Central banks have lost control of global liquidity. The dollarised international financial system has become treacherously unstable and vulnerable to a sudden reversal in capital flows.

Yet the International Monetary Fund is a diminished force and no longer has the firepower to act as the world’s lender of last resort in an emergency. That is the stark conclusion of a G20 task-force of leading currency experts.

A surge in offshore dollar lending - increasingly through opaque security markets - has exploded to $18 trillion and has overwhelmed the safety buffers of the existing financial architecture. The concern is that a continued surge in the value of the US dollar - potentially triggered by the coronavirus epidemic, or any other black swan catalyst - could bring this to a head.

“The risk of an unexpected and unplanned reversal of abundant global liquidity hangs over the world economy. Strong contagion across markets could make the endogenous dynamics of global liquidity very dangerous,” the panel warned in an advisory report for G20 ministers, the Financial Stability Board and the IMF.

A decade of ultra-low interest rates and quantitative easing has flooded the globe with highly unstable forms of funding denominated in dollars, with no guarantor standing behind them. Glaring currency and maturity mismatches have accumulated.

This structure is prone to an abrupt “dollar crunch” should borrowers in China, east Asia, emerging markets, or even parts of Europe suddenly start scrambling for scarce US currency to repay bonds and loans in a crisis.

The report from the Robert Triffin International forum said the purely “private component of global liquidity” (defined as foreign currency credit to non-banks) has mushroomed to $12 trillion. This now dwarfs the shrunken $3 trillion pool of “official” liquidity, such as IMF resources, central bank swap lines, and even the eurozone bailout fund (ESM).

This private liquidity is highly geared to spasms of risk appetite and over-confidence, and even more geared to panic when trouble starts. It can snap back violently and set off potentially unstoppable chain reactions in a heartbeat. The liquidity is ‘destroyed’ by forced deleveraging. Staircase up, escalator down.

“As the 2008 experience shows, the supply of private liquidity cannot be relied upon in periods of stress,” according to the document by Bernard Snoy, Andre Icard and Philip Turner, former top officials at the World Bank and the Bank for International Settlements.

They warned that there is no clear back-stop if anything goes wrong. This is the Achilles Heel in the structure of globalised modern finance, the torment of regulators at their Swiss sanctum sanctorum in Basel.

The IMF cannot plausibly come to the rescue in a major upset. Its resources have dwindled to just 1pc of global external liabilities, down from 4pc in the 1980s, overtaken by the mushrooming scale of cross-border finance. “The IMF is not in a position to function as an international lender-of-last-resort. The global financial safety net is too small,” they said.