Dangers to the global financial system are “starting to loom” despite strong global growth as non-bank borrowers around the world pile up debts, according to the International Monetary Fund (IMF).
While the IMF this week raised its forecasts for global economic growth, it today warned of “rising financial vulnerabilities” which threaten a complete recovery from the global financial crisis.
Global systemically important banks – which include behemoths such as Citigroup, HSBC and Barclays – have become much safer since the crash in 2008, the IMF said, but threats to stability are growing in non-financial companies.
Borrowing by governments, households and companies (not including banks) in the major G20 economies exceeds $135 trillion (£102 trillion), according to IMF figures, equivalent to more than double their annual economic output.
“As the search for yield intensifies, vulnerabilities are shifting to the non-bank sector, and market risks are rising”, the IMF said in its biannual global financial stability report.
The IMF urged policymakers to rein in excessive capital market financing, as well as warning major central banks to take a cautious approach to tightening monetary policy.
Tobias Adrian, director of the IMF monetary and capital markets department, wrote: “If left unattended, these growing vulnerabilities will continue to mount, threatening to derail the economic recovery when shocks occur.”
Pressures on companies to repay their big debt piles are already high in major economies like Australia, Canada, China and Korea, the IMF said. This will increase “their sensitivity to tighter financial conditions and weaker economic activity”.
There is “still work to do” in China in particular, the IMF said in its report. Economists from around the world, including the Bank of England, have repeatedly warned the world’s second largest economy risks taking on too much debt in their pursuit of rapid economic expansion.
However, the world economy is enjoying a period of strong growth, with the IMF expecting global output to expand by 3.6 per cent this year and 3.7 per cent in 2018.
Speaking today at the IMF’s Washington headquarters, managing director Christine Lagarde said: “The global recovery is now stronger – and more broadly based – than we have seen in a decade.”
The agency’s financial stability report said: “These favorable conditions create a window of opportunity to strengthen the financial system that should be seized.”