The increased strain on the global financial system is coming from a simultaneous deterioration of credit quality, a drop in valuations given to structured credit products, a market liquidity drought and the ongoing de-leveraging in the financial system.
(now you know what is causing the problem )
"The critical challenge now facing policy makers is to take immediate steps to mitigate the risks of an even more wrenching adjustment, including by preparing contingency and other remediation plans, while also addressing the seeds of the present turmoil," the IMF paper warns.
The estimate of potential losses at $945-billion is on the pessimistic side, but is not outrageously high. More pessimistic analysts have pegged total losses at well above $1-trillion when all is said and done.
Still, the IMF warns that the losses may circle back to hurt financial institutions in a second round of effects, especially as monoline insurers run into trouble. Plus, the risk of litigation is growing, the report warns.
While the United States remains the "epicentre" of the crisis, the spillover effects to other industrialized countries is major. The IMF warns that industrialized countries with inflated house price levels, as well as stretched corporate and household balance sheets.
The Bank of Canada has repeatedly pointed out that in Canada, corporate and household balance sheets are remarkably healthy, and financial institutions are well capitalized.
However, analysts are watching house prices closely for signs of bubbles. And the central bank is moving to set up new liquidity functions in case the credit crisis takes more direct aim at credit conditions and solvency in Canada. Until now, however, the main effects of the global credit crunch have been in the form of tighter credit and a slower economy, especially for Canada's non-commodity exports.
The head of the IMF, Dominique Strauss-Kahn, said this week that the need for government intervention in credit crisis is becoming more evident, but the Global Financial Stability Report steered clear of such sensitive issues. Rather, it stuck to suggestions for private-sector action and urged central banks to devise ways to stabilize the financial system without increasing moral hazard and fiscal costs.
In question is whether the rescue of investment bank Bear Stearns, led by the U.S. Federal Reserve last month, was a one-time event, or just the beginning of a string of major financial institutions hovering on the brink of insolvency. The debate will likely dominate the spring meetings of the IMF and Group of Seven this weekend.
Inflation adds to G7 worries on markets crisis"These are uncertain times," he warned. "I want to make the case for urgent action by the world's major economies to deal with what is the biggest economic shock since the Great Depression."
Japan on Friday reported the steepest rise in wholesale price inflation in 27 years in March, while the United States said import and export prices surged -- with petroleum import prices up a huge 60 per cent in the past year.
The persistent inflation pressures are complicating the task for central bankers, who need to balance efforts to keep growth on track with their desire to keep a lid on prices.
German Finance Minister Peer Steinbrueck said soaring food prices threaten to create a serious future political issue, and the topic was likely to get a lot of attention as finance officials around the globe gather for meetings of the International Monetary Fund and World Bank on the weekend.
The more immediate problem for the G7 is how to handle a hefty set of recommendations from the Financial Stability Forum -- set up in the wake of the 1990s Asian financial crisis -- for tightening bank scrutiny and settling a markets crisis that may cost up to $1-trillion (U.S.) in losses.
There were calls to urgently implement the proposals, which aim in part to ensure banks aren't caught short of cash in future times of stress, as happened in recent months as credit markets seized up.
"Today we must commit to implementing the Financial Stability Forum report fully and quickly," Mr. Darling said, a sentiment echoed by Mr. Steinbrueck.
The next step will be to push bankers to match the vigour of the efforts that global central banks have shown in battling the liquidity squeeze by urging these private-sector players to quickly put their losses behind them and resume lending.
A select group of bankers has been invited to a dinner on Friday night at the U.S. Treasury Department, following the formal G7 meeting and after a G7 communique has been issued at around 6:30 p.m.
The G7 comprises the United States, Britain, Canada, France, Germany, Italy and Japan. U.S. Treasury Secretary Henry Paulson clearly stated his position Thursday that he wants banks to be ready to play their role as a market stabilizer.
"If you think you're going to need capital, don't be looking for the government to help you," Mr. Paulson said. "If you think you need capital, go raise it."
On the eve of Friday's gathering, Bank of Japan Governor Masaaki Shirakawa said the G7 countries "need to show a clear determination towards stabilizing the financial system."
The eight-month-old crisis, which originated in a meltdown of U.S. subprime mortgage markets, ricocheted through the global economy as securities cobbled together on Wall Street from bits and pieces of mortgage loans turned sour.
It has now has cast a pall over global economic prospects. The International Monetary Fund said this week it expected the United States to topple into a "mild recession" this year and estimated a 25 per cent chance the global economy will grow by 3 per cent or less, which would be considered recessionary.
The outlines of the FSF's proposals are known: fuller disclosure of risks by banks, more rigid standards for credit rating agencies, measures by central banks to ensure they can effectively pump cash into the system at times of stress.
While the focus is clearly on financial-system reform, G7 ministers want to send a message that the global economy is not about to run off the rails.
They were expected to give a cold shoulder to European efforts to use the communiqué to express concern over recent gyrations in currency markets, while repeating boilerplate language that "excess volatility and disorderly" moves were undesirable.
"I deplore the excessive volatility of exchange rates," European Central Bank President Jean-Claude Trichet said Thursday after the euro hit a record peak of $1.5912.
Past communiqués also have encouraged China to speed up appreciation of its yuan currency, and the pace of the currency's rise has picked up. It crossed 7.00 to the U.S. dollar on Thursday for the first time in more than a decade, although it eased on Friday.
