WASHINGTON, USA - THE credit crisis stemming from the US housing slump has triggered a 'negative feedback loop' in the global economy that poses risks for growth, the International Monetary Fund said on Monday.
'Global financial markets continue to be fragile and indicators of systemic risks remain elevated,' the IMF said in an update of its April report on global financial stability.
A year after the financial markets were battered by the US subprime, or high-risk, home mortgage crisis, those expected losses have now been 'largely acknowledged' by financial institutions but the risk has 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 IMF said.
Banks are under 'renewed stress' to raise additional capital amid a sharp plunge in banking stocks, which has 'increased the likelihood of a negative interaction between banking system adjustment and the real economy,' according to the update of the Global Financial Stability Report.
'The downside risks outlined in the April GFSR appear to be materialising, leading to a negative feedback loop between the financial system and the broader economy,' Mr Jaime Caruana, the director of the IMF's financial markets department, said at a news conference.
The IMF estimated banks and financial institutions have written off in excess of 400 billion dollars (S$544.74 million) in soured mortgage-related investments.
The 185-nation institution said that due to the slump in the asset-backed securities and ongoing loan delinquencies, it had 'little reason' to change its April 3 estimate of of 945 billion dollars for the 'total mark-to-market losses' in the financial crisis.
Stemming the decline in the US housing market 'would remove a key component of the feedback loop, as this would both help households and financial institutions recover', Mr Caruana said.
He noted that with sharply rising loan delinquencies and foreclosures and a continuing fall in home prices, 'a bottom for the housing market is not yet visible'.