Jose Vinals, Director IMF Monetary and Capital Markets Department. - Re
Retrenchment of capital flows and increased expected bank write-downs have raised the need for fresh capital in emerging markets that have relied on foreign-financed credit growth, says Viñals. - Reuters photo

WASHINGTON The International Monetary Fund said on Tuesday that the total amount of bad debt in the global financial system had risen to more than $4 trillion — the highest level since the Great Depression.

While the financial crisis originated largely with bad debts from the sub prime mortgage bubble in the US, the pool of bad assets has been augmented by a surge in troubled loans in Europe and Japan stemming from a string of corporate failures and depressed housing and commercial real estate markets.

The Fund's Global Financial Stability Report warned that global lending might not fully recover until 2011. While lending had bounced back somewhat in recent months, the credit crunch continued to make it harder and more expensive for businesses around the world to obtain financing, the report said. The credit crunch was particularly pronounced and worrying in the developing world.

The report noted with concern that taxpayers in many nations were growing weary of bailout efforts at a time when more might be needed for a sustained global recovery.

'The political support for such action is waning as the public is becoming disillusioned by what it perceives as abuses of taxpayer funds in some headline cases,' the report said.

'There is a real risk that governments will be reluctant to allocate enough resources to solve the problem.'

But the IMF pointed out that an unprecedented policy response to the global economic crisis — including the recent expansion of resources for international institutions and the IMF's enhanced lending framework — was 'gradually beginning to restore market confidence.'

However, continued decisive and effective action was needed to preserve and strengthen these first signs of improvement, and to help provide a more stable and resilient platform for sustained global growth, said José Viñals, Financial Counselor and Director of the IMF's Monetary and Capital Markets Department.

In particular, emerging market risks had risen the most in the past six months, the report said.

'The retrenchment of capital flows is straining economies that have relied on foreign-financed credit growth, while the deteriorating economic environment has increased expected bank write-downs and raised the need for fresh capital in emerging market banks,' Viñals told reporters.

The Fund also raised its estimate of the cost of the global financial crisis to more than $4 trillion in write-downs on soured credit. The estimate covers the period from the beginning of the financial crisis in mid-2007 to 2010.

The total estimated cost of $4.054 trillion includes $2.712 trillion in losses in US-originated assets. European losses were estimated at $1.193 trillion and Japanese losses at $149 billion.

This cost represents what is needed and will be needed by financial institutions because of the deterioration in credit, in particular in the plunge in the value of equities backing credit, such as mortgage loans.

The report suggested that the financial crisis would take longer to run its course in Europe, and could ultimately prove more costly for Europeans to fix - potentially meaning governments there might have to spend tens of billions more in bank bailouts.

The delayed response, officials note, is tied to the fact that the crisis started in the United States, giving US financial institutions more time to identify and deal with the scope of the problem.

The report noted that US banks had already written off about half the estimated $1.1 trillion worth of bad loans and toxic assets. European banks had moved much slower, so far writing down less than 25 per cent of the $1.4 billion worth of bad debts on their books.

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