IMF spreads gloom on 2008; Deutsche faces hit

By Cheryl Juckes, Reuters

LONDON — Investors reeling from world credit problems took fresh hits Monday as the IMF said their economic impact would be worse in 2008 and sources said Deutsche Bank looked set to lose up to 1.7 billion euros in profits from falls in loan values.

International Monetary Fund Managing Director Rodrigo Rato said the United States was likely to bear the brunt of fallout from the credit squeeze and said world economic growth should remain high next year if below 2006 and 2007.

But downside risks increase the longer financial markets remain in crisis, he said.

“Credit markets are correcting, but slowly; we aren’t at a stage of normality,” Rato told a seminar in Madrid.

“It has an effect on the real economy which will be felt more in 2008, with greater intensity in the United States, less in other areas,” he said.

More financial firms joined the list of credit squeeze casualties but there was also speculation that a number of hedge funds were circling last week’s major victim, UK mortgage lender Northern Rock. Britain’s Sunday Telegraph reported that former Goldman Sachs banker Chris Flowers and buyout funds Cerberus and Citadel were planning a breakup of Northern Rock by acquiring its mortgages at below face value and holding them until maturity.

Leading M&A bank Deutsche Chief Executive Josef Ackermann said last week that the German bank was heading for a rocky third quarter, flagging a revaluation of 29 billion euros of credit it had promised to clients.

The loans would normally be farmed out to other banks, but the squeeze has made selling the debt hard and sources familiar with the situation told Reuters on Monday that the loans were now worth between 4 and 6 percent less than face value.

Japan’s largest lender, Mitsubishi UFJ Financial Group warned it might have to mark down the value of some of its investments, while newspapers reported Britain’s Barclays Plc was selling its subprime consumer loan unit at a loss.

Mitsubishi UFJ has the biggest exposure to the subprime crisis among Japanese banks — about US$2.5 billion (300 billion yen) in related investments as of mid-July.

“If credit market conditions continue to deteriorate, our capital funding structure may need to be adjusted, and our funding costs may increase,” the bank said in a U.S. Securities and Exchange Commissions filing.

Hong Kong’s new financial tsar John Tsang said the city’s banks were in a strong position to deal with the effects of the subprime mortgage crisis but warned the extent of the exposure was unclear.

Drawing analogies with the financial crisis that convulsed Asia in 1997 and 1998, Financial Secretary Tsang said lenders around the world could have indirect exposure to distressed markets but not realize it given the difficulty of working out whether they have funded buyers of collateralized debt obligations (CDOs).

“Banks in Hong Kong do not have a large exposure to CDOs. However, we share a concern that, as credit risk is being spread further and wider, it is not always clear where it ends up, or who is bearing it,” Tsang told a financial forum.

There were tentative signs of some reduction in pressure on money market rates with a fall in sterling deposit rates to their lowest since Aug. 10 while the Australian central bank again found it necessary to drain liquidity from the banking system.

London interbank offered rates for three month sterling deposits were fixed lower on Monday for the ninth straight session, continuing to fall in the wake of Bank of England efforts to bring down three-month lending rates.

But comparable euro Libor rates were fixed slightly higher than Friday and both sterling and euro continue to show a premium of more than half a percentage point over BoE and European Central Bank base rates.

Libor three-month sterling rates were fixed at 6.355 percent against 6.365 percent Friday, the British Bankers Association said Monday.

Three-month euro Libors were fixed at 4.72938 percent from 4.72375 percent Friday, still well above the ECB’s benchmark 4 percent target rate and reflecting signs that banks remain unwilling to lend out three-month money.

In a U-turn last week, the Bank of England said it would inject funds into the money market to bring down three-month rates after earlier arguing it was not its job to bring those rates down.

On Sunday, British Prime Minister Gordon Brown praised Bank of England Governor Mervyn King’s economic record but would not comment on whether King would be reappointed next year.

The money market stresses caused problems for banks and savers rushed to pull out their money until the government said it would guarantee all deposits.

The Reserve Bank of Australia (RBA) said conditions remained tight in global markets although there was some easing in funding conditions and it was too soon to say the problems were over.

“This is a welcome development, though it is too early to be confident that there will not be further bouts of market turbulence and strained liquidity conditions in the period ahead,” it added.