Global turmoil brought the financial markets to their knees last month, according to a new report that estimates global losses from the U.S. mortgage meltdown will now reach $1.4 trillion.
The report, published by the International Monetary Fund, said that the collapse or near-collapse of several key institutions during September added more stress to an environment where financial institutions have been shedding bad assets, reducing borrowing and seeking new capital.
"Confidence in financial institutions and markets has been badly shaken by the global credit turmoil that has its roots in the U.S. subprime mortgage market but that has spread globally to other financial sectors," the IMF said. "Credit deterioration has continued to spread to more sectors and countries -- from subprime to prime mortgages, and from residential mortgages to consumer credit, commercial real estate, and now to the corporate sector."
Through September, losses on U.S.-based loans and securities of $0.6 trillion had already been realized, the report said. The IMF now projects losses could ultimately reach $1.4 trillion -- climbing from an estimate of $0.9 trillion in April.
In the report, IMF Managing Director Dominique Strauss-Kahn called for an end to piecemeal solutions and urgent attention to national comprehensive measures. He noted a comprehensive approach that is consistent among countries should help restore confidence and functioning markets.
He offered a three-point plan to "break the downward spiral of disorderly de-leveraging" that includes relieving banks of illiquid and impaired assets, injecting capital into viable institutions that are hampered by market misconceptions, and aiding dysfunctional funding markets.
"The most serious risk going forward is an intensifying adverse feedback loop between the financial system and the real economy -- in which financial institutions' distress leads to impaired credit intermediation and slower economic growth, which in turn leads to further credit deterioration," Strauss-Kahn warned.
The report cast a shadow over the ability to determine future cash flows from assets to be purchased through the recently passed $700 billion mortgage bailout package.