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IMF: 'Dangerous undercurrents' threaten global economy


By added on 10/10/2018

(BBC) -- One of the most comprehensive studies of the state of banking and markets since the financial crisis warns that "dangerous undercurrents" are a rising threat to the world economy.

The International Monetary Fund's Financial Stability Report says that although banks are far safer than they were in 2008 there are new risks.

Trade tensions are growing, the IMF says, and inequality has risen.

Further moves towards a trade war could "significantly harm global growth".

Other threats to trade, such as a disorderly Brexit, could also "adversely affect market sentiment", the IMF argues.

The US-based organisation says that a "no-deal" departure from the European Union could lead to fragmentation in European money markets, meaning that finance cannot flow around the system so efficiently.

The body urges the Bank of England to be ready to provide more quantitative easing - money printing - if it is required.

In a separate report, the IMF said the UK had historically weak public finances with high levels of debt and low levels of assets. Britain sold off many of its assets in the privatisations of the 1980s and 1990s and also did not create a sovereign wealth fund from its oil revenues, which Norway did.

Of leading industrialised countries, only Portugal's "net worth" was in a poorer position, the IMF said.

That could mean that Britain will have to raise more taxes in the future because government-owned asset growth will not provide as much support to the economy.

The Financial Stability Report is the second time in 24 hours the IMF has published sober warnings about the state of global finance.

On Monday, it downgraded world growth forecasts for next year, blaming new trade barriers.

Tuesday's report says governments should resist attempts to roll back banking regulations put in place in 2008 to stop a similar financial crisis happening again.

Complacent

President Donald Trump has already pushed through laws repealing banking rules in America for smaller institutions, saying they were holding back bank lending to businesses.

The IMF also warns market investors, who have seen the largest upward bull run in stocks in history.

The report says they are in danger of becoming complacent about the chances of an economic shock to the system.

One could be the ending of "easy money".

Central banks are starting to withdraw the stimulus that was put in place at the time of the financial crisis.

Interest rates are rising and quantitative easing - money printing - being dialled back.

The IMF fears this could lead to sharp falls in markets.

The risks of a government funding crisis in Italy, where the country's banks are under pressure, is also highlighted.