GLOBAL FINANCIAL markets are "fragile" and indicators of systemic risk remain "elevated" almost a year into the credit crisis, the International Monetary Fund said yesterday.

The fund warned that credit growth in the US could fall further as a result of continuing financial system stress and warned that emerging markets would be tested as global financing conditions tighten and policymakers grapple with rising inflation.

The IMF also noted that house prices had softened in a number of European economies, raising the possibility of further problems in those markets. The assessment came in the July update to the global financial stability report, led by Jaime Caruana, former Bank of Spain governor.

The IMF said while likely losses on US subprime mortgages had "largely been acknowledged" in write-downs, financial institutions faced a second wave of losses on other loans.

Credit quality "across many loan classes has begun to deteriorate with declining house prices and slowing economic growth".

The fund said bank balance sheets were under "renewed stress" and the decline in bank share prices had made it more difficult for them to raise new capital. This "increased the likelihood of a negative interaction between banking system adjustment and the real economy".

With mounting inflationary pressure, the fund said, "policy trade-offs between inflation, growth and financial stability are increasingly important".

The IMF reaffirmed its earlier, contentious, estimate that total losses in this cycle could total $945 billion (€600 billion) - a number that combines mark-to-market losses on subprime-related securities and estimates of likely losses on loans.

Relative to April, when the fund published its last Global Financial Stability Report, it said "systemic strains in funding markets continue" and the "low level of risk appetite remains unchanged". Interbank lending rates "remain elevated", while "long-term funding costs have risen" for financial institutions.

The IMF said financial institutions globally had written off about $400 billion since the crisis began last August and that while they had raised substantial amounts of capital, the losses had "exceeded capital raised".

Banks also faced problems maintaining their earnings as weakening stock prices were making it more difficult to raise capital.-(Financial Times service)