THE International Monetary Fund has warned of "growing turmoil" in financial markets unless a coherent international effort restores confidence in the global financial system - and even with co-ordination restoring order will be "challenging".
"Failure to do so could usher in a period in which the ongoing … process [of paying down debt] becomes increasingly disorderly and costly for the real economy," the fund warns in its latest financial stability report released in Washington this morning
"In any case, the process of restoring an orderly system will be challenging, as a significant deleveraging is both necessary and inevitable."
In another part of the report it warns that the paying-down debt process may continue past the end of the decade as banks repair their balance sheets and financial organisations contract or fold.
"The pace of deleveraging will depend on the depth of the economic and housing downturns, the scope for banks to restructure activities and rebuild profits, and the willingness of investors to provide banks with fresh capital."
In its latest World Economic Outlook report, the fund says it does not see the global economy starting to recover until later next year, once the housing market stabilises.
It also warns of persistent inflationary pressures as commodity prices drive up the cost of food and fuel in poor nations - even as the Western world is distracted by its own problems.
The latest stability report is gloomier than its April assessment, in which it expressed hope that the adjustments in the financial markets could be managed.
The latest report says the peak in US housing defaults is still to come and that declared losses on US loans and securitised assets are likely to reach $US1.4 trillion, much higher than its April estimate.
The US public is also very gloomy. A poll released by CNN found that 59 per cent of people think a depression is likely or very likely to occur in the US.
The President, George Bush, tried to reassure the public on Monday, saying it would take time for the $US700 billion rescue plan to have an effect on the US financial system but that in the long run the American economy will be "just fine".
"It's a resilient economy; it's a productive economy with good workers," he said. "This is a reminder that we have been through tough times before and we're going to come through this just fine."
But the International Monetary Fund said piecemeal interventions across the world had not worked and that it was time for central banks and governments of the affected countries to commit publicly to working together.
It said "comprehensive, timely and clearly communicated measures were now required across nations to avert chaos".
To keep the credit sector growing, even modestly while strengthening bank capital ratios, about $US675 billion in capital would be needed by the big global banks, the fund said.
This would require authorities to inject capital into viable institutions and to let non-viable banks undergo an "orderly resolution", even though bank collapses would be politically difficult.
The fund backs many of the US measures, including using taxpayer money to buy up securitised assets to prevent fire sales and allowing greater judgment in the applications of the mark-to-market accounting rule.
It warns that extending deposit insurance needs to be done in a co-ordinated way and across borders but it should only be temporary especially if conditions deteriorate further.
