Global debt writedowns may reach $4.1 trillion

Global write-downs of toxic debt among banks and other financial institutions in the United States, Europe and Japan could reach $4.1 trillion, the International Monetary Fund said on Tuesday.

The IMF, in its Global Financial Stability Report, said U.S. institutions were about halfway through their needed writedowns, with their euro area counterparts lagging. The report for the first time included estimates of credit losses on debt originated in Japan and Europe.

The report said banks needed more capital to weather the expected write-downs and to restore investor confidence in the financial system.

Banks worldwide have so far raised about $900 billion in capital, about half of it through government rescue loans.

The IMF also said it now expects the deterioration in U.S.-originated assets to reach $2.7 trillion, substantially more than the $2.2. trillion it forecast in January. The sharp increase reflects losses mainly between October and January.

Globally, banks will face the bulk of the write-downs. The IMF estimated write-downs for loans and securities held by banks could be about $2.8 trillion, and that about one-third has already been written down.

According to the Fund, U.S. banks have written down about $510 billion in assets with further write-downs of $550 billion expected over the next two years.

In the euro area, write-downs so far have totaled $154 billion, with another $750 billion in write-downs expected through 2010. In Britain, bank credit losses have been $110 billion, with another $200 billion in write-downs likely in 2009-10, the IMF said.

The IMF estimated potential write-downs by Western banks through their subsidiaries and cross-border holdings of securities in emerging markets could amount to $340 billion.

Since the start of the crisis, market capitalization of global banks has more than halved to $1.6 trillion from $3.6 trillion.

Using different scenarios, the IMF estimated banks could need additional capital of between $275 billion to $500 billion in the United States, about $125 billion to $250 billion in Britain, and about $375 billion to $725 billion in the euro area.

The IMF noted the size of total credit losses could be lower if forceful and well-targeted actions are taken.

It said banks in the United States, euro area and Britain were expected to post losses between 2008-10 before they return to modest levels of profit.

Financial institutions are likely to face losses for a period that would be broadly consistent with the time it took banks to recover during the Great Depression and in Sweden in the early 1990s, the IMF said. However, it said current write-downs are likely to be more severe than during those crises.