It’s official! Well, almost. The IMF, that august body which presumes to overlook the “world economy”, has used the “T” word.

The International Monetary Fund says that losses from the credit crunch by financial institutions worldwide are set to reach $1 trillion (£500 billion), threatening severe economic fallout.

The Fund says, “At present, the issuance of most structured credit products — instruments that pool and tranche credit risk exposures in various ways — is at a standstill and many banks are coping with losses and involuntary balance expansions.”

On the day when the UK’s biggest mortgage lender, the Halifax, reported a staggering 2.5pc drop in house prices in March alone, the IMF warns governments, central banks and regulators that they now face a test of their mettle unique in modern times.

In its twice-yearly Global Financial Stability Report, the Fund remarks, “The critical challenge now facing policymakers is to take immediate steps to mitigate the risks of an even more wrenching adjustment.”

The danger is that the escalating losses of banks, combined with credit market uncertainties, could generate a vicious downward spiral as they weaken economies and asset prices, leading to higher unemployment, more loan defaults and even deeper losses.

“This dynamic has the potential to be more severe than in previous credit cycles, given the degree of securitisation and leverage in the system.”

The report indicates that this downturn is about more than just liquidity, as some commentators are still arguing, but is rooted in “deep-seated fragilities” among banks with too little capital. This “means that its effects are likely to be broader, deeper and more protracted.”

In addition, “a broadening deterioration of credit is likely to put added pressure on systemically important financial institutions.”

Moreover, “The corporate debt market appears vulnerable as default rates are set to rise.” Loan defaults on junk bonds (high-risk corporate debt) have already begun to increase in both the US and Europe, which is “an area of specific concern”.

“This leaves financial institutions, most recently hedge funds, vulnerable to mutually reinforcing funding and market liquidity spirals, in which investors sell assets to meet funding requirements, creating price declines, a loss of confidence, and further funding pressures.”

The IMF advises : “National authorities may wish to prepare contingency plans for dealing with large stocks of impaired assets if writedowns lead to disruptive dynamics and significant negative effects on the real economy.”

Which broadly means that the situation is bad and getting worse, and the worst-case scenario may be just around the corner.

Macroeconomics was never so fascinating, and never so scary.

Read the report here.