Britain faces biggest losses as crunch costs spiral, IMF warns

Fund raises estimate of financial crisis losses to $4.1 trillion

Nick Clark
Wednesday 22 April 2009 00:00

The UK's banking bailout could cost more than any other financial rescue scheme in the world, figures from the International Monetary Fund revealed yesterday, as the lender raised its estimate of the total global cost of the credit crunch to $4.1 trillion (£2.8 trillion).

The IMF said the cost to the UK of financial stabilisation could be as much as 13.4 per cent of GDP, the highest of any advanced nation except Ireland, although analysts pointed out that this was the "worst-case scenario". That would be the equivalent of £200bn, or £3,000 for every man, woman and child in the country.

The IMF figures were seized upon by the Conservatives, who pointed out that official government estimates of taxpayers' losses from the banking sector are likely to come in at around £60bn. The shadow Chancellor, George Osborne, condemned what he called "the potentially massive cost of Gordon Brown's utter failure to regulate the banking system".

However, a Treasury spokesman said the IMF forecast was very high, and did not take the consequences of the Government's actions into account. He added that today's Budget would "make a prudent provision for potential losses".

The IMF, which does not expect a speedy recovery for the world economy, made the bearish predictions in its "Global Financial Stability Report", published yesterday.

Should global writedowns hit $4.1 trillion, as the IMF expects, it would mark a staggering further slump over the next 18 months, according to analysts, who pointed out that, in the current meltdown so far, financial institutions have written off only $1.3 trillion. The IMF called for a "thorough cleansing of banks' balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalisation".

The half-yearly report from the IMF is closely studied by markets, and will be discussed by the Group of Seven and Group of 20 economies on Friday.

Peter Dixon, an economist at Commerzbank, said: "This is a bleak number and there is clearly still some way to go, and the banks face much more pain." He added, however: "This number is the worst-case scenario."

The IMF said yesterday that the global financial system "remains under severe stress as the crisis broadens to include households, corporation and the banking sectors in both advanced and emerging market countries".

Of the estimated $4.1 trillion losses for the global financial sector, about two-thirds will be incurred by banks, the IMF said. The rest will come from groups including pension funds, insurers and hedge funds.

It added that the losses taken over the course of the credit cycle were likely to be higher because exposure to equities and derivative positions were hard to value. "In addition, global banks are expected to take an additional $340bn of writedowns on exposure to emerging market assets," it said.

While the majority of the investments are in US instruments, Europe, excluding the UK, is expected to suffer the worst writedowns at $1.11 trillion. This compares with $1.05 trillion in the US. Mr Dixon said the prediction was hugely worrying for European banks as those across the Atlantic had already written down at least twice the value of assets. The UK is estimated to take a writedown of $316bn.

The IMF raised its predicted writedowns for US-originated assets by next year from $2.2 trillion in an update in January to $2.7 trillion yesterday, saying it was "largely as a result of the worsening base case scenario for economic growth". In October, the IMF estimate stood at $1.4 trillion.

The fund said the crucial challenge was to break the downward spiral between the financial system and the global economy.

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