A worldwide debt binge could trigger the next financial crisis and tip Britain back into recession, former Bank of England governor Lord King has warned.

Households, companies and governments have borrowed ever-greater amounts of money since the Great Recession, egged on by central bankers who cut interest rates to record lows.

But with inflation returning as growth picks up a decade on from the crash, investors are braced for steep rises in interest rates.

Fears over higher rates have sent financial markets into a tailspin in recent days – leading to the biggest one-day points fall of all time on Wall Street.

Former Bank of England governor Lord King said it was essential to tackle the global debt pile, which stands at £166trillion

And experts are now warning that higher rates will push up the cost of servicing the world's mammoth debts, with potentially devastating consequences.

King said it was essential to tackle the global debt pile, which stands at £166trillion, according to the Washington-based Institute of International Finance.

'The areas of weakness in the current system are really focused on the amount of debt that exists, not just in the US and UK but across the world,' King said.

'Debt in the private sector relative to GDP is higher now than it was in 2007, and of course public debt is even higher still.'

Although European and US banks have far larger reserves to draw on today, he warned banking disasters in less tightly regulated countries could create a global shock causing panic.

International Monetary Fund chief Christine Lagarde also sounded the alarm last month and researchers believe China is a danger.

Benn Steil and Benjamin Della Rocca of the Council on Foreign Relations said a meltdown is rapidly approaching, saying: 'Given our evidence that China is shovelling new loans to companies with the least ability to pay them back, we think China is heading towards a debt crisis.'

Markets have swung wildly as investors grapple with the return of inflation as the global economy takes off and normality returns in the West after sluggish growth.

The recovery has been welcomed, but it is expected to spark a jump in wages and rising prices.

To keep this under control, banks will have to hike interest rates and Peter Tutton of Stepchange Debt Charity warned: 'Even a modest rise in interest rates could tip people who are just about managing into difficulties with mortgage payments and unsecured credit commitments.'