Thursday, 23 April 2009

The International Monetary Fund report pretends to tell us something we didn't already know (transcript)

With so much media coverage of the global financial crisis it would be hard not to understand that toxic debt is actually higher than originally anticipated, working capital is hard to find and, in the case of Australia, that the national economy was bound to go into recession this year, government revenue fall and unemployment deepen.

So the International Monetary Fund's April 2009 report on global financial stability does not report the unexpected:

The global financial system remains under severe stress as the crisis broadens to include households, corporations, and the banking sectors in both advanced and emerging market countries. Shrinking economic activity has put further pressure on banks' balance sheets as asset values continue to degrade, threatening their capital adequacy and further discouraging fresh lending. Thus, credit growth is slowing, and even turning negative, adding even more downward pressure on economic activity. Substantial private sector adjustment and public support packages are already being implemented and are contributing to some early signs ofstabilization. Even so, further decisive and effective policy actions and international coordination are needed to sustain this improvement, to restore public confidence in financial institutions, and to normalize conditions in markets. The key challenge is to break the downward spiral between the financial system and the global economy. Promising efforts are already under way for the redesign of the global financial system that should provide a more stable and resilient platform for sustained economic growth.To mend the financial sector, policies are needed to remove strains in funding markets forbanks and corporates, repair bank balance sheets, restore cross-border capital flows (particularly toemerging market countries); and limit the unintended side effects of the policies being implemented to combat the crisis. All these objectives will require strong political commitment under difficult circumstances and further enhancement of international cooperation. Such international commitment and determination to address the challenges posed by the crisis are growing, as displayed by the outcome of the G-20 summit in early April. Without a thorough cleansing of banks' balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalization, risks remain that banks' problems will continue to exert downward pressure on economic activity. Though subject to a number of assumptions, our best estimate of writedowns on U.S.-originated assets to be suffered by all holders since the outbreak of the crisis until 2010 has increased from $2.2 trillion in the January 2009 Global Financial StabilityReport (GFSR) Update to $2.7 trillion, largely as a result of the worsening base-case scenario for economic growth. In this GFSR, estimates for writedowns have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $4 trillion, about two thirds of which would be incurred by banks. There has been some improvement in interbank markets over the last few months, but funding strains persist and banks' access to longer-term funding as maturities come due is diminished. While in many jurisdictions banks can now issue government-guaranteed, longer-term debt, their funding gap remains large. As a result, many corporations are unable to obtain banksupplied working capital and some are having difficulty raising longer-term debt, except at much more elevated yields.

Global Financial Stability Report, April 2009 Summary Version and Statistical Appendix

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