A recent report by the International Monetary Fund (IMF) states that governments and central banks risk sparking a massive global financial crisis. The stark warning comes as debt binging becomes prevalent in the continuously developing world.
The report states that companies in emerging markets have over-borrowed by $3 trillion during the last ten years. During this time, the IMF Global Financial Stability Report showed that the private sector quadrupled during the 2004 to 2014 period, according to The Telegraph.
"Corporate and bank balance sheets are currently stretched," the IMF warned. "Immediate prudential attention is needed."
If left unchecked, the debt binge could trigger a sharp capital crunch and massive capital outflows in economies that are already reeling due to low commodity prices. Emerging economies are not the only risk factors, as advanced economies also risk tipping the global economy to chaos due to a "vicious cycle of fire sales, redemptions and more volatility," reports The Sydney Morning Herald.
"The global financial outlook is clouded by a triad of policy challenges: emerging market vulnerabilities, legacy issues from the crisis in advanced economies, and weak systemic market liquidity," the report said.
The fund further warned that there is no margin of error for policymakers, who are navigating through the hazardous tasks. A slight miscalculation could collapse into a "failed normalization" of interest rates and conditions, which would in turn wipe out a significant percentage of the world's economic output over the next two years.
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