IMF: fresh financial crisis could emerge as global economy destabilises

13 Apr 16

The global economy is at risk of a fresh financial crisis the International Monetary Fund has warned in its Global Financial Stability Report, published today.

 

The fund said a return to the market turmoil witnessed during the 2008-09 recession could wipe 3.9% off IMF projections for world output over the next five years.

“The stakes are high,” the report said. “First, rising risks of weakening growth and instability must be avoided. Then, growth must be strengthened and fiscal stability improved beyond the baseline.

“An ambitious policy agenda is required, compromising a more balanced and potent policy mix, including stronger financial reforms together with continuing monetary accommodation.”

With threats to global stability higher than they were in October, the fund said the necessity of undertaking additional measures to deliver a “more balanced and potent policy mix” is the main message of today’s report.

Without such measures, it said market turmoil may recur and rising risk premiums may tighten financial conditions further “creating a pernicious feedback loop of fragile confidence, weaker growth, lower inflation and rising debt burdens”.

The news follows the release of a gloomy World Economic Outlook released by the IMF yesterday, where the fund downgraded its growth forecasts by a further 0.2% and highlighted that its predictions were becoming increasingly less optimistic.

The IMF stressed the need to tackle a “triad of global challenges”, including legacy issues in advanced economies and vulnerabilities in emerging markets.

The fund called for urgent action to fix the problems of banks in advanced economies, 15% of which it said faced “significant challenges in attaining sustainable profitability without reform”.

A solution for banks in the eurozone in particular “cannot be further postponed”, it stressed.

Mortgage markets in the US, which the IMF points out were at the epicentre of the 2008-09 crisis, still receive considerable government support.

It advised the US government to reinvigorate efforts to reduce the dominance of and reform the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, known as Fannie Mae and Freddie Mac, both of which were taken over by the government amid the subprime mortgage crisis.

The fund also raised concerns about China’s rebalancing towards a more service-driven economy. It said this is “inherently complex” and a more ambitious policy agenda is needed to stay ahead of rising vulnerabilities.

Emerging markets, struggling with slower growth, weak commodity prices, tight credit conditions and volatile markets, should work to shore up their resilience.

“Progress along this path will enable the world’s economies to make a decisive break towards a strong and healthy financial system and a sustained recovery,” it stated.

“In such a scenario, world output could expand by 1.7% relative to the baseline by 2018.”

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