New financial crisis would make 2008's seem child's play

Editor's note: At the Boao Forum for Asia in Hainan last week, Zhu Min, an economist with Tsinghua University and former deputy managing director of the International Monetary Fund, aired his views on the high debt ratio of the world economy in a sub-forum. Excerpts:

If a financial crisis happened today, the situation could be much worse than 2008.

The reasons are simple. First of all, the debt ratio today is much higher than that of 2008. So the risks the world faces today are bigger, and the influence of a crisis, if there is one, on the real economy would be more extensive.

Currently, the interdependence and interconnectivity among all major economies are of a much higher level than 2008. So if a crisis happened, the whole world would instantly feel its impacts.

When the debt ratio and risk level are extremely high, as they are now, the space for policy response is quite small. The debt-to-GDP ratio of Western countries has increased from 70 percent in 2008 to about 110 percent now, and it is almost the same for the developing countries and emerging markets.

As for the currency market, the effective annual interest rate is zero or nearly zero. Compared with 2008, the macro risks now are bigger. In 2008, the governments still had space for both remedial monetary policy and financial policy adjustment. Now the space becomes much narrower. Once a crisis happens, who can be the saviors, and what measures can they take?

The market environment is delicate and constantly changing. Everybody knows the high debt ratio and high risk level are there, and that interest rates are quite low. The Federal Reserve has made a sharp turn in its monetary policy, as it has suspended its interest-rate rise cycle. In Japan and Germany, the interest rates for 10-year bonds are actually already negative.

Therefore, a crisis, if one happened today, would likely be worse than expected as there is less space for it to return to a safer setting.