IMF warns of new financial crisis risk

The world could fall into another financial crisis leading to a global recession as governments are not paying enough attention to the current market instability, an International Monetary Fund executive member has warned.

IMF head of financial stability José Viñals says the effects of high risk premiums, corporate defaults rising in emerging markets and a general decline in appetite for riskier assets could likely lead to a global recession, the Financial Times reports.

Viñals said the IMF’s negative view “does not rely on extreme assumptions at all” and that “if we don’t get it right we could set the clock back in terms of growth”.

However, he added: “Our central scenario is not a crisis. The downside scenario is not a global crisis but a situation in which we would have significant losses in terms of GDP.”

In its most recent growth report, the IMF cut its forecast for global growth by 0.2 percentage points for 2015 and 2016 to 3.1 per cent and 3.6 per cent respectively amid slow growth from emerging markets.

The report states: “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.”

Viñals also warned on the perils of the excess of credit to which many countries are exposed, citing China as the most exposed country relative to the size of its economy.

He said: “In emerging markets, we are in the late stages of a credit cycle. There is about $3tn of overborrowing or excess credit extended now.

“China has recently started to address the problem by increasing banks’ provisions for non-performing loans. The question is how fast is the increase in non-performing loans going to be in the future and it is very important that the authorities remain vigilant so that banks adequately provision now before things get more complicated.”

The IMF has recently urged the leading central banks to hold back on hiking interest rates amid slower global economic growth.

In an agenda-setting note to G20 finance ministers and central bank governors, who met in Ankara, Turkey, earlier in September, the IMF said the world’s largest economies needed to raise their medium-term growth performance from the current “moderate” level.

The fund said an expected boost from lower oil prices had failed to materialise and, with low inflation in all advanced economies, “monetary policy must stay accommodative to prevent real interest rates from rising prematurely”.