IMF Boosts Estimate of Bank Selloffs to $4.5 Trillion

Failure to implement central supervision could force asset shrinkage

The International Monetary Fund (IMF) said that if political leaders fail to quell the fiscal crisis, either by missing a deadline for setting up a single supervisory system or by not tightening fiscal policy sufficiently, it foresees European banks having to sell up to $4.5 trillion in assets through 2013.

Bloomberg reported late Tuesday that the IMF increased its estimate of how much banks may have to shrink their assets by 18% from what it anticipated last April. If the 58 European Union (EU) banks have to trim that much, the IMF said, credit would be harmed, and 2013 growth would fall by 4% in the peripheral countries of Cyprus, Greece, Ireland, Italy, Portugal and Spain.

“Intensification of the crisis has manifested itself in capital outflows from the periphery to the core at a pace typically associated with currency crises or sudden stops,” the IMF wrote in its Global Financial Stability Report. “Restoring confidence among private investors is paramount for the stabilization of the euro area.”

The day before, it had cut global growth predictions, as reported by AdvisorOne. Jose Vinals, director of the IMF’s monetary and capital markets department, said in prepared remarks for a Tokyo press conference that the European Stability Mechanism (ESM) and the ECB bond buying program “must be regarded by markets as real, not ‘virtual’ and should be coupled with credible conditionality.”

Back in April, the IMF had anticipated asset sales of $3.8 trillion in a “weak policies scenario.” However, in the months since, failure of policymakers to make decisions that would actually resolve the crisis resulted in greater pressure on funding; at the same time, the benefits of the European Central Bank’s (ECB) unlimited three-year loan program dissipated.

Looking at a baseline scenario that assumes governments keep pledges already made, the IMF has said that bank assets will fall by $2.8 trillion. In April that figure was $2.6 trillion. The IMF also said that “both Spain and Italy have suffered large-scale capital outflows” in the 12 months through June; Spain has seen an outflow of $296 billion and Italy $235 billion.

“Unless confidence in the euro area is restored, fragmentation forces are likely to intensify bank deleveraging, restrict lending, add to the economic woes of the periphery, and spill over to the core,” the IMF said in its report.

Reprints Discuss this story
This is where the comments go.