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The head of the IMF says a global recovery can't truly take hold until financial institutions come clean about all their losses - not just those associated with sub-prime mortgages but also those stemming from the steep world recession.
"What is important is to restore confidence in the system. And to restore confidence, you need total disclosure of possible losses," Dominique Strauss-Kahn, managing director of the International Monetary Fund, told reporters after a speech at the Conference de Montreal.
"Not only losses which are linked to the original sub-prime crisis, but also the losses linked to the slowdown in the economy, and impaired assets coming from this slowdown."
He warned economists and investors not to get too carried away with projections for imminent recovery, saying that the crisis is global, and even though some data in the United States suggests an upturn, the world's largest economy could still suffer repercussions from lingering trouble in Europe and Japan.
It's fine to focus on "green shoots" and "stress tests," he said, but economists need to do a better job of also explaining why credit markets are still "immobile" in some areas.
"The more you say the bigger problems are behind us, the more you need to explain why" credit is still not flowing properly, he told the conference.
For Mr. Strauss-Kahn, the explanation is a persistent lack of trust. Financial institutions are hesitant to lend because they still don't know where all the losses are hidden.
"Until the guy in the street and entrepreneur going to his banker asking for credit will not have positive answers, and [as long as]the answer is 'I'm sorry, I cannot help you,' the economy will not resume," Mr. Strauss-Kahn said.
Financial institutions "have to speed up [their disclosure] The process is much too slow. That's probably the biggest downside risk to recovery in 2010," he said. "There are lots of things that still have to be disclosed."
He did not name any particular country or region as being particularly guilty, but he chastised world leaders for promising at the G20 summit in London to disclose losses, but then going home and "doing nothing."
Goldman Sachs estimates that there is about $500-billion (U.S.) left in losses yet to be disclosed, said chief economist Jan Hatzius, who is generally more upbeat about prospects for recovery than Mr. Strauss-Kahn.
"We're pretty clearly through the worst, in the banking losses," Mr. Hatzius told the conference. That's because mark-to-market accounting forced financial institutions to front-load their losses, he said.
And remaining losses can probably be covered by earnings, he added. While the "earn-your-way-out" approach didn't work for Japan in the previous decade, U.S. banks make far more money from regular banking than Japanese banks, so the approach should work for them, he said.
While Mr. Hatzius and other economists at the conference may be more optimistic than the IMF in the short-term, they all agreed that recovery would be abnormally slow, with the after-effects lasting for years to come.
Mr. Strauss-Kahn also urged policy-makers to put their fears of U.S. protectionism in context of the global co-operation that has allowed the world economy to sidestep an intractable recession.
"There has been an incredible cooperation among countries," he told the hundreds of business and government delegates at the conference.
Central banks' co-ordination of liquidity measures and interest-rate cuts has been well executed and is showing signs of putting a floor under the financial crisis, Mr. Strauss-Kahn said.
And governments around the world have mainly heeded the IMF's call to spend 2 per cent of gross domestic product on stimulating domestic economies, he added.
On average, "what I can say today is, this 2 per cent has been attained."
The policy co-ordination didn't prevent the global crisis, but it mitigated the worst-case scenario, he said.
Policy-makers who are worried about rising protectionism need to remember that the bigger picture emerging from the crisis is one of unprecedented cooperation, he said.
He spoke just minutes after Quebec Finance Minister Raymond Bachand lashed out at "Buy America" policies that he argued would hurt Americans as much as Canadians.
The way the Buy America provisions are being used is "very dangerous, destructive and disruptive," Mr. Bachand told the conference. He said there should be no distinction in the way Americans use goods and services from Canada, compared to American products.
Mr. Strauss-Kahn reiterated that he believes the global economy will turn a corner in the fall, and resume growth in early 2010, but stressed that the recovery is fragile.
Mr. Strauss-Kahn also said that emerging markets are still at risk of not being able to fund their liabilities - not through any fault of their own but because credit has dried up.
And the world's poorest countries face major humanitarian and political problems as the crisis takes its toll on poverty and stability, he said.
He also stressed that the post-crisis world will not look the same as the pre-crisis world. Even after advanced countries figure out how to withdraw their monetary and policy stimulus, they will still have to deal with a fundamental shift in the global balance of power, he predicted.
"Certainly, the next world is not the same as the previous world," he said. While global co-operation has been incredible during the crisis, there is no guarantee it will persist, he said.
"What kind of balance of power do we want to establish after the crisis?"