IMF Warns Of European Banks' Asset Sales
European banks are in the midst of an emergency fire sale of assets worth more than £8,000 for every single household in the continent, it has emerged.
The warning from the International Monetary Fund came 24 hours after it slashed its growth forecast for Britain's economy by more than any other major developed country.
It said political leaders - especially those in the eurozone - are running out of time to put right the economic problems weighing them down.
In its Global Financial Stability Report, the IMF predicted Europe's biggest banks will need to sell off $2.8 trillion (£1.75trn) of assets in the coming months - some $200bn (£125bn) higher than its estimate in the spring.
The sum is equivalent to 10,350 euro (£8,331) for each of Europe's 210 million households - and will mean there is less money available to be lent to consumers, worsening the credit crisis.
The IMF added that if the euro crisis worsens, the scale of these sell offs could mount to $4.5trn (£2.8trn) - equivalent to 16,634.78 euro (£13,394.58) for each of the continent's households.
The deleveraging warning is critical to the fate of the European economy, since its major problem at present is that households and businesses are struggling to survive without regular access to credit.
Despite the efforts of the European Central Bank and other regulators to keep the financial system afloat over the summer, the IMF warned that the outlook had deteriorated since it last surveyed it six months ago.
Speaking in Tokyo, where the IMF is holding its annual meeting, its head of financial stability, Jose Vinals, said: "The stakes are high. For instance, if pressures were allowed to continue, major EU banks' total assets could be forced to shrink by as much as $2.8trn, and possibly leading to a contraction in credit supply in the periphery by 9% by the end of 2013.
"In a more adverse case, as illustrated in our weak policies scenario, EU banks' assets could shrink by as much as $4.5trn, and lead to a reduction in the supply of credit in the periphery by up to 18%. In contrast, a rapid move to complete policies would avoid this economic damage."
Although the IMF said the UK remains vulnerable - because of its proximity to the euro crisis and because of the size of its banking system - its financial institutions had at least "made progress through continued divesting and by cutting back non-core activities".
However, the IMF warned late last month that the financial system remains just as vulnerable to a future crisis as it did before the collapse of Lehman Brothers in 2008.
This latest report will add further pressure as policymakers aim to try to repair the banking system.