labels: Economy - general
IMF sees risk of financial "contagion" as US Fed eases liquidity further news
18 March 2008

Mumbai: The mounting global credit crisis could develop into a financial "contagion" and could wipe $800 billion of value from the books of US and global financial institutions, an official of the International Monetary Fund said.

"Current estimates suggest that the global financial system could be facing losses of close to $800 billion spread across banks, insurance companies, hedge funds and pension funds, although some analysts are projecting much higher losses," Anoop Singh, IMF director for the Western Hemisphere Department, told a conference in Brazil.

He also saw growing signs that the problems in the US housing market are starting to spread beyond the subprime mortgage market to housing prices abroad - that might "deflate abruptly," - with potential financial implications as well.

The US Federal Reserve is expected to slash interest rates by as much as one full percentage point to two per cent at its policy meeting later in the day as investors await investment bank results that could aggravate fears of a full-blown markets crisis.

Traders expect the Fed to cut rates aggressively in an effort to boost the flagging economy.

The Fed had cut overnight rates by 2.25 percentage points to 3 per cent since mid-September.

Economists and traders now expect the Fed to announce its biggest rate cut since 1982 - for the fifth time since September - rendering the Fed also "sub-prime".

The markets seem to have priced in the Fed rate cut fully.

Fed funds futures contracts were fully discounting a one percentage point cut in late morning trade in London.

The Fed has already taken a series of radical steps in an attempt to stabilise the financial system.

The US central bank has also used several other unorthodox steps to provide liquidity, including $30 billion in financing to enable JPMorgan to buy Bear Stearns.

It also set up a new programme to provide cash to a wider range of big financial firms through loans at its discount window.

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IMF sees risk of financial "contagion" as US Fed eases liquidity further