Updated
The world remains vulnerable to another financial
meltdown as a result of "side effects" from extraordinary measures to
prevent a repeat of the Great Depression, the International Monetary
Fund has warned.
Key points:
- IMF: "The extended period of ultralow interest rates in advanced economies has contributed to the build-up of financial vulnerabilities"
- The fund warns there are already signs of long-term effects on economic growth from increased protectionism
- "Increased cybersecurity risks pose challenges for financial institutions, financial infrastructure, and supervisors", says IMF
In its latest World Economic Outlook released overnight, the IMF said "large challenges loom for the global economy" and singled out ultra-low interest rates and surging debt levels as potential triggers for another meltdown.
"The extended period of ultralow interest rates in advanced economies has contributed to the build-up of financial vulnerabilities," the IMF warns.
"The large accumulation of public debt and the erosion of fiscal buffers in many economies following the crisis point to the urgency of rebuilding those defences to prepare for the next downturn."
The IMF also said action by central banks, notably the US Federal Reserve and the European Central Bank, to bail out institutions and stimulate economies through trillions of dollars of quantitative easing would not be possible in managing any new crisis.
"Some of the crisis management tools deployed in 2008–09 are no longer available … suggesting financial rescues in the future may not be able to follow the same playbook," the report warned.
"The extraordinary policy actions to prevent a second Great Depression have had important side effects."The IMF's warning comes a decade after the Lehman Brothers investment bank collapsed in September 2008, triggering a Wall Street meltdown and the global financial crisis.
Speaking on the 10th anniversary of the Lehman Brothers collapse, former British prime minister Gordon Brown warned of complacency, saying he feared the world economy was "sleepwalking into a future crisis".
Mr Brown also referred to a "leaderless world" and that, because of rising protectionism, the global unity of 2008 and 2009 to prevent a repeat of the Great Depression is not present today.
Canada Pension Plan president Mark Machin warned last month that massive global debt is a significant risk and could contribute to a day of reckoning.
The IMF said, as a result of near-zero interest rates, global debt levels are significantly higher than in 2008 and that unregulated sectors of the financial system could panic when rates rise or debt is called in.
"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", the IMF cautioned.
"Supervisors must remain vigilant to these unfolding events."
Protectionism could have 'long-term consequences'
The IMF report also examined the impact of rising protectionism in the world, without specifically mentioning the actions of Donald Trump as US President and Britain's decision to leave the European Union."Societal support for openness and global economic integration appears to have weakened in many countries after the crisis," the IMF said.
"The corollary of these developments is the rising appeal of protectionist nostrums and populism.
"There are already signs of possible long-term consequences of the crisis on potential growth through its impacts on migration, fertility and future labour input."
But the IMF said "a fuller reckoning of such long-lasting legacies of the 2008 financial crisis" will emerge in coming years.
Cryptocurrencies pose financial risks
The IMF's global financial stability report also pointed to the risks of digital trading systems and digital currencies, such as bitcoin, and that regulators need to remain "vigilant"."Despite its potential benefits, our knowledge of its potential risks and how they might play out is still developing," the IMF said.
"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."
The IMF also singled out the rise in lending by "shadow banks" in China as a concern and a regulatory failure to impose tougher restrictions on institutions that manage trillions of dollars of funds.
In an echo of the 2008 crisis, the IMF pointed to the growth of banking giants JP Morgan and the Industrial and Commercial Bank of China amid concerns that they remain "too big to fail".
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