The UK faces a bill of almost £200 billion for propping up its ailing banking system, the International Monetary Fund (IMF) has said.
Its latest Global Financial Stability Report estimated the cost of support measures would run to 13.4 per cent of the UK’s entire economic output of £1.46 trillion in 2008.
Only struggling Ireland would pay more as a percentage of its output to rescue its banks, the IMF added.
The report delivered a fresh blow to Chancellor Alistair Darling on the eve of today’s Budget, which will unveil soaring public debt and the worst year for the economy since the end of the Second World War. UK banks would also face a £137 billion hit over the next two years as bad debts soared, the IMF said.
Overall global losses could total £2,730 billion by the end of 2010 as growth declined, it estimated.
“The global financial system remains under severe stress as the crisis broadens to include households, corporations, and the banking sectors in both advanced and emerging market countries,” the IMF warned.
The huge rise in borrowing to fund bail-outs has seen the cost of insuring against governments defaulting on their debts rise – with the UK more affected than other large economies, the IMF said. Mr Darling faces pressure to plot a long-term path back to health for the public finances in tomorrow’s Budget, in particular to reassure the bond markets which will be tapped up for billions to fund higher borrowing.
“In order to address investor concerns, governments need to clearly communicate the potential costs of financial support packages as part of a sustainable medium-term budget framework, including a credible commitment to fiscal correction once economic conditions improve,” the report warned.
The IMF added that the crisis would require “far-reaching changes” in the shape and functioning of financial markets and a toughening-up of regulation.
“Since neither market discipline nor public oversight were sufficient to properly assess and contain the build-up of systemic risks, improved financial regulation and supervision are key components to preventing future crises.
“The emphasis should be on how to detect and mitigate systemic risks through better regulation,” it said.
A Treasury spokesman said their view was the IMF forecast was very high and did not seem to attempt to take into account the consequences of the UK Government’s action.
He confirmed the “Budget will make a prudent provision for potential losses from banking interventions in line with our cautious approach to forecasting the public finances”, and said the figure would be “based on a detailed understanding of the schemes, stress testing and takes account of the fees”.