The International Monetary Fund’s (IMF) 2008 Global Financial Stability Report warns that the fallout from the global financial crisis will be severe and losses related to the crisis could top US$945 billion.

In the report, released April 9, the IMF notes that the “current turmoil is more than simply a liquidity event, reflecting deep-seated balance sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper, and more protracted.”

“Financial markets remain under considerable stress because of a combination of three factors,” says Jaime Caruana, head of the IMF’s monetary and capital markets department. “First, the balance sheets of financial institutions have weakened; second, the deleveraging process continues and asset prices continue to fall; and, finally, the macroeconomic environment is more challenging because of the weakening global growth.”

The crisis has weakened the funding of large financial institutions, which increases risk. The IMF suggests that these institutions cut back assets or raise capital to cope with the strain.

Caruana says, “The recent Fed [U.S. Federal Reserve] actions in solving the Bear Stearns case and also in providing liquidity to a broader range of counterparties have reduced the probability of a tail event in the financial system, although there are still funding pressures that continue.”

The IMF identifies the U.S. as the epicentre of the crisis but says other industrialized countries have been affected. The report says that countries with inflated house prices or companies with stretched balance sheets are particularly at risk.

The report also gives a laundry list of recommendations to both the public and private sector as means to improve the resiliency of the global financial system and says “the hands-on role of major central banks in this crisis suggests that a re-examination of their tools for emergency liquidity support is also warranted.”

Read the full report from the IMF’s website.

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