IMF Warns Turmoil Set to Continue, Banks Hit
Any hopes of an early resolution to world credit market problems were hit on Monday as the IMF warned turmoil was set to continue with far reaching economic consequences and more financial firms detailed damage to their loan books.
Sources said leading M&A bank Deutsche looked set to lose up to 1.7 billion euros ($2.4 billion) in profits from falls in loan values and Japan's largest lender, Mitsubishi UFJ Financial Group, said it might have to mark down some of its investments.
Financial markets are betting the U.S. Federal Reserve will have no choice but to cut interest rates again as early as its Oct 30-31 meeting to curb a housing-led slowdown in the wake of trouble in the risky mortgage sector.
International Monetary Fund Managing Director Rodrigo Rato said on Monday that the U.S. economy was likely to bear the brunt of the impact of the credit squeeze and that global growth next year was likely to be below 2006 and 2007 levels.
"It has an effect on the real economy which will be felt more in 2008, with greater intensity in the United States, less in other areas," he said.
The IMF's twice-yearly Global Financial Stability Report, also released on Monday, pointed to future dangers for markets and investment firms.
"The period ahead may be difficult as bouts of turbulence are likely to recur and the adjustment process will take some time...Uncertainty regarding overall losses and exposure has raised market and liquidity risks, with potentially broader implications for financial institutions," it said.
Hedge Funds Look at Northern Rock
There was speculation that a number of hedge funds were circling last week's major credit market squeeze victim, British mortgage lender Northern Rock while Russian Standard Bank, Russia's leading commercial lender, offered reassurance on its liquidity position.
Britain's Sunday Telegraph reported that former Goldman Sachs banker Chris Flowers and buyout funds Cerberus and Citadel were planning a breakup of Northern Rock by acquiring its mortgages at below face value and holding them until maturity.
Russian Standard Bank CEO Dmitry Levin told Reuters on Monday that it would have no problems redeeming a $300 million Eurobond this week and its liquidity was "healthy."
Levin played down reports that Russian Standard had curbed issuance of cash loans and mortgages, saying these were marginal products. Its core businesses -- credit cards and point-of-sale loans -- were growing in line with recent trends.
But there was dour news for Deutsche Bank. Sources familiar with the situation told Reuters on Monday that its credits were now worth between 4% and 6% less than face value.
Newspapers reported Britain's Barclays was selling its subprime consumer loan unit at a loss.
Mitsubishi UFJ, which has the biggest exposure to the subprime crisis among Japanese banks issued a U.S. Securities and Exchange Commissions filing.
"If credit market conditions continue to deteriorate, our capital funding structure may need to be adjusted, and our funding costs may increase," it said.
Hong Kong's new financial tsar John Tsang said the city's banks were in a strong position to deal with the effects of the subprime mortgage crisis but warned the extent of the exposure was unclear.
Money Markets Ease
There were tentative signs of some reduction in pressure on money market rates with a fall in sterling deposit rates to their lowest since August 10 while the Australian central bank again drained liquidity from the banking system.
London interbank offered rates for three-month sterling deposits were fixed lower on Monday for the ninth straight session, continuing to fall in the wake of Bank of England efforts to bring down three-month lending rates.
But comparable euro Libor rates were fixed slightly higher than Friday and both sterling and euro continue to show a premium of more than half a percentage point over BoE and European Central Bank base rates.
In a U-turn last week, the Bank of England said it would inject funds into the money market to bring down three-month rates after earlier arguing it was not its job to bring those rates down.
On Sunday, British Prime Minister Gordon Brown praised Bank of England Governor Mervyn King's economic record but would not comment on whether King would be reappointed next year.
The Reserve Bank of Australia (RBA) said conditions remained tight in global markets although there was some easing in funding conditions and it was too soon to say the problems were over.
"This is a welcome development, though it is too early to be confident that there will not be further bouts of market turbulence and strained liquidity conditions in the period ahead," it added.