The global economy faces a much more serious downturn than almost anyone has until now realised unless international governments take immediate co-ordinated action to deal with the credit crisis, the International Monetary Fund warned yesterday.
The IMF said it now believed the losses on US sub-prime assets and securities would ultimately total $1.45trn (£828bn), more than 50 per cent higher than its previous estimate of $945bn, and called for "a comprehensive set of measures that could arrest the currently destructive process".
Britain, in particular, faces some of the worst fallout from the credit crunch, the IMF said, because it is particularly exposed to the problems of rapidly falling house prices and high personal indebtedness. "With house prices falling rapidly, arrears and losses are likely to rise several times over," it warned.
The IMF sounded the alert in its latest Global Financial Stability Report, which was published as it prepared for its annual meeting which begins in Washington today. The body said the crisis which continues to jam up the world's money markets was increasingly likely to lead to "severe and protracted economic downturns" around the world.
It was just these sorts of fears that haunted investors yesterday, and in the US there was another big sell-off in the stock market as it headed towards the close. The Dow Jones Industrial Average slumped 508 points to 9,447, taking its losses from five consecutive down-sessions to 13 per cent.
"Today's report shows how serious a crisis we currently face," Dominique Strauss-Kahn, the IMF's managing director, said. "The time for piecemeal solutions is over – I therefore call on policymakers to urgently address the crisis at a national level with com-prehensive measures to restore confidence in the financial sector. At the same time, national governments must closely co-ordinate efforts to bring about a return to stability in the international finance system."
So far, however, such co-ordinated efforts have been relatively limited. The Bank of England unveiled further injections of liquidity into the money markets yesterday in moves it said were timed to coincide with similar initiatives from other central banks, and Ben Bernanke, chairman of the Federal Reserve, said that US interest rates could be reduced because "the combination of incoming data and recent financial developments suggests that the outlook for economic growth has worsened".
However, the international response has been criticised for its lack of coherency. Many economists believe a round of simultaneous interest rate cuts from central banks including the Bank of England, the US Federal Reserve and the European Central Bank are now necessary. There has also been criticism of the infighting among members of the European Union over the extent to which savers should be given a legal guarantee about the security of their deposits.
The IMF warned that this sort of incoherency was likely to have devastating effects on the world economy.
"Co-ordination of early action to address problems should send a strong signal to boost market confidence and will also help avoid adverse effects that one country's measures may have on others, or perverse incentives in international markets," the IMF said.
"Without such co-ordination, the adjustment process is likely to be more painful and protracted, steps by individual institutions to defuse their own market pressures may spill over to other jurisdictions and concerns about inequitable burden sharing may prevent necessary and costly measures being taken."
The scale of losses the IMF is now predicting from the credit crunch will shock many analysts given how dramatically it has risen since the body made its last forecast in April. However, the IMF said house prices in the US had continued to fall heavily since that prediction was made.