and capital outflows have intensified, leading to tighter liquidity conditions.
Editing by Tom Hals