Risk of Global Financial Crash Has Increased, IMF Warns

The International Monetary Fund says a slowdown of the Chinese economy and a decline in world trade are undermining the stability of highly indebted emerging economies and threatening a global financial crash.

The Guardian reports:

The Washington-based lender of last resort said the scale of debts racked up by such economies, much of it vulnerable to higher interest rates in the US, meant policymakers needed to act quickly to shore up the financial system.

José Viñals, the IMF’s financial counsellor, said the threat of instability and recession hanging over emerging economies was one of a “triad of risks” that could knock 3% off global GDP. The second, he said, was the legacy of debt and disharmony in Europe, while and the third is centred on battered global markets that are more likely to transmit shocks rather than cushion the blow.

At the very least, central banks would need to remain vigilant and be prepared to increase their stimulus programmes should difficulties in emerging market countries spill over into the financial system.

Addressing the prospect of an interest rate rise in the US, Viñals said there was little reason to tighten monetary policy before Christmas while inflationary pressures and wage rises remained low. “The risks of a premature tightening are greater than those of waiting two or three more months,” he said.

Read more here.

— Posted by Alexander Reed Kelly.