Tuesday, April 21, 2009

UPDATE: IMF: Mkt Confidence Improving, But Need More Action

. Tuesday, April 21, 2009

WASHINGTON (Dow Jones)--Despite signs of improvement in global markets, further coordinated actions are needed by governments and banks to ensure that a world economic recovery can take hold, a senior International Monetary Fund official said Tuesday.

"The unprecedented policy response, both in the financial and macroeconomic domains, is gradually beginning to restore market confidence," said Jose Vinals, director of the fund's monetary and capital markets department.

"But 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," Vinals said in a briefing to discuss the IMF's latest Global Financial Stability Report.

The report indicated a significant deepening and spreading of the crisis beyond the mortgage-related assets in the U.S. responsible for sparking the turmoil. The IMF now projects that worldwide financial losses could top $4 trillion through next year, with the estimated damage from U.S. assets alone increased to $2.7 trillion from a previous forecast of $2.2 trillion in January.

Reflecting the widening scope of the crisis, loan losses and write-downs in assets originated outside the U.S. were also factored in for the first time. Losses from European assets are expected to reach $1.2 trillion through 2010, with estimates of $149 billion for Japanese assets and $340 billion for emerging markets.

Still, IMF officials sounded the most optimistic note yet about the crisis, saying recent improvements in some markets point to the possibility that write-downs could come in below those levels.

"Circumstances in some of the markets were worse than they are now" when the $4.1 trillion loss estimate was calculated at the end of March, Jan Brockmeijer, deputy director of the monetary and capital markets department, told Dow Jones Newswires after the briefing.

That figure is "slightly higher" than current mark-to-market write-downs would suggest, he said, adding that it would be too difficult to give a precise revision due to market fluctuations.

The market improvements have been "across the board" but not significant enough to alter the overall outlook, said Brockmeijer. Some of the biggest improvement has come from emerging-market spreads, which he said is in part due to the recent announcement of plans to triple the IMF's resources, and to countries like Mexico, Poland and Colombia lining up for the new flexible credit line to backstop sound economies.

"Certain emerging-market spreads have come in quite considerably since these liquidity facilities have been announced," said Brockmeijer.

Despite some positive signs, the IMF stressed the need for banks to raise a significant amount of additional capital, estimating that U.S. and European firms would need $875 billion more equity just to return to pre-crisis levels. U.S. banks are nearly halfway there, but European institutions have raised just a third of the capital that may be needed to restore market confidence, the report said.

"The key takeaway is that higher write-downs, together with market demands for both lower leverage and more stringent capital ratios will require financial institutions to hold more capital - whether raised in markets or provided by governments," said Vinals.

When asked about reports that the U.S. may convert some of the preferred shares it owns in banks into common equity - which would cover most of the need for capital among local banks - Vinals said it is a possibility, but that it is up to the government to decide.

Temporary nationalization may also be necessary for a "limited subset of cases" around the world, just long enough to stabilize the situation, said Vinals. But he also welcomed the Obama administration's public-private investment program to provide incentives for the private sector to buy up toxic assets.

"This is something which is useful in order to make private capital come back into the banking system," he said. link...

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