IMF Predicts $1 Trillion in Credit Crisis Losses

The total losses from the worldwide financial crisis affecting credit markets could reach nearly $1 trillion over the next two years, the International Monetary Fund said on Tuesday.

The Washington-based organization said housing prices and rising delinquencies on mortgage payments could lead total losses of $565 billion. Adding other loans and securities tied to commercial real estate, consumer credit and corporations, the total reaches about $945 billion.

The events of the past six months have demonstrated the fragility of the global financial system and raised fundamental questions about the effectiveness of the response by private and public sector institutions, the IMF said.

Combined with losses to non-bank financial institutions including monocline bond insurers there is also the possibility for additional reverberations back to the banking system. Risks remain elevated it said.

The IMF estimate for mortgage-related losses is on the high end of some previous predictions from Wall Street economists which have predicted losses between $400 billion and $600 billion.

These estimates, while based on imprecise information about exposures and valuation, suggest potential added stress on bank capital and further writedowns, the report stated.

While the U.S. remains the epicenter of the problem, financial institutions in other countries have been affected, especially industrialized nations which have also seen inflated house price levels.

Emerging markets have been resilient but some are vulnerable especially those who depended on external funding for growth.

Some financial institutions have already found investors willing to inject funds to strengthen shaky balance sheets. Among the largest recipients have been Citigroup, which has secured about $40 billion in capital since the crisis began. Other major banks include Merrill Lynch and Credit Suisse.

The IMF foresees the need for additional funding.

Equity inflows have already been forthcoming from various investors, including sovereign wealth funds, but more equity infusions will likely be needed to help recapitalize institutions, the report stated.