The International Monetary Fund (IMF) warned on Tuesday that losses in the U.S. financial sector could reach a total of $1.4 trillion, as the real estate market crisis, the main reason for the current turmoil, has yet to peak.
In its annual report on global financial stability, the IMF cautioned that the number of cases of mortgage loan defaults arising from the financial crisis is only set to reach its highest level, despite a record number of homeowners being unable to repay their loans over the past year. Banks will fail, and financial institutions will face an inevitable period of restructuring in their struggle to secure new capital needed to strengthen their balance sheets, the report further states. However, the IMF urged governments in the countries hardest hit by the crisis, primarily the U.S. and Europe, to take coordinated actions to curb market instability. It also calls for the establishment of legal frameworks to prevent future collapses and to provide necessary assistance to the surviving banks.
"What is needed at this moment is a decisive joint and systematic response from the international community to ensure the orderly functioning of the debt reduction process relative to capital," said Jaime Caruana, head of the IMF’s Monetary and Capital Markets Department. Such advice followed Tuesday’s agreement among EU finance ministers to increase the amount that states guarantee for bank deposits, from the current minimum level of €20,000 to at least €50,000. These measures were taken to alleviate consumer fears. The U.S. raised that ceiling to $250,000 last week, after previously guaranteeing deposits up to $100,000. The IMF also warned that developing economies will not be spared from financial crises in industrialized countries of the world. (H)
