Monday, July 28, 2008

IMF Says End of U.S. Housing Slump `Not Visible' (Update1)

By Christopher Swann

July 28 (Bloomberg) -- The International Monetary Fund said there's no end in sight to the U.S. housing recession and warned that deteriorating credit conditions for consumers and banks may prolong a period of slow economic growth.

``At the moment, a bottom for the housing market is not visible,'' the IMF said in its Global Financial Stability Report, released today in Washington. ``Stemming the decline in the U.S. housing market is necessary for market stabilization as this would help both households and financial institutions to recover.''

The IMF, which a year ago failed to foresee the depth of the subprime mortgage collapse, stood by its April forecast for about $1 trillion in losses stemming from the U.S. mortgage crisis. While U.S. policy makers have helped contain the financial losses, ``credit risks remain elevated'' and banks need to raise more capital.

Worldwide asset writedowns and losses have totaled $469 billion in the past year and $345 billion has been raised.

The Washington-based lender in the report said the Federal Reserve's decisions to expand lending to Wall Street firms ``have succeeded in containing systemic risks.'' Still, weakness in housing threatens to extend the slump.

``The growing concern is that, with delinquencies and foreclosures in the U.S. housing market rising sharply, and house prices continuing to fall, loan deterioration is becoming more widespread,'' the IMF said.

`Few Signs'

Jaime Caruana, head of the IMF's capital market division, speaking to the press in Washington today, said housing data in the U.S. showed few signs of improvement. ``Some indicators continue to go south,'' he said. Improving affordability, he said, should at some point help the market recover.

Falling share prices are making it harder for banks to raise capital, increasing the risk of a downward spiral in the global economy, the IMF said. The outlook for banks may make investors reluctant to provide fresh funds needed to restore the strength of financial institutions, the fund said.

``As economic growth slows, banks will face continued headwinds in maintaining earnings due to falling credit quality, declining fee income, high funding costs, and exposures to monoline and mortgage insurers,'' Jaime Caruana, director of the IMF's monetary and capital markets unit, said in a statement.

Fannie, Freddie

The fund warned that the frailty of the financial system would be increased by the failure of Fannie Mae and Freddie Mac, the two largest sources of U.S. mortgage financing. Shares of both companies are down more than 80 percent in the past year.

The U.S. Congress two days ago passed legislation to stem foreclosures for 400,000 homeowners and aid Fannie Mae and Freddie Mac, its most sweeping effort to halt the biggest housing slump since the Depression. President George W. Bush may sign the bill into law this week.

IMF economists said that the global holdings of Fannie Mae and Freddie Mac debt meant that ``there would have been systemic consequences had confidence in the debt come into question.''

The report said oversight of Fannie Mae and Freddie Mac was too weak. ``Part of the problem stems from the current regulatory framework, which has allowed their balance sheets to expand to their current systemic significance,'' the fund said.

For central bankers, the risks of inflation as well as weaker growth are rising, the IMF said.

Inflation Quickens

On July 17 the IMF said inflation in developing and emerging countries would average 9.1 percent in 2008, up from a forecast of 7.4 percent in April. Their prediction for inflation in advanced economies for this year was raised to 3.4 percent, compared with a forecast of 2.6 percent in April.

``Policy trade-offs between inflation, growth and financial stability are becoming increasingly difficult,'' the fund said. ``With inflation risks on the rise, the scope for monetary policy to be supportive of financial stability has become more constrained.''

IMF economists said the duration of the turmoil in credit markets was testing the resilience of emerging markets, leaving investors wary of putting money in countries with rising inflation and large trade deficits.

``There are now clear signs that investors are becoming more cautious about adding to positions,'' the fund said. ``Outflows from emerging market equity funds have been concentrated on Asian markets where inflation and downside growth risks are most elevated.''

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