The Bank for International Settlements, the central bank of central banks, has warned that an extremely high global debt ratio across major global economies increases the vulnerability of the financial system to the monetary tightening by the US Federal Reserve (Fed).
Clarudio Borio, the bank’s chief economist, said that the warning signs are no longer “isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines”. Among them capital outflows from China that are rocking equity markets.
Assessing the consequences of the turbulence that frazzled markets in the last weeks, the BIS said that total debt ratios are significantly higher now than they were at the peak of the last credit cycle in 2007. To make matters worse, this time around emerging markets took part in the latest credit spree and exposed themselves to the related vulnerabilities.
Claudio Borio stresses that “this is . . . a world in which interest rates have been extraordinarily low for exceptionally long and in which financial markets have worryingly come to depend on central banks’ every word and deed, in turn complicating the needed policy normalisation”.
The warning assumes a very critical importance as the Fed will soon decide whether to raise interest rates for the first time since 2006. Mr Borio also added: “It is unrealistic and dangerous to expect that monetary policy can cure all the global economy’s ills”.
The BIS’ report comes as a surprise if we take a look at recent views expressed by Mark Carney, governor of the Bank of England, among others, who said that the Bank of England had not lost its monetary sovereignty and was still able to set monetary policy in response to domestic conditions.
What the BIS paper highlights, however, is that “monetary conditions in the US affect monetary conditions elsewhere beyond what similarities in business cycles or global risk factors would justify”.
More in the media:
- "Stock sell-off reveals ‘major faultlines’ in economy, BIS says" - The Financial Times
- "US interest rate rise could trigger global debt crisis" - The Telegraph