IMF: Credit crunch losses to hit $1trn

Global financial markets "continue to be fragile, and indicators of systemic risk remain elevated", according to the IMF's latest Global Financial Stability Report.

Even though the fund's economists recently revised their estimates for world growth slightly higher, the IMF warns deteriorating credit conditions for consumers and banks may prolong a period of sluggish growth.

The fund's downbeat review of financial prospects is driven by pessimism about the US housing slump. "At the moment, a bottom for the housing market is not visible. Stemming the decline in the US housing market is necessary for market stabilisation as this would help both households and financial institutions to recover.

"The growing concern is that, with delinquencies and foreclosures in the US housing market rising sharply, and house prices continuing to fall, loan deterioration is becoming more widespread."

Some $1trn (£502bn) in losses will be suffered by the banking system as a result of the sub-prime and wider mortgage crises, says the IMF. "Credit risks remain elevated" and the banks need to raise more capital.

Around $469bn of losses have been acknowledged by financial institutions since the credit crunch started almost a year ago; roughly $345bn of new capital has been raised. The IMF reported banks' balance sheets are under "renewed stress" and bank share prices have "fallen sharply", calling into question their ability to raise fresh equity funding.

The efforts by the world's central banks to inject liquidity into the financial system were praised by the IMF as they "succeeded in containing systemic risks."