Debt is above 2008 level and failure to reform banking system could trigger crisis…
The floor of the New York stock exchange in September 2008. Photograph: Richard Drew/AP
The world economy is at risk of another financial meltdown, following the failure of governments and regulators to push through all the reforms needed to protect the system from reckless behaviour, the International Monetary Fund has warned.
With global debt levels well above those at the time of the last crash in 2008, the risk remains that unregulated parts of the financial system could trigger a global panic, the Washington-based lender of last resort said.
Much has been done to shore up the reserves of banks in the last 10 years and to put in place more rigorous oversight of the financial sector, but “risks tend to rise during good times, such as the current period of low interest rates and subdued volatility, and those risks can always migrate to new areas”, the IMF said, adding, “supervisors must remain vigilant to these unfolding events”.
A dramatic rise in lending by the so-called shadow banks in China and the failure to impose tough restrictions on insurance companies and asset managers, which handle trillions of dollars of funds, are highlighted by the IMF as causes for concern.
The growth of global banks such as JP Morgan and the Industrial and Commercial Bank of China to a scale beyond that seen in 2008, leading to fears that they remain “too big fail”, also registers on the IMF’s radar.
The warning from the IMF Global Financial Stability report echoes similar concerns that complacency among regulators and a backlash against international agreements, especially from Donald Trump’s US administration, has undermined efforts to prepare for another downturn.
The former UK prime minister Gordon Brown said last month that the world economy was “sleepwalking into a future crisis,” and risks were not being tackled now “we are in a leaderless world”.
Speaking this week before the fund’s forthcoming annual meeting – taking place next week on the Indonesian island of Bali – the IMF’s head, Christine Lagarde, said she was concerned that the total value of global debt, in both the public and private sectors, has rocketed by 60% in the decade since the financial crisis to reach an all-time high of $182tn (£139tn).
She said the build-up made developing world governments and companies more vulnerable to higher US interest rates, which could trigger a flight of funds and destabilise their economies. “This should serve as a wake-up call,” she said.
The stability report said the development of digital trading platforms and digital currencies such as bitcoin, along with other financial technology companies, had been rapid. It said:
“Despite its potential benefits, our knowledge of its potential risks and how they might play out is still developing. Increased cybersecurity risks pose challenges for financial institutions, financial infrastructure, and supervisors. These developments should act as a reminder that the financial system is permanently evolving, and regulators and supervisors must remain vigilant to this evolution and ready to act if needed.”
In a separate analysis, as part of the IMF’s annual economic outlook, it warned that “large challenges loom for the global economy to prevent a second Great Depression”.
It said the huge rise in borrowing by corporates and government at cheap interest rates had not shown up in higher levels of research and development or more general investment in infrastructure.
This trend since the collapse of Lehman Brothers, which triggered the global financial crisis, had limited the growth potential of all countries and not just those which suffered the most in the aftermath of the crash. It had also left the global economy in a weaker position, especially as it enters a period when a downturn is possible.
The IMF said:
“The sequence of aftershocks and policy responses that followed the Lehman bankruptcy has led to a world economy in which the median general government debt-GDP ratio stands at 52%, up from 36% before the crisis; central bank balance sheets, particularly in advanced economies, are several multiples of the size they were before the crisis; and emerging market and developing economies now account for 60% of global GDP in purchasing-power-parity terms – which compares with 44% in the decade before the crisis – reflecting, in part, a weak recovery in advanced economies.”
Like many institutions the IMF has warned that rising levels of inequality have a negative impact on investment and productivity as wealthier groups hoard funds rather than re-invest them in productive parts of the economy. Without a rise in investment, economies remain vulnerable to financial stress.