Arthur J. Villasanta – Fourth Estate Contributor
New York, NY, United States (4E) – It could be 2008 all over again in a few years but it might also be far worse this time around, warns the International Monetary Fund (IMF).
In its Global Financial Stability report, the IMF is sounding the alarm that global debt levels are above 2008 and failure to reform the banking system will trigger a larger crisis. As a consequence, the world economy is at risk of another financial meltdown – but far worse than that of 2008.
This impending crisis will also be due to the failure of governments and regulators to implement all the financial and regulatory reforms needed to protect the global financial system from reckless behavior, said the IMF.
The organization asserts that global debt levels are well above those at the time of the Great Recession of 2008.because of this, the risk remains that unregulated segments of the financial system might trigger a global panic.
IMF Managing Director and Chair Christine Lagarde said she is concerned 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 $182 trillion.
She said the build-up made developing countries and companies more vulnerable to higher U.S. interest rates. These higher rates, in turn, might ignite a flight of funds to the U.S. and destabilize their economies. “This should serve as a wake-up call,” she said.
The IMF noted with some irony that “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.” It also pointed out that “supervisors must remain vigilant to these unfolding events.”
It warned that “large challenges loom for the global economy to prevent a second Great Depression.” It said the huge increase in borrowing by corporations and government at cheap interest rates hasnot resulted in higher levels of research and development or more general investment in infrastructure.
This trend since the 2008 collapse of Lehman Brothers, which triggered the Great Depression, has left the global economy in a weaker position, especially as it enters a period when a downturn is possible.
The stability report pinpointed China as a massive danger to the world’s financial system. A dramatic surge in lending by shadow banks in China, and the failure by Beijing to impose tough restrictions on insurance companies and asset managers (which handle trillions of dollars of funds) are causes for great concern, said the IMF. Too big to fail banks are now even too bigger to fail.
The IMF stability report chided Donald Trump’s administration for undermining efforts to prepare for another downturn. It also said the development of digital trading platforms; digital currencies such as bitcoin and other financial technology companies had been too rapid.
“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.”
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