IMF puts cost of credit crisis at $1 trillion!

WASHINGTON - April 8, 2008 - The financial sector faces potential losses of almost $1,000bn as a result of the credit crisis, the International Monetary Fund said on Tuesday, warning of further losses and write-downs on prime mortgages, commercial real estate, leveraged loans and consumer finance.

The IMF said total losses and write-downs would reach about $945bn, based on market prices in mid-March. Banks would suffer slightly more than half the total losses, with the rest falling on insurance companies, pension funds, hedge funds and other investors.

The IMF believes that banks have already taken most of the write-downs needed on U.S. subprime loans - with about $193bn taken already and only about $80bn to come. But it warned that as the US economy weakened, pain was spreading to other forms of lending.

“The deterioration in credit has moved up and across the credit spectrum,” Jaime Caruana, head of monetary affairs and capital markets at the Fund said.

The estimate is set out in a gloomy Global Financial Stability Report, which challenges the more optimistic tone in the markets since the rescue of Bear Stearns by the Federal Reserve and JP Morgan Chase. The report says “systemic risks have risen sharply” since October.

Mr. Caruana, a former governor of the Bank of Spain, told reporters that the Bear rescue “helped to reduce the possibility of a tail event in the financial system” - in other words, it made a truly catastrophic outcome less likely.

But he said “funding strains remain high and balance sheet pressures on financial institutions continue.”

Mr. Caruana said there had been a “collective failure to appreciate the extent of leverage in the financial system” and that balance sheet strains could limit banks’ capacity to lend.