IMF: It's Worse Than It Looks

The International Monetary Fund on Tuesday increased its estimate of global losses from the financial meltdown to $1.4 trillion and warned that the world's economic downturn was deepening.

"Declared losses on U.S. loans and securitized assets are likely to increase further to about $1.4 trillion," the IMF said, increasing the loss estimate from $945 billion in April and slightly up from $1.3 trillion it cited last month.

In its quarterly assessment of global capital markets, the IMF said global economic activity is slowing down as growth in advanced economies decelerates and emerging economies start to lose momentum.

"Despite better-than-expected performance early this year, rising financial turmoil has led to a downgrade in the IMF's baseline forecast for global economic growth in 2008-09," it said.

The IMF called for "internationally coherent and decisive policy measures" to restore confidence and to avert a more protracted economic slowdown, but warned that central banks would need to continue injecting cash to calm the unprecedented turmoil.

"The risk of a more severe adverse feedback loop between the financial system and the broader economy represents a critical threat," the IMF said.

"The combination of mounting losses, falling asset prices, and a deepening economic downturn has caused serious doubts about the viability of a widening swath of the financial system," it added.

It estimated that major global banks will need about $675 billion in capital over the next several years.

The IMF warned of further losses, with significant gaps between reported and estimated write-downs, as the crisis increasingly becomes disorderly.

It said a further decline in the U.S. housing market and a wider economic slowdown is leading to new loan deterioration. Delinquencies on prime mortgages and commercial real estate are increasing, as well as those for corporate and consumer loans, it noted.

With the economic slowdown spreading, financial institutions will increasingly face losses on non-U.S. assets as well, the IMF said.

The fund said pressures were now emerging in Europe, as house prices in some countries decline, economic growth falters and lending conditions tighten.

The IMF warned that overall risks to emerging markets, which earlier appeared resilient to the credit turmoil, have risen sharply as appetite for emerging assets has declined and capital outflows have intensified, leading to tighter liquidity conditions.