We're not even halfway through the banking crisis. Any green shoots you hear about will be weeds!

TELEGRAPH Blog 21.4.09
We are not even half-way through the banking crisis - IMF
Posted By: Edmund Conway 

A month ago the International Monetary Fund was charged by the G20 finance ministers with finding out precisely how the balance sheets of the world's major banks would look if they were to get back to lending again at more or less the rate they were in the pre-crisis days. Today the Fund delivered its verdict and it is both clear and terrifying.

The simple truth is laid out in page 33 of the Global Financial Stability Report, published today in Washington: "if banks were to bring forward to today loss provisions for the next two years, before expected earnings, US and European banks in aggregate would have tangible equity close to zero."

In other words, the entire global banking system would be bankrupt - kaput - if its institutions immediately wrote off all the toxic assets still sitting in their vaults without any government assistance. And bear in mind this already takes into account the money we have already thrown at the banks. So even after all this has been spent the financial system remains, effectively, insolvent, bearing in mind the amount of cash the banks have lost as a result of the bubble of the 2000s.

But, you might well respond, what about all the cash that has been thrown at the banks - almost $800bn across the world, including $110bn in the UK (just over £70bn)? Well, the problem is that according to the IMF this hasn't been enough to get the banks back to health again. In fact, it calculates that a further $125bn will need to be poured into Britain's banks if they are to start lending again at anything like a normal rate. If they are to bring their balance sheets back to a state as healthy as in the mid 1990s, it will take a further $125bn on top of this again.

In other words, if you thought the immense amounts of taxpayer cash funnelled into the system over the past couple of years was enough to bring us back to good health, think again. It is an extremely worrying verdict, particularly coming at a time when many had been assuming that green shoots were starting to sprout and the recession was coming to an end. But it underlines one simple but undeniable truth: that this recession is different. It is the consequence not of a simple one-nation housing crash or a consumer slowdown but a catastrophic collapse of the financial system. And with that system still in a wreck normal service will simply not be resumed without more costly bail-outs - or else we must accept the consequence that money will be far more expensive to borrow in the future, and that economic growth will be far less in the future.

To anyone with a keen sense of history this should hardly come as a surprise. The 1930s were marked by periods of optimism before reality set in again. The IMF's verdict may also take a while to sink in, but here it is, laid out in table 1.4 of the report: we aren't even halfway through the bank bail-out. Gulp...


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