"The global financial outlook is clouded by a triad of policy challenges: emerging market vulnerabilities, legacy issues from the crisis in advanced economies, and weak systemic market liquidity," the IMF concluded in its report. Janet Yellen's Fed is widely expected to start raising US interest rates in December. Credit:Bloomberg The fund warned that there was no margin for error for policymakers navigating these hazardous risks. Easy credit Corporate debt in emerging markets economies has quadrupled over the past ten years. The over-borrowing now adds up to an average of 15 per cent of their gross domestic product, and 25 per cent of China's GDP, the IMF said.

But emerging markets where companies tapped easy credit to soften the impacts of the global financial crisis are now on the verge of a credit downturn, the IMF said. Many of the borrowers are state-owned enterprises and the lenders are often local banks. "Corporate and bank balance sheets are currently stretched," the IMF warned. "Immediate prudential attention is needed." China's exposure to credit risks as it transitions to a more market-based economy is especially worrisome, the Fund said. The stark warning comes after China's August stock market crash and sudden devaluation in August rattled global markets. The IMF said China should improve access to it equity market to provide companies an alternative to bank financing. Telling the Fed to hold off

The IMF estimates there is around $US1.5 trillion in embedded debt in US bond funds through derivatives, which could unwind dramatically if the Fed's interest rate hiking provokes liquidity shocks. Bankers, investors, as well as regulators from the Fed have expressed concerns about bouts of bond market volatility, particularly after a "flash crash" on October 15, 2014. Many market participants have blamed the volatility on crisis-inspired rules requiring higher capital buffers for banks, less proprietary trading and stress tests that have reduced liquidity in markets. The IMF's warning comes after years of near-zero interest rates and massive stimulus programs in the United States and Europe that have failed to return growth to pre-crisis levels. "Monetary policies in key advanced economies must remain accommodative and responsive," the IMF said. The report called on the US Federal Reserve to hold off on its first interest rate hike in nine years and for the authorities in the eurozone and Japan to continue with unprecedented stimulus measures. "Managing any outbreaks in financial contagion will require nimble and judicious use of available policy buffers," the report added. The IMF painted a picture of a brittle financial system that was coming to the end of a historic period of cheap liquidity propped up by low rates. These benign conditions are set to evaporate as the credit cycle tightens in emerging markets.

It recommended the Federal Reserve hold off on raising rates for the first time in nine years until it sees additional signs that inflation is quickening. Subsequent hikes should be gradual and well communicated. "Managing any outbreaks in financial contagion will require nimble and judicious use of available policy buffers," the report said. The IMF painted a picture of a brittle financial system that was coming to the end of a historic period of cheap liquidity propped up by low rates. These benign conditions are set to evaporate as the credit cycle tightens in emerging markets The Federal Reserve has faced criticism for not providing more clarity on when it will raise interest rates, a hotly anticipated move that has caused volatility in emerging markets. Reuters/ The Telegraph, London