The International Monetary Fund (IMF) has warned that the world is sleepwalking into a new financial crisis as investors lose faith in the ability of policymakers.

It a ramping up of its rhetoric the Washington-based institution said that policy inaction risks the creation of a "pernicious feedback loop of fragile confidence, weaker growth, low inflation and rising debt burdens."

José Viñals, the head of the IMF's financial stability division said that a broad and slow downturn could reduce global output by 4% over the next five years.

The IMF's global financial stability report says that the world economy is heading towards a point where a "loss of market confidence" could create a slump that would result in stocks across the eurozone, the UK and the US losing one-fifth of their value over two years.

"This would be roughly equivalent to foregoing one year of global growth," Mr Viñals added.

One of his main concerns is a $1.3tn (€1.15tn) pileup of corporate debt in China which poses "potentially serious challenges" to global financial stability.

There are specific warnings about the future of the eurozone economy, "In the euro area, market pressures also highlighted long-standing legacy issues, indicating that a more complete solution to European banks’ problems cannot be further postponed" the IMF said.

“The hardest hit banking systems within the euro area in February have been those of Greece, Italy and, to a lesser extent, Portugal, along with some large German banks, reflecting some or all of the following factors: structural problems of excess bank capacity, high levels of non-performing loans and poorly adapted business models,” the report continued.