An article yesterday titled ‘Toxic debt writedowns may reach US$4.1-trillion’ reports the International Monetary Fund now thinks Global writedowns of toxic debt among banks and other financial institutions in the United States, Europe and Japan could reach US$4.1-trillion of which the deterioration in U.S. originated assets may account for as much as U.S.$2.7-trillion – up by $500 billion from the IMF’s January forecast, and that globally banks will face the bulk of the writedowns. The article reports that “Since the start of the crisis (presumably dated to about September 2008), market capitalization of global banks has more than halved to US$1.6-trillion from US$3.6-trillion. The IMF apparently thinks Financial Institutions are likely to face losses for a period that would be broadly consistent with the time it took banks to recover during the Great Depression and in Sweden in the early 1990s, but that current writedowns are likely to be more severe than during those crises.

The question I continue to have with respect to these IMF quantifications of forecasted ‘toxic asset’ losses is what accounting standard is assumed when they are generated. If conventional mark-to-market rules are being applied to generate these forecasts it seems to me that is one thing. However, if the new and more subjective mark-to-market rules are being use to generate them the picture may turn out to be far worse than any current forecast implies.

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