The G7 could give a nod to the increased pace of appreciation, which is considered vital to help reduce global economic imbalances, but likely will also urge Beijing to keep the process going.
Q&A: Rising world food prices
The price of wheat, rice and maize have nearly doubled in the past year - and they are not the only foodstuffs trading at a high price on the international commodity market.
Things have got so bad that aid agencies are having to rethink their programmes.
BBC News looks at why prices are rising and what can be done about it.
What is going on?
Prices are increasing sharply for some of the most basic foodstuffs traded on international commodity markets.
The price of wheat has doubled in less than a year, while other staples such as corn, maize and soya are trading at well above their 1990s averages.
Rice and coffee prices are running at 10-year highs, and in some countries, prices for milk and meat have more than doubled.
Why are we seeing these increases now?
It could be the breakdown of the "Goldilocks era" for global commodities - a period stretching back more than 30 years, during which the price of basic foodstuffs has been neither too high nor too low, but remained relatively constant.
For most of this period, the cost of staples such as wheat, corn and soya has actually fallen in real terms.
And food buffer stocks are at all-time lows as countries saw no need to accumulate them.
But it seems this long period of stability is coming to an end. Most commentators believe we are on the cusp of a new era of volatility and rising prices which will last for some time to come.
Who are the winners and losers?
The main losers are poor people who live in cities in developing countries, who are facing higher prices for imported food on low incomes.
Food riots from Haiti to Indonesia are causing increasing political instability.
The World Bank says that the high price of food could lead to developing countries missing international poverty targets.
The main gainers are farmers in rich and emerging market nations like the US, Brazil, Argentina, Canada and Australia, who are getting record prices for their harvests.
Some poor farmers are also benefiting from higher prices.
What are the main causes?
The first reason why prices are rising is growth in the world's population, which is expected to top nine billion by the middle of the century.
That is an incredible number of mouths to feed and will put pressure on a range of resources, including land, water and oil, as well as food supply.
But lurking behind the headline figures for population is an even more significant factor pushing up prices, and that's the economic miracle driving emerging economies such China and India.
To put it bluntly, rich people eat more than poor people, and all this economic growth is generating a whole new tier of middle-class consumers who buy more meat and processed food.
The FAO estimates that processed food now accounts for 80% of food and beverage sales.
What other factors are involved?
There is also the added environmental pressure all these extra people are loading onto the planet, as well as the impact of climate change.
Desertification is accelerating in China and sub-Saharan Africa, while more frequent flooding and changing patterns of rainfall are already beginning to have a significant impact on agricultural production.
And global warming has played a significant role in another driver of rising prices: the shift in agricultural production from food to biofuels.
Ethanol production is on course to account for some 30% of the US corn crop by 2010, dramatically curtailing the amount of land available for food crops and pushing up the price of corn flour on international commodity markets.
What can be done about it?
Many countries are subsidising the price of food, and the World Bank has called for targeted subsidies to help the poor.
And the UN's World Food Programme needs another $500m (£250m) to make up the gap in emergency food aid.
In the longer term, international aid agencies have called for more money to support food production in developing countries.
So far, only a small part of foreign aid goes to help farmers, but the World Bank says it will double its assistance to African agriculture to $800m
The food crisis is also likely to complicate the task of agreeing the next round of world trade talks, the Doha round, which is focused on agriculture.
Agencies like Oxfam also want protection for small farmers in developing countries and agricultural marketing boards against the demand of the rich countries that they fully open their markets.
Story from BBC NEWS:
Published: 2008/04/11 10:26:25 GMT
UN: Soaring food prices likely to persist
Millions worldwide are vulnerable; developing nations especially at risk
The Associated Press
updated 4:05 p.m. ET, Fri., April. 11, 2008
ROME - Even with bigger crops, soaring food prices that have sparked unrest across the globe are likely to persist, threatening millions of people worldwide, a U.N. agency said Friday.
Prices of bread, rice, milk, cooking oil and other basic foodstuffs have sharply increased in the past months in many developing countries, according to a report by the Rome-based Food and Agriculture Organization. Prices of wheat and rice have doubled compared to last year, while those of corn are more than a third higher.
Grain prices have risen as a result of steady demand, especially from China and India, supply shortages and new export restrictions, FAO said.
Even though world grain production is expected to increase this year by 2.6 percent to a record 2.16 billion tons, experts say this is going to have little impact on the prices.
"All indications we have is that this is not a short-term effect ... where the first year you have price increases and the following year there is an increase of supply that brings the prices down," FAO Director-General Jacques Diouf said at a news conference.
Experts say price speculation and market failures will likely reduce the effect of boosted production.
However, the "Crop Prospects and Food Situation" report says that expected growth in production, especially in wheat and rice, could at least ease the tight supply situation worldwide.
FAO said that farmers in developing countries should be granted better access to fertilizers, seeds and animal feed to increase local food production.
Surging food prices, further stoked by rising fuel costs, have triggered protests around the world in recent days. The increases hit poor people hardest, as food represents as much as 60-80 percent of consumer spending in developing nations, compared to about 10-20 percent in industrialized countries, the U.N. agency said.
One person was killed in two days of rioting in Egypt earlier this week, while violence wracked Haiti, where demonstrations over rising food prices led to looting and clashes with police.
In Pakistan and Thailand, troops have been deployed to avoid seizing of food from fields and warehouses, the agency said.
"People are dying because of their reaction to the situation. People will not be sitting dying of starvation, they will react," Diouf said.
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