IMF Sounds Warning About Future Financial Crisis
With many central banks still operating accommodative monetary policies with ultra-low interest rates or quantitative easing activities, it could be argued that the global economy is still in a recovery phase from the last Global Financial Crisis. Against this backdrop, it is perhaps shocking that the IMF are sounding a note of caution about the risks for another so soon.
The trigger for the Global Financial Crisis was sub-prime investments which grouped together risky loans and sold them on as triple A-grade investments. When confidence in investors’ chances of these debts making it to term, the whole edifice came crashing down.
The IMF warning is based on the concern that global debt levels are above their 2008 high water mark, debt in itself is not a risk, but it becomes one if the recipients are unable to meet repayments. The IMF notes that governments and regulators have yet to enact all the reforms called for during the crisis to protect against aggressive and reckless behaviour by some banks. The concern is that unregulated sections of the global financial system could trigger local crises that feed into a wider, global panic due to the interconnected state of global finance.
The IMF notes that much has been done to improve the liquidity of major banks since the crisis but states: “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; supervisors must remain vigilant to these unfolding events”.
The IMF are concerned about lending by “shadow” banks in China and weak regulation on insurance companies and asset management firms which may have trillions of Dollars under their control. They are concerned that expansion of some banks such as JP Morgan may make them “too big to fail” because of the knock-on consequences of such a failure – this would leave authorities with little choice but to bail them out with public money (again).
The estimated value of public and private debt is an eye-watering $182 trillion - roughly $26 000 per inhabitant of the planet.