Subprime losses could rise to $400bn

Subprime losses could rise to $400bn

By David Pilling and Jonathan Soble in Tokyo and Gillian Tett in London

Published: February 10 2008 19:35 | Last updated: February 10 2008 19:35

Senior global policymakers have raised projections for the size of subprime-related credit losses in a move that implies financial institutions will have to increase write-offs.

Speaking after the meeting of Group of Seven finance leaders, Peer Steinbrück, German finance minister, said the G7 now feared that write-offs of losses on securities linked to US subprime mortgages could reach $400bn.

This is sharply higher than the $120bn credit losses that Wall Street banks and other institutions have revealed in recent weeks – and also far bigger than the US Federal Reserve’s estimates for subprime losses last year of $100bn-$150bn.

But G7 finance ministers admitted that it remained unclear where much of this subprime pain would eventually emerge, not least because the path of the credit crunch was still uncertain. Mr Steinbrück and other ministers appealed to financial institutions to provide “prompt and full disclosure’’ of losses, to restore confidence.

“The next 10 days to two weeks will be crucial because we are going to have the first audited accounts [from financial institutions] since the crisis started,” added Mario Draghi, governor of the Bank of Italy and chair of the Financial Stability Forum, a committee of international supervisors and central bankers.

Mr Draghi said regulators were ready to force banks to reveal their losses and replenish their equity ratios. He did not rule out the possibility that governments might eventually need to inject capital into banks, although he stressed that market solutions should take precedence.

The comments followed a weekend of G7 talks that were dominated by the credit turmoil and the implications of these problems for the global economy.

The finance ministers said they stood braced for individual and collective action to ensure financial stability and avoid recession. They conceded that growth was likely to slow in all their economies, since the world was facing what Hank Paulson, US Treasury secretary, called a “challenging and uncertain environment”, due to tighter credit, a deterioration of the US housing market, higher oil prices and rising inflation.

But Mr Paulson said he believed the US stood a good chance of avoiding recession. “I believe that we are going to keep growing. If you are growing, you are not in recession, right?”

He said the G7 discussion focused on “how we minimise the spillover that is going on in the capital markets into the broader economy”.

He said he was not disappointed that Japan and European countries had rejected the idea, floated by Dominique Strauss-Kahn, International Monetary Fund head, for joint efforts to stimulate their economies by fiscal packages. He implied that other countries would not escape a US downturn, describing decoupling as a “myth”.