Thread: Economy: IMF sees no sign of recovery as credit crunch landm

Economy: IMF sees no sign of recovery as credit crunch landmark looms· Inflation and recession risks pile on the pressure

· Treasury report set to snub idea of a UK Fannie Mae

Kathryn Hopkins The Guardian,
Tuesday July 29 2008

Global financial markets remain fragile and the danger of an economic fallout has increased a year after the credit crunch began, the International Monetary Fund said yesterday.

The IMF's latest global financial stability report said world markets are still under strain from the US housing crisis while the twin risks of rising inflationary pressures and the prospect of recession are making life tough for central bankers as regards setting monetary policy.

Its downbeat assessment came as the Treasury prepared to launch a report by Sir James Crosby, the former chief executive of HBOS, into ways of reviving Britain's mortgage market. It emerged last night that he will reject the idea of creating a UK version of Fannie Mae, the government-backed body that underwrites a large chunk of US home loans.

"Much has been said about the case for launching a US-style agency but it seems unlikely that it would be right to tackle this century's problems with last century's solution, particularly given the time it would take to create any such agency," Crosby is expected to say. But with the IMF highlighting the weakness of the UK mortgage market, the report will suggest the Treasury be willing to swap the mortgage debt of banks for government gilts.

"Global financial markets continue to be fragile and indicators of systemic risk remain elevated," the IMF said. "With inflation risks on the rise, the scope for monetary policy to be supportive of financial stability has become more constrained."

Jaime Caruana, director of the IMF's monetary and capital markets division, said: "A bottom for the housing market is not visible. We consider this market is still at the centre of this turmoil and some of the valuations still depend on where this market finds a bottom."

House prices are softening in the UK, Ireland and Spain, the report said, which could cause losses in mortgages, construction and commercial property. The Fund stands by its estimate in April that losses in US assets due to fallout from the sub-prime crisis could reach $1tn. "We think this figure is probably right," Caruana said.

The report said banks have acknowledged these risks and written off some $400bn of assets. But it points out they have only been able to raise new capital to cover about two-thirds of those losses, so the likelihood is they will have to further tighten lending conditions.

"As economies slow, credit deterioration is widening and deepening, and as banks deleverage and rebuild capital, lending is beginning to be squeezed, restricting household spending and clouding the outlook for the real economy," Caruana said.

The IMF called for "a clear and permanent solution" to deal with problems and oversight lapses of US mortgage lenders, including Fannie Mae and Freddie Mac, saved from bankruptcy last week.

"The steps taken by central banks to extend the maturity and the range of collateral and counterparties have succeeded in containing systemic risks. In the context of the deleveraging process and uncertainty about asset valuations, credit risks remain elevated, indicating that further raising of capital may be needed in a number of financial institutions," it said.

The IMF also said emerging markets, resilient in the credit crisis, face problems as external funding conditions tighten.

Caruana said it was important that emerging markets deal with inflation. "If they don't do it promptly they will have to do it later, and perhaps more intensely later, but also we think financial markets will discriminate among those countries that do not take proper measures."

David Kern, economic adviser to the British Chambers of Commerce, said the report "confirms the growing pressures on the international banking system could hit businesses, with dire consequences for jobs". Falling house prices could weaken banks' balance sheets, which may bring a "dangerous cutback" in lending.

"If this happens, individuals as well as businesses would be hit, and what is now a very unpleasant slowdown could degenerate into a nasty recession," he said.

http://www.guardian.co.uk/business/2008 ... editcrunch

Wish these Brits and others would quit speaking the truth, because we don't deal well with that in our Goldilocks economy. We seem to prefer the hot-air puffed balloons of very careful language.