Jason Kelly

The International Monetary Fund updated its Global Financial Stability Report yesterday. I received a barrage of emails from analyst cohorts telling me about the green lights provided by the report. I dove in, and came away with less an impression of green lights than a slight flickering of the red from being lit up so brightly for so long. I'll go through some highlights with you, and let you make up your own mind.

The GFSR thinks overall financial sector losses are less than it expected six months ago, but still staggering. "For both banks and other financial institutions, the GFSR calculates that actual and potential writedowns from bad assets such as loans and securities have fallen by some $600 billion over the past six months -- from about $4 trillion to $3.4 trillion, as a lessening in financial stress has narrowed spreads." When was the last time writedowns of $3.4 trillion were considered a pop-the-champagne moment in your experience? It expects US banks to lead the debtors list by incurring about $1 trillion of that sum.

It estimates that commercial banks have already written off $1.3 trillion so far in 2009, but still have another $1.5 trillion to go. In other words, we're not even halfway through this collapsing card house yet!

From the report: "Even though bank earnings are recovering, they are not expected to be big enough to offset fully the anticipated writedowns over the next 18 months. The insufficient earnings, combined with continuing deleveraging pressure, means banks will have to raise more capital." You think? Anybody running a spreadsheet through this crisis has been aware of that for about eighteen months, and wondering what all the stock market excitement has been about.

Despite being only halfway done, "Many private sector financial risks were transferred to the public sector during government rescue operations, leaving the governments vulnerable to future shocks. Countries with high debt-to-GDP ratios and large contingent liabilities (such as bank asset or liability guarantees) are particularly vulnerable." In other words, the United States. This means that if we do see a double-dip, there isn't a whole lot more left in the government tank to stimulate the economy into another false bubble. On the next leg down, we shouldn't expect another liquidity rescue like we got last time.

Those saying that the crisis is over and the economy on the mend will enjoy this next part: "Although banks' balance sheets have been stabilized, some of it because governments have injected capital, banks are not yet in a strong position to lend support to the economic recovery." No kidding, and maybe that's why we haven't seen lending tick up yet. Trillions into the black holes of banking, nothing out, sounds like just the recipe that created a two-decade recession in Japan -- so far.

If that's what passes for good news these days, brace yourself for the bad.

Posted by Jason Kelly at 6:59 PM Japan time
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