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The strength of G 20

The combined GDP of G 20 countries accounts for 90% of the world's total, and their trade volume is over 80% of the global trade.

How much could they commit?

Under the GFRI, the G 20 countries could commit a small percentage of their GDP to this entity through their central banks or ministry of finance.

Based on a median of all projections, we can estimate that the total loss on US securities and loans alone could reach over US 3.3 trillion. For safety, we could work with a higher number of, let's say, US $ 4 trillion. Some of these assets will probably recover in value, but some might not. A good chunk of these toxic assets would be absorbed by the existing bail-outs in place to support the financial system. There is now a strong possibility of non-US assets turning sour. We are already seeing how various asset classes, besides sub-prime, are now being affected. Well, if the patient is not treated, the disease may well spread in other healthy parts of the body, that could lead to fatality. The same applies for economy. Going forward, we will need to get a good assessment of the health of the economy. The additional commitment from G 20 could act as a cushion. It may be used if and when required.

Can we get a good estimate of the real depth of the toxic assets clogging banks' balance-sheets?

We should be able to get very good estimates of the amount of toxic assets the banks are holding in their balance-sheets. This is an auditing exercise. I must say, by auditing the banks, we do run the risk of discovering that there is a huge black hole and the system is probably insolvent. Some banks might already have a good estimate of what their exact exposure could be, but to avoid any surprises, let the independent auditing be mandatory. Then put them through a series of stress test to get a good estimate of the amount of capital an individual bank / financial institution will require to remain healthy. The stress test should be designed to get a good estimation of what amount should be written off and what could still be recovered from the toxic assets held by the bank. Using a scale of 1 to 10 (10 being 100 percent), rank the recovery rate of the toxic assets. For example, an asset with a 5 ranking will be marked at 50% of its value at maturity, and then put them under an 'eligible to apply' candidate category.

What sort of the numbers are we talking about?

For safety and to keep a good buffer, let us assume that the financial institutions may collectively have additional losses of over US $ 2 trillion on their assets going forward.

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Sanjeev Kumar is Chief Executive Officer of Delamore & Owl Group of Companies (Website: www.delamoregroup.com), Toronto, Ontario, Canada. He holds dual Master's Degrees - one in Business Administration and another in International Finance. He has been the recipient of the "Southeast Asia Young Achiever's Award" for Year 2002.
Article posted on March 14, 2009.