Losses from the credit crisis are still mounting, the global economic downturn is still deepening, and still more is needed to pull the world out of recession ... The International Monetary Fund (IMF) dampens the hope of an early recovery for world economy with a reality check of the global financial system.

In its latest Global Financial Stability Report (GFSR) released on Tuesday, the agency said that the global financial system remains under severe stress as the crisis broadens to include households, corporations, and the banking sectors in both advanced and emerging market countries.

The IMF warns that shrinking economic activity has put further pressure on banks' balance sheets as asset values continue to degrade. The agency predicted that the world could suffer a total loss of around US$4 trillion since the outbreak of the crisis until 2010, about two-thirds of which would be incurred by banks.

The IMF also increased write-downs on US-originated assets from US$2.2 trillion in the January 2009 GFSR Update to US$2.7 trillion.

The IMF report came one day after the US stocks tumbled more than 3.5 percent after a six-week winning streak, as investors' fears of bank bad loans resurfaced. On Monday, Bank of America Corp. plunged 24 percent as rising charge-offs for bad loans overshadowed better-than-estimated earnings. Citigroup Inc. lost 19 percent after Goldman Sachs Group Inc. said the bank's credit losses are growing at a "rapid rate."

Bolder steps like temporary government ownership, as the IMF said in the report, might be required if private sector investors couldn't be motivated to help government prop up the financial industry.

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

The IMF stressed that policies aimed at the financial sector will be more effective if they are reinforced by appropriate fiscal and monetary policies. It said that stimulative policies are needed now, but careful attention must be paid to the degree of fiscal sustainability and implications for the government's funding needs in any stimulus package, particularly given the contingent risks to the government's balance sheet. And, in order to reopen credit and funding markets, use of unconventional central bank policies is encouraged when needed.

To address the key challenge of breaking the downward spiral between the financial system and the global economy, the IMF proposed short-term and long-term policy recommendations. In the short run, governments and central banks need to ensure the banking system's access to liquidity, identify and deal with impaired assets, and recapitalize weak but viable institutions and promptly resolve nonviable banks.

The IMF also warned that the sharp drop-off in capital flows from advanced to emerging markets could trigger "major negative spillovers" for the whole world. The agency projected annual cross-border portfolio outflows of around 1 percent of emerging market GDP over the next few years. And private capital flows to emerging markets could see net outflows in 2009, with slim chances of a recovery in 2010 and 2011.

The IMF urged policymakers in both advanced and emerging economies to continue developing a "more robust financial system for the long term."

"Since neither market discipline nor public oversight were sufficient to properly assess and contain the buildup of systemic risks," the report said, "improved financial regulation and supervision are key components to preventing future crises."

Five priority areas have been identified as key to regulatory reforms: extending the perimeter of regulation to cover all systemically important institutions and activities, preventing excessive leverage and reducing procyclicality, addressing market discipline and information gaps, improving cross-border and cross-functional regulation, and strengthening systemic liquidity management.

As a prelude to its Spring Meetings with the World Bank in Washington D.C. this weekend, IMF was scheduled to publish the GFSR on Tuesday and its latest World Economic Outlook report on Wednesday. Last month, the fund slashed its outlook for the world economy, projecting a negative growth of between 0.5 percent and 1percent in 2009, the first contraction in more than 50 years.

(Xinhua News Agency April 22, 2009)