Worldwide credit crisis may reach 1.6T

[Jim Nickerson]

Bank losses from credit crisis may run to $1,600bn, warns Bridgewater

http://www.telegraph.co.uk/money/mai...nbridge108.xml

By Ambrose Evans-Pritchard

Last Updated: 1:59am BST 08/07/2008

Bridgewater Associates has issued an apocalyptic warning to clients that bank losses from the worldwide credit crisis may reach $1,600bn (£800bn), four times official estimates and enough to pose a grave risk to the financial system.

The giant US hedge fund said that it doubted whether lenders would be able to shoulder the full losses, disguised until now by "mark-to-model" methods of valuing structured credit.

"We are facing an avalanche of bad assets. We have big doubts as to whether financial institutions will be able to obtain enough new capital to cover their losses. The credit crisis is going to get worse," said the group in a confidential report, leaked to the Swiss newspaper SonntagsZeitung.

Bank losses on this scale would have far-reaching effects. Lenders would have to curtail loans by roughly 10-to-one to preserve their capital ratios. This would imply a further contraction of credit by up to $12,000bn worldwide unless banks could raise fresh capital.

It would be almost impossible to attract or even find such sums from investors. While sovereign wealth funds command roughly $3,000bn in funds, this money is mostly committed already. The funds have grown extremely wary of Western banks with sub-prime exposure after burning their fingers so many times already.
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If Bridgewater is anywhere near correct, governments alone have the wherewithal to rescue the system. This would mean the de facto nationalisation of the banking systems in the US, Britain and Europe.

All the news is bad.

[c1ue]

Re: Worldwide credit crisis may reach 1.6T

Depends on your point of view.

I've said before I expect losses to top $2T, possibly exceeding $4T.

If the losses are only $1.6T, that's good news in my book