US outpaces Europe as banks shed bad debt

While European officials have blamed many of their financial problems on the United States, they will soon have to face the music. A new report from the International Money Fund (IMF) indicates that up to $1.2 trillion in additional capital may be needed to fix the mess. And the report says U.S. banks are far ahead of European banks in clearing off bad loans.

The IMF found that financial institutions and investors worldwide stand to lose $4 trillion, with banks set to absorb about two-thirds of those losses. That's the worst since the Great Depression. The IMF also warned of growing credit woes in emerging markets, and the World Bank has announced that it would triple its spending to help developing countries ride out this economic storm.

The IMF estimates that U.S. banks have written off about half the estimated $1.1 trillion in troubled loans and toxic assets from their books, while European banks have moved much more slowly. So far European banks have written off less than 25 percent of $1.4 trillion in bad debts.

In a separate report, Calyon Securities analyst Mike Mayo told the Wall Street Journal that losses will crest at 3.5 percent of loans, a level that he said will slightly eclipse the peak rate during the depression. He believes that U.S. banks are about a third of the way through writing off their losses on non-mortage consumer loans, while business loans are in their early stages.

While the financial crises may have started with the U.S. subprime bubble, the European housing and commercial real estate bubbles are deflating now. Some believe the housing bubble in Europe may have been even larger than the one in the United States.

IMF does not expect to see a worldwide recovery until 2011. Even though the IMF believes larger bailouts are needed for the banks, public support for those bailouts is losing steam. IMF wrote in its report, "There is a a real risk that governments will be reluctant to allocate enough resources to solve the problem."

The IMF does call for governments to reinforce the financial system through bailouts, even if governments must nationalize some banks to do so. If nationalization is necessary, the IMF calls for these banks to be returned to the private sector as soon as possible.

When the Group of 20 industrialized and developing nations met in London earlier in this month, they agreed in principle to beef up the resources of the IMF and World bank by $1 trillion, but did not agree on where that money would come from. Finance ministers from the Group of Seven industrialized nations will work on that task while meeting in Washington, DC, this week. The World Bank and IMF host their annual spring meetings on Saturday and Sunday. You can probably expect some decisions made this week to be announced over the weekend, if not before.

Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies.


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