Fears a chaotic Brexit or an escalation of the US – China trade row will derail the global economy
The risks to the global financial system have grown in the past six months and will worsen if there is a chaotic Brexit or an escalation in the trade row between the US and China, the International Monetary Fund warned.
Low interest rates are helping to offset a downturn in growth in the world economy, the Fund said. But rising levels of government and company debt are storing up potential problems for the future.
In its Global Financial Stability Report, the IMF claimed that a Brexit stalemate ‘threatens to unsettle financial markets, damage investors’ confidence, adversely affect business confidence’ and create uncertainty in Europe and in the UK.
Jitters: Low interest rates are helping to offset a downturn in growth in the world economy, the International Monetary Fund led by Christine Lagarde, pictured, has warned
‘Given heightened uncertainties related to Brexit negotiations, there is a risk that volatility in financial markets may rise sharply as key deadlines approach,’ it said.
The Fund, led by Christine Lagarde, noted that there had been a sell-off in financial markets in 2018 but they had rebounded this year because of hopes the US and China could iron out trade tensions and expectations that interest rates would stay low.
But they added that vulnerabilities in the system continue to build as some companies and governments become more indebted.
The report said that company balance sheets are strong enough to withstand a moderate economic slowdown or a rise in interest rates, but warned that debt burdens and risk-taking have increased.
It said the volume of bonds – IOUs issued by companies – that are ranked as being risky has burgeoned in the US and the eurozone since the financial crisis.
The report also warned that the state of the Italian economy had rekindled fears its sovereign debt woes could spill over into the country’s weak banking system, as happened in the eurozone crisis of 2012.
Italy has a £2trillion debt burden, equivalent to around 130 per cent of its economy. There are worries that investors will mark down the value of its government bonds, which could in turn hit banks and insurance companies.