Washington: The International Monetary Fund (IMF) said on Tuesday that losses stemming from the US mortgage crisis may reach $4 trillion and the global financial system "remains under severe stress".
The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year.
But the Washington-based lender said in its latest Global Financial Stability Report (GFSR) that its best estimate of write-down on US-originated assets (to be suffered by all holders) will be $2.7 trillion, "largely as a result of the worsening base-case scenario for economic growth".
"In this GFSR, estimates for write-downs have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest write-downs could reach a total of around $4 trillion, about two-thirds of which would be incurred by banks," said the IMF.
The IMF report followed a global plunge in stocks on Monday, when US stocks slid more than three per cent after a six-week winning streak, which was the longest for the S&P 500 since 2007 and led to the biggest gain over the period for the Dow Jones since 1938.
The report warned 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," the report said.
"Thus, credit growth is slowing, and even turning negative, adding even more downward pressure on economic activity," it said.
"Substantial private sector adjustment and public support packages are already being implemented and are contributing to some early signs of stabilisation."
The report called for decisive actions to restore confidence in the global financial system.
"Further decisive and effective policy actions and international coordination are needed to sustain this improvement, to restore public confidence in financial institutions, and to normalise conditions in markets," said the report.
The key challenge is to break the downward spiral between the financial system and the global economy, said the IMF, noting that 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"
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