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IMF: Worldâ€™s financial system is on the â€œroad to recoveryâ€

30 September 2009 15:35 (UTC +04:00)

Baku â€“ APA. The International Monetary Fund has declared for the first time that the worldâ€™s financial system is now on the â€œroad to recoveryâ€, cutting its estimate of the amount of wealth likely to be destroyed by the crisis, The Telegraph reported.
In what many will take as a convincing signal that the worst has now passed, the Fund used its closely-watched Global Financial Stability Report to reduce its estimate of losses derived from the financial crisis from $4 trillion ($4,000bn) to $3.4 trillion.
It said the improvement was due largely to the sharp increases in asset and equity prices around the world over the past six months. However, it said that losses facing banks specifically, as opposed to the broader financial system, remained unchanged at $2.8 trillion, of which more than half is still to be recognised.
Given that the IMF has been among the most pessimistic of all the major international institutions both on the state of the economy and the financial system, the news is likely to come as a welcome relief to markets. However, the Fund maintained that in spite of this, banks around the world still need to shore up their balance sheets significantly to ensure their health in the coming years.
The report said: â€œSystemic risks have been substantially reduced following unprecedented policy actions and nascent signs of improvement in the real economy. We appear now to be embarking on the road to recovery.
â€œCredit, however, remains strained, while household and financial sector balance sheet pressures and ongoing market dysfunctions remain drags on the recovery. This underscores the need for adopted policies to be more fully implemented, while others need to be fine-tuned or extended to ensure that confidence is restored further and credit channels are reopened.â€
Since the onset of the crisis in mid 2007, banks have written down $1.3 trillion worth of loans and securities which were effectively proved worthless in the wake of the sub-prime and securitisation bubbleâ€™s implosion, the report said. However, significantly, this is less than half of the total which it estimates will eventually need to be written off, with a further $1.5 trillion of â€œactual and potential writedownsâ€ yet to be recognised between now and the end of next year.
According to the GFSR, produced to mark the effective start of the IMFâ€™s annual summit in Istanbul today, the problem is particularly acute for the UK and euro area banks, which have been slower than the United States in tackling the rot in their banking systems.
The report showed that while the US banks have recognised around 60pc of their anticipated writedowns, euro area and UK banks have recognized only 40pc.