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WASHINGTON: The International Monetary Fund urged central banks on Tuesday to collectively throw life lines to the global banking system sinking in financial turmoil, saying 675 billion dollars was needed over the next several years.
Loan defaults in the United States, the epicentre of the financial crisis, are still rising and declared losses are expected to reach 1.4 trillion dollars, the IMF said said in its latest Global Financial Stability Report (GFSR).
That was substantially higher than the 945 billion dollars estimated in the April GFSR, which at the time was criticised by some economists as excessively high.
Dominique Strauss-Kahn, the head of the IMF, called for urgent action to confront the worst financial crisis since the 1930s Great Depression and a crisis of confidence that has made even banks afraid to lend to each other.
"The time for piecemeal solutions is over. I therefore call on policymakers to urgently address the crisis at a national level with comprehensive measures to restore confidence in the financial sector," Strauss-Kahn said in a statement.
The IMF managing director underscored that "national governments must closely coordinate these efforts to bring about a return to stability in the international financial system."
The report was published ahead of the annual meetings of the IMF and World Bank this weekend, when world leaders and private financiers gather in Washington to discuss the global economy and poverty.
"With financial markets worldwide facing growing turmoil, internationally coherent and decisive policy measures will be required to restore confidence in the global financial system," the IMF said as markets worldwide quaked under a near-collapse of the credit flows that are the lifeblood of the global economy.
"Failure to do so could usher in a period in which the ongoing de-leveraging process becomes increasingly disorderly and costly for the real economy," it warned.
The IMF cautioned that central bank lending facilities aimed at restoring the functioning of interbank markets should provide incentives for market participants to start dealing among themselves "and thus to allow for an orderly exit by the central bank once more extreme strains have eased."
Even if re-capitalisation plans were government-led, they should ensure that incentives remain for private sector capital-raising, including from existing shareholders, it said.
"To keep private sector credit growing, even modestly, while strengthening bank capital ratios, the GFSR estimates some 675 billion dollars in capital would be needed by the major global banks over the next several years," the IMF said in the report.
"The global financial system has entered a new phase of the crisis, where the threat to solvency of some institutions has led to persistent, widespread counterparty risk concerns and required the commitment of public resources to contain systemic risks and the economic fallout," it said.
The GFSR's release coincided with a US Federal Reserve announcement of plans to buy commercial paper, mainly short-term loans, from private firms in an emergency bid to unblock short-term corporate lending amid the current global credit crunch.
To raise the estimated 675 billion dollars of additional capital needed to keep credit growing, the IMF suggested that authorities may need to inject capital into viable institutions.
"While there are many ways to accomplish this, it is preferable that the scheme provide some upside for the taxpayer, coupled with incentives for existing and new private shareholders to provide new capital.
"Though politically difficult, orderly resolution of nonviable banks would demonstrate a commitment to a competitive and well-capitalised banking system," the IMF said.
"With capital markets at present almost shut, governments will likely, in some cases, need to be involved in re-capitalisation of financial institutions where they are viable and important to the financial system," it said.
Under "extreme circumstances," deposit insurance of individual retail accounts could be expanded beyond normal limits and, if conditions deteriorated further, a blanket guarantee could be undertaken as a temporary, emergency measure, "best undertaken in a coordinated fashion across countries." - AFP/de
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