FINANCE Minister Tharman Shanmugaratnam has warned that the worst of the credit crunch has yet to come.

The world's biggest banks still have toxic assets on their balance sheets, which are clogging up their ability to lend, Mr Tharman said in an interview with Bloomberg Television on Wednesday.

RELATED LINKS  Transcript of Mr Tharman's interview with Bloomberg TV

Banks are still focusing on replenishing capital 'and estimates of the extent of bad assets on their books are still on the upswing', said Mr Tharman. 'We haven't seen the worst yet.'

The International Monetary Fund's (IMF) report released on Wednesday signalled that writedowns and losses at banks totalling US$1.1 trillion (S$1.7 trillion) so far are only half of what is to come.

Losses on that scale would leave banks needing at least US$500 billion in fresh capital to restore confidence in their balance sheets, the fund said.

Governments worldwide have injected capital into banks to ensure that lending to companies and consumers does not freeze up.

US President Barack Obama's administration and federal regulators are also considering setting up a 'bad bank' that would absorb illiquid assets from otherwise healthy financial firms.

'It's right that governments recapitalised banks in the West and they're trying their best to incentivise new lending,' Mr Tharman said. 'It's too early to say how successful this will be. Governments have to take more risk, and that means taxpayers have to be willing to foot part of the bill.'

The Government of Singapore Investment Corporation (GIC) and Temasek Holdings have invested about US$24 billion (S$36 billion) in UBS, Citigroup and Merrill Lynch in the past 14 months, said Bloomberg.

GIC, which manages the country's reserves, has invested about US$18 billion in UBS and Citigroup since December 2007. Temasek, which has a US$130 billion portfolio, increased its investments in Merrill and Barclays in 2007 and last year.

Temasek was the biggest shareholder in Merrill before the US securities firm was taken over by Bank of America. It is also the largest shareholder in London-based Standard Chartered and Singapore's DBS Group Holdings, and has holdings in India's ICICI Bank and other lenders in Indonesia, South Korea and Pakistan.

Temasek and GIC remain 'well diversified' enough in their portfolios to offer the long-term returns the government seeks, Mr Tharman said.

'We would be worried if global banks comprise a large proportion of the portfolios of GIC and Temasek, or for that matter, any other highly vulnerable industry globally,' he said.

'But these are diversified portfolios, with not a large degree of concentration risk. But everyone has been down this year. Every major investor has seen a reduction in the value of their assets.'

Mr Tharman said Temasek, which had an average 18 per cent annual return on investment since its inception in 1974, and GIC have performed 'credibly by international standards - 'over a long period of time.'

GIC said in September that annual returns in the past 20 years averaged 7.8 per cent in US dollar terms, compared with about 6 per cent for the MSCI World Index.

GIC last year also said it is boosting investments in emerging markets, private equity and other asset classes to raise returns after cutting back stocks and holdings in developed nations.

'I'm comfortable with the actions both Temasek and GIC have taken early in this crisis to reduce risk, to move into more liquid asset allocation and to prepare for opportunities in this downturn,' Mr Tharman said.

Added the minister: 'The government never gets into the game of looking at specific investments, or trying to shape Temasek and GIC's specific investments. They've got to make their risk decisions, and we look at the overall return.

'So far so good, and we've got to ensure that we maintain that record of prudent investment of portfolios as a whole, diversifying risks, and being prepared for crises from time to time.

'But the risk is escalating. I mean global banks are now becoming consumer banks, as opposed to investment banks, and so people's losses would actually translate to actual losses in the longer term.'

Mr Tharman also said the economic growth model that makes Singapore vulnerable to swings in global demand still works.

Singapore is in its fourth contraction since 1998 and the economy may shrink a record 5 per cent this year as exports slump and the global economic slowdown hurts its financial services and tourism industries.

'We are plugged into the markets that are largely in the rich countries and when you go through a global crisis like this, you come down very quickly,' Mr Tharman said. 'You don't have Asian domestic demand buffering you.'

But Singapore should not strive to be less susceptible to global markets, he said. 'That's our future, that's where our fortunes are tied to,' he added. Rather, the Government will keep restructuring the economy to emerge 'leaner and smarter' after each downturn.

'Singapore will come out of this,' said Mr Tharman. 'We will bounce back the way we've bounced back three times already in 10 years.'