IMF warns credit crunch will be long lasting with the worst yet to come

THE International Monetary Fund has warned that the credit crunch will be deep and long-lasting, with the worst yet to come.

The IMF believes the financial crisis is entering a dangerous new phase, with massive government budget deficits making it impossible for banks and companies to raise money.

This will particularly affect countries such as Australia that depend on international capital markets to finance the banking system.

The fund’s review of world financial stability released last night said nations relying on wholesale financial markets risked “more rapid, disorderly deleveraging” in which bank lending could be abruptly slashed.

The IMF believes the downturn will last for years, saying the weakness of lending in the US and Europe resembled that in Japan, where there was no growth for a decade.

The IMF believes the financial crisis will result in bad debts of $US4.1 trillion, ($5.7 trillion), of which $US2.8 trillion would hit the banks.

Only one-third of those losses have so far been recognised. In a damning assessment of the solvency of the world banking system, the IMF says:

“If banks were to bring forward to today loss provisions for the next two years before expected earnings, the

US and European banks in aggregate would have tangible equity close to zero.”

The IMF estimates the banks will have to raise at least $US875 billion in additional capital, and possibly as much as $US1.7 billion, if they are to resume lending.

However, raising funds is becoming increasingly difficult, despite some recent improvement in interbank markets.

article excerpts news.com.au