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IMF Nightmare Forecast: Economic Crisis Creates $4 Trillion In Toxic Assets

05/09/2009 05:12 am ET | Updated May 25, 2011

The International Monetary Fund is set to release an updated report on the scale of toxic assets that are sitting on the balance sheets of financial institutions and banks worldwide. To characterize the IMF revised numbers as jaw dropping would be a severe understatement; the International Monetary Fund will indicate that toxic assets now amount to a staggering $4 trillion. If there are any doubts remaining as to the severity of the global economic crisis, this most current estimate of the rot eating away at the global financial architecture should set them aside.

It was only back in January that the IMF had estimated that toxic assets tied to the United States stood at $2.2 trillion, while NYU professor of economics Nouriel Roubini provided a more sobering analysis that placed a figure of $3.6 trillion regarding toxic garbage sitting on global balance sheets, half that figure being directly tied to U.S. financial institutions. The revised IMF numbers, in my view, tell us two things: 1. The erosion in asset values across the world is accelerating and 2. No one knows for certain how catastrophic this financial cancer is; the only certainty is its virulence.

As expected, the United States is the major component in the IMF scenario of horrors, being the source of three-quarters of the $4 trillion nightmare forecast. However, nearly a trillion dollars of bad assets are, according to the IMF report, tied to Europe and Asia. That latter figure is actually a portent of much worse news, as all the macro-economic indicators from Europe and Asia are deteriorating. The Eurozone is in deep recession, Eastern Europe is defaulting on massive debts and the banking sector in the U.K. is for all intents and purposes insolvent. The world's second largest economy, Japan, is in free fall collapse, with catastrophic contraction of its critical export trade. China's export market is shrinking, in the process shattering Asian economies on her periphery. The OECD (Organization for Economic Cooperation and Development) is projecting that the economies of its thirty member countries will collectively contract by 4.3%, while global trade is reduced by a savage rate of 13%. These numbers suggest that the fundamentals that have facilitated the erosion in global asset values will be even more destructive in the months ahead.

Placed in context, the IMF revised estimate on the meltdown in the global financial architecture is merely a pointer in a very dangerous direction, and not a final estimate on toxic assets. It is likely that the ultimate number goes beyond $4 trillion. How much worse can it get? A secret document leaked from the European Commission suggested that European banks alone hold up to $24 trillion in "troubled" assets. If one quarter of those assets are indeed toxic, it is not beyond the realm of possibility that the actual scope of financial toxicity on global balance sheets may be in the range of $8-9 trillion. However, even worse than any apocalyptic forecast is the realization that no one knows with certainty how massive the financial contagion really is. In the final analysis, it is the uncertainty being wrought by the global economic crisis that is most destructive to the world's financial system, even more than the appalling statistics, as frightening as they are in the abstract.