The global credit crunch shows no signs of abating, according to the International Monetary Fund (IMF). In its latest global financial stability report, the IMF says that falling house prices and slowing economic growth are hitting credit. It warns that banks are under renewed stress, and further cutbacks in bank lending could deepen the slowdown. The IMF also says that emerging markets like China may also suffer more pain in the future from the credit crunch.
Gloomy reading The report makes for gloomy reading nearly one year after global financial markets froze in August 2007
n April, the IMF said that banks and other financial institutions could lose $1 trillion (£503bn) from the credit crisis as mortgage-backed assets lost most of their value – and it is still sticking to that estimate.
The current report says that that the banks have now acknowledged these risks and written off nearly $500bn worth of assets.
But it points out that they have only been able to raise new capital to cover about two-thirds of those losses, so the likelihood is that they will have to restrict their lending further.
The IMF warns that “as banks seek to deleverage and economise on capital, assets are being sold and lending conditions tightened, resulting in slower credit growth in the US and the euro area.”
In the US, private sector borrowing has dropped to the lowest level since the 2001 recession. And there is now less scope for central banks to cut interest rates to boost economic growth because of the higher risk of inflation.
The IMF also warns that credit risks in the US are spreading from sub-prime lending to other types of mortgages and to all other major credit categories, such as car loans and credit card loans
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