According to the International Monetary Fund the world’s economy is teetering on the brink of a financial meltdown as regulators and governments fail to push reforms through that would be vital to protect against reckless behavior. The news does not look promising for global finance as the IMF’s latest report is full of doom and gloom about the current financial situation.

Globally, levels of debt are now significantly higher than the 2008 crash levels and the risk still remains that the areas of the financial system which are still unregulated trigger global panic.

Over the past decade, bank reserves have been shored up and rigorous oversight over the finance sector has been put into place. However, risks rise during the good times, including those when interest rates are low and volatility is subdued, and the risks are always apt to migrate into new areas. Hence, the IMF warns that supervisors should stay vigilant for unfolding events.

Causes for Concern

There has been a huge rise among China’s shadow banks in lending and with the failure in imposing tougher restrictions on insurance providers and managers of assets who are handling trillions in fund money, the IMF is quick to highlight these areas as ones of concern.

The Industrial and Commercial Bank of China, JP Morgan and other global banks are growing at an unprecedented rate not seen since 2008. The fears are now arising that complacency is rife that these banks are now too large to fail. The IMF warns that similar complacency from regulators has caused the effort to prepare for a downturn to be undermined.

Even former UK leader Gordon Brown warned recently of an imminent economic disaster, citing the “leaderless” world as the major cause of problems.

Fears About Global Debt

The head of the IMF spoke recently on the subject of global debt both in the private and public sectors which has skyrocketed by as much as 60% over the past decade. It now stands at $182tn – an all-time high. This build up makes developing world companies and governments vulnerable to the higher US interest rate that could end up triggering the flight of funds which could be so strong as to destabilize their economy.

Digital Currencies A Worry

The IMF also warns of the rapid rise of Bitcoin and other digital currencies which, despite their many potential benefits, may pose their own increased risks in terms of cybersecurity. The challenges that these digital currencies pose for the financial infrastructure and institutions may be being underestimated, and this could have serious consequences.

A Real Chance of Another Great Depression

In the IMF’s economic outlook, there was a gloomy warning about large challenges looming for our world economy if another Great Depression was to be averted. Although governments and corporates have been borrowing more at a cheaper rate of interest, there has still been no more investment in research or development in terms of infrastructure.

Since Lehman Brothers collapsed, triggering a world financial crisis, this trend has had a limiting effect on all countries’ growth potential. The global economy has also been left in a considerably weaker position, particularly now when it is entering a period when downturns are possible.

The world economy following the Lehman Brothers’ bankruptcy has a median debt-GDP ratio for general government of 52% – an increase of 16% since before that crisis. In the most advanced economies, the central bank balance sheets are considerably bigger than before the bankruptcy and their recovery is particularly weak.

With rising inequality levels having a seriously negative impact on productivity and investment, wealthy groups are choosing to hoard their funds instead of re-investing them in the economy’s most productive areas. If no further investment is received, then economies will remain vulnerable and at the mercy of financial stress.

The IMF’s Message

Overall, it seems clear that the IMF’s message must be taken seriously. The world economy could be set to take a serious downturn and another depression could be just around the corner. It’s time to take steps to remedy the situation and take action. We may cut it fine but at all costs this financial disaster must be averted for global well-being.