‘New compass’ needed for global economy — BIS

GENEVA — Countries must dramatically rethink strategies for avoiding and dealing with financial crises, the Bank for International Settlements (BIS) said this week, urging far more focus on fighting debt.

The Swiss-based BIS — dubbed the central bankers’ central bank — warned in its annual report that while the global economy was showing some encouraging signs of recovery from the crushing 2008 financial crisis, the factors that sparked it were still very much in play.

If governments fail to make the necessary policy adjustments to ward off similar crises and crashes, “the global economy may be set on an unsustainable path”, the report said, warning that “at some point, the current open global trade and financial order could be seriously threatened”.

BIS voiced deep concern over the stark contrast between the euphoria currently seen in many financial markets and the continued weak investments being made in the real economy, especially at a time when the geopolitical outlook remains “highly uncertain”.

“A new compass is badly needed,” Claudio Borio, who heads BIS’s monetary and economic unit, insisted to reporters ahead of the report launch.

Central banks’ bid to help spark growth by among other things slashing interest rates has helped create more appetite for short-term, high-risk investments on stock markets, and froth in property and corporate bond markets, the report found.

But at the same time, economies that had been hard-hit by the crisis had not done enough to sanitise balance sheets and root out the debt-dependency that got them in trouble, while countries spared last time were showing growing signs of financial vulnerability, the report indicated.

Ditch debt as key growth engine 

This was especially true in emerging markets that have seen their economies boom amid an abundance of cheap credit in recent years, it said, stressing that clear policy shifts were needed “in all major economies, whether or not they were hit by the crisis”.

As a clear sign of the troubled road, Borio warned that both private and public sector debt was rising steadily “even as the capacity to pay for it is diminishing”.

“It is essential to move away from debt as the main engine of growth,” he insisted.

To overcome the legacy of the global financial crisis, policymakers need to go beyond their traditional narrow focus on business cycles, and take on financial cycles, which are far longer but also cause far more damage when they contract, according to BIS.

“Focusing our attention on the shorter-term output fluctuations is akin to staring at the ripples on the ocean and losing sight of the more threatening underlying waves,” Borio warned.

The BIS report called for policies aimed at aggressively warding off financial booms, but also at dishing out fewer growth incentives during busts to avoid inspiring more debt taking.

“The road ahead is long,” Borio acknowledged, saying it was all the more important to “start the journey sooner rather than later”.

“The current upturn in the global economy is a precious window of opportunity that should not be wasted,” he said.