IMF sees no end in sight to credit crisis

On Monday, July 28th 2008, one year after the Subprime crash in the US, the International Monetary fund issued a Bleak assessment of the global credit crisis. In its Global Financial Stability Report Market Update, the Fund warned that:

• "Banks under renewed stress, making raising capital hard"
• "Increased likelihood of spillovers into real economy "
• "Resilience of emerging markets now being tested"

"Credit quality across many loan classes has begun to deteriorate with declining house prices and slowing economic growth. Although banks have succeeded in raising additional capital, balance sheets are under renewed stress and bank equity prices have fallen sharply".

Further comments from the Bank appear to indicate that measures taken by banks so far to raise equity might not only be insufficient, but actually lead to negative consequences in the longer term. According to IMF Sources, "The Update notes that banks have been fairly successful in raising equity so far, amounting to about three-fourths of the writedowns to date.... However, the renewed stress has made raising additional capital more difficult and increased the likelihood of a negative interaction between banking system adjustment and the real economy".

We have already bee experiencing a growing de-coupling of financial instruments from consumer behaviours, and the Fund predicts that governments and central banks are going to find it increasingly difficult to strike a balance between inflation, growth and financial stability.

The report predicts a further weakening of the US housing market, and also sees a weakness in a number of European countries.

Overall, it expects global economic growth to drop 20% from 5% in 2007 to 4.1% in 2008, with only 3% growth predicted in 2009. By Q1 2009, I expected that 2008 numbers will have been revised downwards to about 3.8%. This is based on historical prediction trends, where growth forecasts in a slowing economy always turn out to be lower than the estimates six months earlier.