“You won’t have a recovery” until you cleanse the system of toxic assets, but “nobody wants to discuss it”, a senior official complained to the FT’s Gillian Tett before the G20.
You can see why the subject is so daunting. Only in January the International Monetary Fund (IMF) doubled its forecast of total losses on US-originated assets to $2.2trn. Now it’s set to increase that figure to around $2.8trn, while $1trn could be lost on assets originated in Europe. The global tally is over $4trn. Having taken losses on complicated subprime-related debt instruments, financials are now mostly grappling with losses on loans.
Weakness is seeping through the US housing market, with seriously delinquent (more than 60 days in arrears) prime mortgage loans jumping to 2.4% of all mortgage loans by the end of last year, up from 1.1% in the first quarter. Commercial property loans in default or foreclosure rose by 43% in the first quarter. Residential mortgage losses “may be halfway to the peak”, while credit card and consumer loan losses are a third of the way there, reckons Mike Mayo of Calyon Securities. Mayo expects overall losses on loans, now 2%, to hit 3.5% – eclipsing the 3.4% reached in 1934, says Calyon.
To compound uncertainty, US accounting rules have been tweaked so banks need no longer mark their assets to depressed market values, which will make it easier to “hide their garbage”, as Newsweek’s Matthew Philips puts it. The banking system is “basically insolvent”, says George Soros, and that won’t be fixed in a hurry.