Zhu Min, deputy managing director at the International Monetary Fund (IMF), is the latest to warn of a financial meltdown citing liquidity concerns. The decline of the global stock market since the beginning of 2016 is just a preview of how the world would react to increased cost of borrowing as the US Federal Reserve continues to raise interest rates this year, he noted.
Speaking to a panel of the ongoing Davos 2016, the 46th annual meeting of the World Economic Forum, which has seen participation from leaders and celebrities including the likes of Leonardo DiCaprio and Prime Minister David Cameron, Min added that the sell-off could be worse if all the investors decide to exit the markets at the same time.
Warning that asset markets had become dangerously correlated and considering that both investors and wealth funds were together in crowded positions, Min elaborated on the effects of any shift in the mindsets. He said, according to the Telegraph: "The key issue is that liquidity could drop dramatically and that scares everyone. If everybody is moving together we don't have any liquidity at all. We have to be ready to act very fast."
The deputy managing director said policymakers had failed to realise that money moves swiftly across borders and the recent tightening policy by the Fed would stir trouble. "When rates go up, market valuations have to adjust," he added.
Zhu's warning adds to the doomsday prophecy by the Royal Bank of Scotland, which earlier in January warned its clients that 2016 could be a "cataclysmic year", going as far as predicting stock values could fall by a fifth and oil prices could plunge to $16 (£11, €15) a barrel, even though crude has not dropped below the $30 threshold for 12 years.
Ex-BIS chief economist William White also warned of an epic debt tsunami worse than 2007, ahead of Davos. He underlined the significance of the crisis in China for the world economy and said: "Emerging markets were part of the solution after the Lehman crisis. Now they are part of the problem too."