Those hoping for quick fixes to the strains in the global economy
will continue to be disappointed, writes the Bank for International
Settlements (BIS) in its 82nd Annual
Report, released yesterday.
Five years on from the outbreak of the financial crisis, and the
global economy is still unbalanced, seemingly becoming more so as
interacting weaknesses continue to amplify each other. The goals of
balanced growth, balanced economic policies and a safe financial
system still elude us.
The Report points out that the financial sector, governments, and
households and firms need to repair their balance sheets: "the
financial sector needs to recognise losses and recapitalise;
governments must put fiscal trajectories on a sustainable path; and
households and firms need to deleverage. As things stand, each
sector's burdens ... are worsening the position of the other two."
"The financial sector is putting pressure on the government," the
Report continues. "Governments, with their deteriorating
creditworthiness and need for fiscal consolidation, are hurting the
ability of the other sectors to right themselves. And as households
and firms work to reduce their debt levels, they hamper the recovery
of governments and banks. All of these linkages are creating a
variety of vicious cycles."
"Central banks," the Report says, "find themselves in the middle
of all of this, pushed to use what power they have to contain the
damage: pushed to directly fund the financial sector and pushed to
maintain extraordinarily low interest rates to ease the strains on
fiscal authorities, households and firms. This intense pressure puts
at risk the central banks' price stability objective, their
credibility and, ultimately, their independence."
Breaking the vicious cycles, and thereby reducing the pressure on
central banks, the BIS says, is critical. It can be accomplished by
"cleaning up and strengthening banks at the same time as the size
and riskiness of the financial sector are brought under control. ...
Only then, when balance sheets across all sectors are repaired, can
we hope to move back to a balanced growth path. Only then will
virtuous cycles replace the vicious ones now gripping the global
economy."
Christian Noyer, BIS Chairman and Governor of the Bank of France,
said today: "We have yet to achieve the goal of a strong and stable
financial environment for the global economy. To get there, the
international community must intensify its cooperative efforts to
reduce global financial imbalances and improve international
financial regulation."
BIS General Manager Jaime Caruana told central bankers gathered
for the Bank's Annual
General Meeting in Basel today: "The current difficulties of the
world economy have deep roots and will require fundamental
solutions. Fiscal adjustment, the repair of banks' balance sheets
and other reforms cannot be put off in the hope of better times.
Relying only on central banks but failing to act on other fronts
would ultimately damage confidence and increase the risks to
macroeconomic and financial stability."
The BIS's financial results, which were also published in the
Annual Report, included a balance sheet total of SDR 255.7 billion
(USD 395.9 billion) at end-March 2012 and a net profit of SDR 758.9
million (USD 1,174.9 million).
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