Saturday , 10 June 2023

IMF Warns: World Economy At Risk Of Another Financial Meltdown – Here’s Why

The International Monetary Fund (IMF) has warned that the world economy is at risk of another financial meltdown….[Here’s why.]

This version of the original article by The Guardian, has been edited* here by for length (…) and clarity ([ ]) to provide a fast & easy read.  For the latest – and most informative – financial articles sign up (in the top right corner) for your FREE bi-weekly Market Intelligence Report newsletter (see sample here)

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” [such as]:

  • A dramatic rise in lending by so-called shadow banks in China,
  • The failure to impose tough restrictions on insurance companies and asset managers, which handle trillions of dollars of funds…
  • 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”…
  • Complacency among regulators and
  • A backlash against international agreements, especially from Donald Trump’s U.S. administration,
[which have all]…undermined efforts to prepare for another downturn… 

The IMF’s boss, Christine Lagarde, [has] 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…
  • [and this] buildup [has] made developing-world governments and companies more vulnerable to higher U.S. 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 also said:

  • the development of digital trading platforms and digital currencies such as bitcoin, along with other financial technology companies, has been rapid saying: “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…
  • had limited the growth potential of all countries and not just those that suffered the most in the aftermath of the crash and
  • 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;
  • 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.”
  • rising levels of inequality have a negative impact on investment and productivity as wealthier groups horde funds rather than re-invest them in productive parts of the economy. Without a rise in investment, economies will remain vulnerable to financial stress.
(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.}
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