[OPE] IMF estimate of total write-downs

For the latest IMF estimate of capital losses in its Global Financial Stability Report, the FT has a story here (IMF puts financial losses at $4,100bn, Sarah O'Connor) http://www.ft.com/cms/s/0/68bd1602-2e72-11de-b7d3-00144feabdc0.html?nclick_check=1 but the FT story leaves important aspects out, so it's better to surf to the data in the report itself which is here: http://www.imf.org/external/pubs/ft/gfsr/2009/01/pdf/chap1.pdf (the whole report is here http://www.imf.org/external/pubs/ft/gfsr/2009/01/index.htm ).

Table 1.3 on page 28 shows the April 2009 Estimates of Financial Sector Potential Writedowns (2007-2010) as of April 2009 (In billions of U.S. dollars) distinguishing by type of loan and type of institutional investor. This begins to give some empirical indication of the debt structure in the Triad countries. For example,

Estimated total for all loans outstanding by banks, insurers and other fund managers (EU, US, Japan) = $40.8 trillion
Estimated total for all debt securities outstanding by banks, insurers and other fund managers = $16.9 trillion
Grand total for all loans and debt securities placements by banks, insurers and other fund managers = $57.7 trillion
Total consumer loans (not including residential mortgage) = about $7.6 trillion
Total corporate loans = $16.7 trillion

The estimated total write-downs (losses) are highest for the US ($2.7 trillion, two thirds), then Europe ($1.2 trillion or just under a third) and lowest for Japan ($149 billion or nearly 4% or so of the total). The total write-down is estimated at about $4 trillion. About 45% of that total is attributable to residential mortgages, the rest is other kinds of credit failures.

It could of course be the case that the total write-down will be revised upwards again, because new debt defaults expose a new round of dodgy financial deals that cannot be sustained.

You can easily figure out, that globally the total debt of consumers (persons) to financial institutions can only be about one-quarter of the total debt volume, all the rest of the debt is business-to-business debt (debt from one business to another). If you subtract the debts of people owning $1 million or more (the bourgeoisie proper), you would have to conclude the consumer debt of all ordinary wage and salary earners in the Triad is between a fifth and a sixth of the total debt volume. Of course the more capital you own, the more capital you can borrow (if only to reinvest the borrowed capital at a return higher than the cost of borrowing).

The executive summary of the IMF report comments:

"Though subject to a number of assumptions, our best estimate of writedowns on U.S.-originated assets to be suffered by all holders since the outbreak of the crisis until 2010 has increased from $2.2 trillion in the January 2009 Global Financial Stability Report (GFSR) Update to $2.7 trillion, largely as a result of the worsening base-case scenario for economic growth. In this GFSR, estimates for writedowns have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $4 trillion, about two-thirds of which would be incurred by banks. (...) In order to comprehend the order of magnitude of total capital needs of Western banking systems, we have made two sets of illustrative calculations that factor in potential further writedowns and revenues that these banks may experience in 2009-10. The calculations rely on several assumptions, some of which are quite uncertain, and so the capital needed by banks should be viewed as indicative of the severity of the problem. The first calculation assumes that leverage, measured as tangible common equity (TCE) over tangible assets (TA), returns to levels prevailing before the crisis (4 percent TCE/TA). Even to reach these levels, capital injections would need to be some $275 billion for U.S. banks, about $375 billion for euro area banks, about $125 billion for U.K. banks, and about $100 billion for banks in the rest of mature Europe. The second illustrative calculation assumes a return of leverage to levels of the mid-1990s (6 percent TCE/TA). This more demanding level raises the amount of capital to be injected to around $500 billion for U.S. banks, $725 billion for euro area banks, $250 billion for U.K. banks, and $225 billion for banks in the rest of mature Europe."

It boils down to the idea that to prop up the banks, the Triad government brokers jointly need to negotiate about $1 trillion of "insurance" into the banking system within the next few years. They can do that obviously, but an important financial consequence of that is that (1) the budgets of other government activities become additionally strained, (2) the taxpayer is liable for a large chunk of the repayment of the debt, even although banks could probably repay part of the state facilities over time, (3) in the longer term, there is a threat of price inflation that's difficult to control. The state taketh, and the state giveth away, but it looks like in future the state will be taking more, than giving out to citizens. In turn, that is likely to make the state less popular. In the 1970s, James O'Connor talked about "the fiscal crisis of the state" but proportionally the fiscal crisis is bigger now, and in turn that becomes a justification for imposing greater austerity on the working population. Yet, as I indicated, forcing down real incomes of households in the Triad, to reduce business costs, cannot have all that much real financial effect on the total debt situation, and indeed curbs final demand even more.

As I said before, I think what's different is that the present slump clearly cannot be blamed on the workers - but, equally, it can be said that rather few people and institutions actually profit from the slump, i.e. almost all strata of the population sustain significant losses. Hence the idea that we are all in the same boat anyway. But that is obviously not really true either.

Jurriaan

What have I done to deserve such a fate
I realize I have left it too late
And so it's true, pride comes before a fall
I'm telling you so that you won't lose all
I'm a loser
And I lost someone who's near to me
I'm a loser
And I'm not what I appear to be

- The Beatles, "I'm a loser"

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Received on Tue Apr 21 17:04:16 2009