KEY POINTS:
A year on and the global credit crisis shows no sign of ending, the International Monetary Fund said yesterday.
The crisis which originated from the US housing slump has triggered a "negative feedback loop" in the global economy and an end to the slump is "not visible", the
IMF said in an update of its April Global Financial Stability Report.
The IMF yesterday estimated that internationally, banks and financial institutions have now written off in excess of US$400 billion ($540 billion) in soured mortgage-related investments. Due to the slump in asset-backed securities and ongoing loan delinquencies, it saw "little reason" to change its April 3 estimate of US$945 billion ($1.3 trillion) for the total losses in the financial crisis.
In March, investment bank Goldman Sachs estimated global credit losses stemming from market turmoil would reach US$1.2 trillion, with Wall St companies bearing about US$460 billion of that total.
While losses in the US sub-prime and wider home mortgage market have been "largely acknowledged" the IMF said risk contagion had spread to other forms of credit. "Credit quality across many loan classes has begun to deteriorate with declining house prices and slowing economic growth," the 185-nation institution said.
Banks were under pressure to raise additional capital amid a sharp plunge in banking stocks, which had "increased the likelihood of a negative interaction between banking system adjustment and the real economy".
The New Zealand economy and the Australian banks which control over 90 per cent of the banking industry here have shown they are not immune to the global turmoil. This week New Zealand's largest bank, ANZ National, and its Australian parent revealed a sharp increase in costs for bad loans, blaming "the ongoing deterioration in the global credit environment and softening domestic economies in New Zealand and to a lesser extent in Australia". Just a few days before that, BNZ Bank's Australian parent National Australia Bank revealed A$830 million ($1072 million) worth of provisions or bad debt charges.
Just yesterday, investment bank Merrill Lynch said it would write down a further US$5.7 billion in addition to US$40 billion in previously announced writedowns, because of additional losses on the sale of mortgage securities and hedging contracts.
Merrill Lynch's disclosure fuelled a fresh wave of anxiety about the US financial sector which saw Wall Street's Dow Jones Industrial Average slip 2 per cent on Monday. That negative sentiment hit other markets too, with the already bruised banking sector dragging Australia's S&P/ASX200 index down 74.7 points to 4847.4.
On the New Zealand sharemarket, which has no financial stocks of significant size, the effect was more muted, with the NZX-50 closing 21.072 points lower at 3235.5.
Sharemarket losses aside, New Zealand's primary exposure to the crisis has been via the banking sector.
This country's large banks raise up to 30 per cent of the funds they lend to customers on overseas markets, where the crisis has seen the cost of funds rise considerably over recent months.
Although ASB Bank and ANZ National have cut key mortgage rates in the wake of last week's cut in the Official Cash Rate, ANZ National chief executive Graham Hodges this week reiterated recent comments that further increases in funding costs may yet be passed on to borrowers.
"One would hope that rates would either stay flat or potentially come down over time but you can't rule out any further increases."
Although Hodges said his bank had not been rationing credit, a number of finance companies exposed to the property development sector have spoken of a lack of refinancing options even for completed projects that has affected borrowers' ability to repay loans, ultimately contributing to the latest round of failures.
LOSING OUT
* The IMF yesterday estimated the credit crunch has now cost banks and financial institutions more than US$400 billion in write offs and it sees no end in sight.
* It is sticking to its April estimate of US$945 billion in "total market-to-market losses" in the financial crisis.
* In March, investment bank Goldman Sachs estimated global credit losses stemming from market turmoil would reach US$1.2 trillion, with Wall St companies bearing about US$460 billion of that total.
- AGENCIES