IMF: World Economy Facing Another Potential Financial Crisis
Debt has risen beyond the 2008 level and inability to bring about reform making systems could lead to this.
According to the IMF, the world economy is at the brink of another potential financial collapse, owing to the inability of the governments and regulatory authorities to pass the regulations required to safeguard the system from unacceptable behaviors.
As per the Washington-based lender of last resort, the global debt level has gone beyond the levels of 2008, the risk still persists that unmonitored sections of the financial system may lead to a potential global crisis.
IMF went on to clarify that, numerous steps have been put in place during the course of the last decade with more strict guidelines, but the risk generally increases during times of prosperity, especially where there are times of low interests’ rates and minimal volatility. Such risks can then get shifted to other areas. Hence, it is the duty of the supervisors to ensure that they are aware of these potential situations.
There is a rapid increase in the lending done by shadow-banks mostly established in China and the inability to impose strict sanctions on insurance companies and asset managers which handles trillions of dollars are stated as causes of concern for by the IMF.
The IMF stated that the rapid growth of global banking giants such as JP Morgan and the Industrial and Commercial Bank of China to a scale much greater than 2008, has led to the concern that these institutions have become too big to fail.
The warnings issued by the IMF Global Financial Stability report shares similar concerns that the lack of authority by the regulators and the disagreement for international conventions mainly from the Donald Trump’s government has affected the effective preparation for another such financial crisis.
Gordon Brown, ex-prime minister of the UK, said last month, the world economy is drifting into a possible crisis and if it we are leaving it as it is, echoing that the world is leaderless at present.
IMF head, Christine Lagarde speaking just prior to the annual meeting of the IMF in Bali, she stated her concerns for the value of global debt, both in private and public sectors has risen over 60% in the past ten years following the financial crisis to attain an all-time high figure of $182tn (£139tn).
She went on to add that the increasing debt has the governments and organizations of the developing world more prone for increased US interest rates which could potentially lead to a flight of funds and undermine the economy. She added that this should be a wake-up call to all.
The stability report clarified that the bloom of digital trading platforms and digital currencies in the form of bit coin with the simultaneous rise of financial technological organizations has been brisk. It went on to add that, although there are several advantages, the possible risks associated with it are yet to be fully realized. The strict cyber security places an added risk on the financial organizations, financial infrastructure and supervisors. Such developments should be regarded as reminders that the financial system is continuously evolving. Hence, the regulators as well the supervisors should be highly proactive to this possible development and be ready to proceed appropriately.
In another analysis conducted as a section of the IMF’s annual economic outlook, it emphasizes the possible danger of extreme upcoming challenges for the global economy and steps needed to be taken to avoid another great depression.
It is noted that the increasing lending by corporates and governments at nominal interest rates has not been visible to the sophisticated research and development or even for general investments made in infrastructure.
This trend following the demise of the Lehman Brothers, triggering the international financial debacle had restricted the growth capabilities in all countries and was not restricted to the countries which it occurred in. It resulted in weakening of the global economy and a possible downturn is a possibility.
The IMF clarified that the aftereffects of such and the policy changes which were brought about by the Lehman scenario is formed a world economy where the average general government debt-GDP ratio is at 52% which is an increase from the 36% prior the crisis. Central banks in advanced economies have grown several folds following the crisis. In the case of emerging markets and developing countries accounts for over 60% of the world’s GDP in purchasing-power-parity terms – which is an increase from the previous 44%, which reflects the weak growth seen in more developed economies.
Similar to numerous other institutions, the IMF has issued a warning on the increasing level of inequality and the subsequent effect of it on investment and productivity, as the wealthy would accumulate funds rather than investing to push the economy. With a lack of investments, the economy is probe to financial stress.