The International Monetary Fund (IMF) has labelled emerging markets the biggest risk to the global economy. Private companies have amassed staggering debt while in the fifth straight year of slowing growth – and this has to be repaid soon.

“We estimate there is up to $US 3 trillion ($A 4.16 trillion) in over-borrowing in emerging markets,” said Jose Vinals, director of the IMFs Monetary and Capital Markets department on Wednesday.

Mr Vinals’ comments came as he presented the Global Financial Stability Report to the IMFs annual meeting.

He later told reporters that unprecedented lending was hit hard by plunging oil, mineral, and commodity prices – all attributed to the slowdown in China’s economy.

On the one hand, investment in capital (to take advantage of these markets) is now looking like a bad bet

But on the other, governments around the world are begging businesses to take some risks, invest in new markets, and kick start their economies.

Commodities-dependent countries (such as those found in Latin America) will most likely be hit the hardest by any bankruptcies as a consequence of the over-extension on borrowings.

“The worst case scenario,” continued Vinals, “is a vicious cycle of fire sales and volatility.”

Global markets were sent reeling from the recent devaluation in China. Mr Vinals said any reclamation of economic strength needed to be carefully managed .

Morevoer, he said many advanced economies still laboured under debts inherited from the Global Financial Crisis.

European banks needed to shed some 900 billion ($A 1.4 trillion) in bad debts; which would allow two-thirds of that amount to be lent out again.

The US is not expected to raise its interest rates, which have languished near zero per cent since the crisis.

But when they do, it will only exacerbate the problems of those currencies who owe their debts in U.S. dollars.

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