IMF warns of ‘perilous’ path ahead for the world economy 

A new wave of financial crises could undermine an already weak global economy, the International Monetary Fund (IMF) warned.

The collapse of Credit Suisse in Europe and US lenders including Silicon Valley Bank (SVB) has already clouded the outlook at a time of skyrocketing inflation and rising interest rates.

But in its latest Global Financial Stability Report, the financial agency warned of further risks ahead, as it revealed a “dangerous combination of vulnerabilities that have been lurking beneath the surface of the global financial system for years.”

Tobias Adrian, IMF chief stability officer, added: “Tensions remain at other institutions as investors reassess the health of the financial system.

“The rise of stress in financial markets complicates the task of central banks, which are trying to maintain the path to higher interest rates despite stubbornly high inflation.”

The warning came as the IMF warned that the global economy was “entering a dangerous phase” of low economic growth and mounting risks to financial stability at a time when “inflation is not yet definitively around the corner.”

It cut its global growth forecasts to 2.8 percent this year and 3 percent next year and warned that while Britain would do better than previously feared, it was still on track for a contraction of 0.3 percent in 2023, making it the weakest of the G7 countries.

The extent of the rescue of the US banking system – in the wake of the collapses of SVB and Signature Bank of New York – was also exposed in the financial stability report.

It shows that the Federal Reserve’s aid to struggling US banks has already cost an estimated $400 billion and partially reversed the central bank’s efforts to shrink its balance sheet. It is a figure that could rise even further.

Adrian said that in bailing out SVB and Credit Suisse, central banks have deviated from the ‘resolution arrangements’ that have been put in place since the financial crisis.

But he indicated that in a crisis such as that of the Bank of England last October over the safety of pension funds, it was necessary to act decisively and quickly.

He said it is critical for central banks to carefully monitor deteriorating credit conditions before raising interest rates further.

The organization said the loss of confidence in Credit Suisse and US banks has been “a powerful reminder” of the challenges of higher interest rates and the build-up of vulnerabilities since the global financial crisis.

Despite strong interventions from regulators and central banks, the IMF said market sentiment remains “fragile.”

And it warned that some institutions are “simply unprepared” for higher interest rates.

Market participants have insufficiently prepared for interest rate hikes, possible disruptions in financing markets and links with the rest of the financial system, the report said.

Adrian added: “Some institutions are just not prepared for the higher rate environment.

“The deficiencies in risk management exposed by the recent episodes are a cause of concern.”