Credit crisis losses could reach $1 trillion – IMF

Economic growth, Financial Events, Leverage

Last week the IMF warned there was a 25% chance of a global recession in 2008. Today, it said that the ‘crisis (was) creating serious macroeconomic feedback effects’ and could have ‘profound financial system and macroeconomic implications’.

We normally expect central bankers to weigh their words carefully. But now the IMF has decided to throw caution to the winds in an effort to get its core message across as clearly as possible. Challenging those who believe the crisis is already history, it emphasised that:‘This feedback dynamic is potentially more severe than in earlier credit cycles, as it was fuelled by a proliferation of new credit products that allowed more people to obtain credit. Thus, it is now clear that the current turmoil is more than simply a liquidity event, reflecting deep-seated balance sheet fragilities, which means its effects are likely to be broader, deeper, and more protracted,” it added.

It is also clear about the spread of the problem. It comments that ‘even though the United States remains at the “epicenter,” financial institutions in other countries have also been affected by the current market crisis—reflecting the same overly benign global financial conditions, an inattention to appropriate risk management systems, and lapses in prudential supervision’.

These are powerful statements from a leading central bank. And given the chemical industry’s dependence on housing markets, the Fund’s views on the outlook for housing are particularly worrying – not least because they come as it was reported that UK prices had fallen 2.5% last month.

The Fund says that ‘countries in which house prices have been more inflated or corporate or household balance sheets have been more stretched are particularly at risk’. It therefore calls on governments to prepare ‘contingency plans for dealing with large stocks of impaired assets’. And it warns that losses from the crisis, originally estimated at a ‘mere $100bn’ could now reach at least $1 trillion.

If the IMF feels contingency planning is in order, then clearly it might be wise for chemical companies to follow its advice and develop contingency plans in case a global slowdown impacts their sales and profits.


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