The International Monetary Fund continues to boost its estimate of asset writedowns due to gloomier than expected economic conditions.

In the latest version of the IMF’s Global Financial Stability Report released Tuesday, it says that its 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 to $US2.7 trillion from $US2.2 trillion in the January edition of the report, “largely as a result of the worsening base-case scenario for economic growth”.

Additionally, in this latest version of the report, the IMF’s estimates for writedowns have been extended to include other mature market-originated assets and, it suggests that this could push the writedown total to around $US4 trillion, about two-thirds of which would be incurred by banks.

Moreover, the IMF warns that failure to deal with these problems could exacerbate the global economic slowdown. “Without a thorough cleansing of banks’ balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalization, risks remain that banks’ problems will continue to exert downward pressure on economic activity,” it warns.

The report notes that, while there has been some improvement in interbank markets over the last few months, “funding strains persist and banks’ access to longer-term funding as maturities come due is diminished.”

It concludes that more must be done to save the financial system and the global economy. “Despite unprecedented official initiatives to stop the downward spiral in advanced economies — including massive amounts of fiscal support and an array of liquidity facilities — further determined policy action will be required to help restore confidence and to relieve the financial markets of the uncertainties that are undermining the prospects for an economic recovery,” it maintains.

To stabilize the banking system it says three things are needed: a more active role of supervisors in determining the viability of institutions and appropriate corrective actions; full and transparent disclosure of the impairment of banks’ balance sheets; and clarity by supervisors regarding the type of capital required and the time periods allotted to reach new required capital ratios.

“Even if policy actions are taken expeditiously and implemented as intended, the deleveraging process will be slow and painful, with the economic recovery likely to be protracted. The accompanying deleveraging and economic contraction are estimated to cause credit growth in the United States, United Kingdom, and euro area to contract and even turn negative in the near term and only recover after a number of years,” it warns.

IE