Why the world’s banks are stuffed: Kohler

The IMF has grabbed the world’s central bankers and the business and political classes by the collar and slapped their faces, shouting: “…writedowns could reach a total of around $4 trillion, about two-thirds of which would be incurred by banks”.

It is understandable that politicians remain focused on employment and equity market investors on profit forecasts, but these are second tier issues this time.

This is not an employment downturn caused by a tightening of monetary policy to control inflation, or simply a sharemarket bust following a bubble, as in 1987. The IMF has reminded us this morning that it is a credit crisis caused by $US2.7 trillion in write-downs of US-originated assets.

This has led to a massive deleveraging process that is only about a third of the way through.

In addition, the “retrenchment from foreign markets is now outpacing the overall deleveraging process”, the IMF says, so that a sharp decline in cross-border funding has intensified the crisis in several emerging countries.

The IMF estimates the refinancing needs of emerging markets at $US1.8 trillion in 2009. Yet it also estimates that net private capital flows to emerging markets this year will be negative.

To some extent the IMF is talking its book, making the argument for more funding from its members. But it is painting a horrifying picture – more than $US2.5 trillion in additional write-downs by western banks and a funding deficit for emerging countries in this year alone of about $US2 trillion.

What’s more, governments are throwing the kitchen sink at their economies (it didn’t use that expression) to try to put a cap on unemployment, and that is likely to cause its own problems.

“There are continuing concerns about unintended distortions and whether the short-term stimulus costs, including open-ended bank support packages, will combine with longer-term pressures from aging populations to put strong upward pressure on government debt burdens in some advanced economies.”

The report might have been headed: “We’re not out of the woods yet, not by a long chalk”, with a sub-heading: “It’s all about the banks. They’re stuffed – fix them first.”

This article first appeared on Business Spectator