Dire news emerged from the International Monetary Fund’s latest Global Financial Stability report that has nations across the globe panicking.
The report warned that the next financial crisis was on the horizon, and the timing couldn’t be worse, as the flaws from the last crisis have yet to be corrected, according to The Guardian.
While massive monetary stimulus has been bucking up world economies since the 2008 recession, the IMF stated a “handover” to a more stable recovery has yet to materialize and therefore threatened positive economic outlooks.
The cheap money created to rescue the floundering economies has “flooded out” into emerging markets, according to the report, inflating asset bubbles. This situation encouraged governments and some companies to take advantage of low borrowing costs, i.e., loading up on debt.
“Balance sheets have become stretched thinner in many emerging market companies and banks. These firms have become more susceptible to financial stress,” the IMF stated.
Failing to correct flaws from the last financial crash means another upset could spark another global panic.
“Shocks may originate in advanced or emerging markets and, combined with unaddressed system vulnerabilities, could lead to a global asset market disruption and a sudden drying up of market liquidity in many asset classes,” the IMF report stated.
While the U.S. Federal Reserve attempts to prepare for peacetime interest rates, financial markets face an “unprecedented adjustment” and the IMF’s prediction for global economies was therefore dismal.
The IMF wasn’t the only agency making such predictions. Andy Haldane, the Bank of England’s chief economist, has argued that the world is entering the final stages of a “three-part crisis trilogy.”
UNCTAD, the U.N.’s trade and development arm, and the Bank for International Settlements also expressed concerns that the global financial system is set up for a crisis, according to The Guardian.
The Bank for International Settlements believes interest rates have been too low for too long, encouraging too much risk-taking in financial markets. All of them fear that the global financial system is primed for a crisis.
The IMF has not given up hope of what it calls a “successful normalisation” – it lays out a series of conditions that would need to be met, from a successful rebalancing of growth in China, to “safeguarding against market illiquidity” in financial markets.
Yet the failure of the world’s policymakers to get to grips with the shortcomings of the international financial system over the past seven years, despite the long shadow cast by Lehman and its aftermath, suggests that any measures enacted now are likely to be too little, too late. The message many may take home from Lima is, “batten down the hatches”.