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IMF Global Financial Stability Report Puts Financial Losses At $4.1 Trillion

MARTIN CRUTSINGER   04/21/09 06:13 PM ET   AP

Imf Report

WASHINGTON — Losses at financial institutions could approach $4.1 trillion worldwide, the International Monetary Fund said Tuesday as it urged countries to take bolder action to bolster banks or risk an even deeper recession.

More capital is needed to cushion against further losses, the IMF's Global Financial Stability Report concluded: An estimated $275 billion in capital for U.S. banks and $600 billion more for European banks.

The report and an updated economic forecast due Wednesday will form the basis for three days of meetings set to begin Friday among finance officials from the world's richest countries and major developing countries. The talks are being held as part of the spring meetings of the IMF and its sister lending institution, the World Bank.

Those talks will seek to flesh out the commitments made at a G-20 leaders summit in London last month. At that meeting, President Barack Obama and the other leaders pledged to boost financial support for the IMF and other international lending institutions by $1.1 trillion.

Obama wrote to congressional leaders this week asking them to support the pledges he made on behalf of the U.S at the G-20 summit on April 2. Those included a tenfold boost in U.S. commitments to an emergency IMF loan fund to $100 billion and U.S. support for changes in how the agency is governed to increase the voting power of emerging developing countries such as China, Brazil and India.

IMF Managing Director Dominique Strauss-Kahn has sought to revamp the agency's lending programs to make them more flexible. The IMF has created a new line of credit that it's willing to extend to countries with solid economic track records without the tough restrictions of normal IMF loan programs. So far, Mexico, Poland and Colombia have petitioned for funds under the new lending program.

The 185-nation IMF, headquartered in Washington, is the globe's economic rescue squad, providing emergency loans to countries facing financial troubles.

The IMF came under severe criticism a decade ago, during the 1997-98 Asian currency crisis, for the types of stringent reforms it imposed on countries receiving IMF assistance.

The agency has shown greater flexibility in the loans it has extended for countries caught up in the current crisis, including those made to the formerly communist Eastern European countries of Hungary, Latvia, Ukraine, Serbia and Romania.

Its latest conclusions were blunt.

"The current inability to attract private money suggests that the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injection in the form of common shares, even if it means taking majority, or even complete control of institutions," the IMF said.

In the current crisis, the IMF is trying to prod rich nations to take the right steps to deal with the banking crisis while seeking additional support to help developing countries. It also is trying to make reforms long sought by developing nations to give them a greater voice in how the agency operates.

"There is no disagreement on the general goals that the IMF should have more resources, and countries such as China should have more of a say in how the agency operates," said Sung Won Sohn, an economics professor at the Smith School of Business at California State University. "But behind the scenes, there will be a lot of arguments because no one wants to give up the power they now have."

The Obama administration has said it's considering converting some of the $200 billion in loans it has made to banks from the $700 billion bailout fund into purchases of common stock to bolster their capital reserves. That could greatly increase the government's ownership stakes in U.S. financial institutions.

A final decision on using this approach is expected to come when results of "stress tests" on the 19 biggest U.S. banks are announced May 4.

Some economists worry that without stringent IMF programs, countries will not make the tough choices needed to trigger an economic rebound. But most believe the new flexibility is a welcome change from past approaches.

The IMF estimated that total losses on loans and securities originating in the United States at $2.7 trillion from 2007 to 2010. That's up from a January estimate of $2.2 trillion and nearly double the $1.4 trillion in losses the IMF estimated just six months ago.

For the first time, the IMF sought to estimate worldwide losses from the financial crisis: It put that figure at nearly $4.1 trillion between 2007 and 2010.

Besides debates over rearranging the governing structure of the lending institutions, the weekend talks are expected to focus on reforms that should be made in how the IMF carries out its duties.

But many economists said meeting all the pledges made by the G-20 for additional money or overhauling the IMF's governing structure likely will remain unresolved.

"You may see some more specifics in the area of financial support, but exactly where all of the money mentioned at the London summit will come from has not yet been made clear," said Michael Mussa, former chief economist at the IMF and now a senior fellow at the Peterson Institute, a Washington think tank.

Some member nations want to give the IMF greater powers as a global economic watchdog. They argue that if the agency had played a greater monitoring role, some of the financial market excesses that led to the current crisis could have been avoided.

But any move to increase the IMF's oversight is likely to meet stiff resistance among countries like China whose officials have objected to IMF lectures on its undervalued currency.

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Filed by Nick Graham  |