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25th Jun 2022

Europe facing €900bn in writedowns, warns IMF

  • Recapitalising its banks has proved costly for the Irish government (Photo: EUobserver)

The International Monetary Fund has warned that governments must take decisive action to deal with deteriorating banking assets and that global writedowns for the financial crisis could total €3,170 billion ($4,100bn) by the end of 2010.

In its Global Financial Stability Report published on Tuesday (21 April), the multilateral lender predicts European writedowns will total over €900 billion as deteriorating economic activity leaves individuals and companies increasingly unable to pay back borrowings.

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Banks are expected to suffer roughly two-thirds of these losses, with other financial institutions such as hedge funds, pension funds and insurances companies also badly effected by the fall in global asset prices.

The report says US banks have taken more radical action in tackling the crisis, writing down about half of their anticipated losses compared to eurozone banks that have so far only written down about 17 percent.

"The current inability to attract private money suggests the crisis has deepened to the point where governments need to take bolder steps," says the report, adding that temporary bank nationalisations should be used where necessary.

Once banks have been stabilised the fund suggests: "A government should aim to ensure that banks can return to private ownership as expeditiously as possible."

Ireland, UK face expensive clean-up

The bill to help banks rebuild capital as a result of credit losses is likely to be expensive however, especially in the United States, United Kingdom and Ireland, says the IMF.

Of the 19 developed countries listed in the report, Ireland will have to pay the highest amount as a proportion of its economic output to stabilise its banks.

The western European island economy that has suffered a housing bubble in recent years will need €24 billion or 13.9 percent of its estimated GDP of €171 billion to deal with its banks, says the fund.

As a proportion of GDP, the UK bill will reach a slightly lower 13.4 percent, with the US coming third on 12.1 percent.

"The United States, United Kingdom and Ireland face some of the largest potential costs of financial stabilisation (12 to 13 percent of GDP) given the scale of mortgage defaults," said the biannual report.

Both the UK and Ireland have large financial sectors relative to the size of their economies.

The fund estimated that equity requirements for banks in the United States by the end of 2010 will be about €212 billion, compared to €290 billion for the euro area.

Meanwhile, new figures produced by the European statistics office, Eurostat, to be released on Wednesday will show the extent of government budget deficits in the EU.

Greece is expected to reach 4.8 percent of GDP for 2008, compared to previous figures released by Athens of 3.7 percent.

Numerous eurozone member states are set to breach rules underpinning the common currency area this year that allows a maximum budget deficit of 3 percent, highlighting the strain being placed on government coffers by the crisis.

Latvia's government said on Tuesday it will run a 7 percent budget deficit in 2009, even after large spending cuts are made. The IMF, which agreed a €7.5 billion lending package for the east European state last year, is pushing for a maximum 5 percent deficit.

Last week Spain's central bank governor Miguel Angel Fernandez Ordonez warned that the country's social security system could run into deficit within a year and urged the government to control public spending.

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