The Bank of International Settlements (BIS) says in its annual report which
was issued Sunday that the current global markets euphoria does not reflect economic
reality and its general manger warned on interest rates that: " if they persist
too long, ultra-low rates could validate and entrench a highly
undesirable type of equilibrium - - one of high debt, low interest rates and
The BIS is the bank for central banks and is the oldest international
financial organisation, having been founded in Basel, Switzerland in 1930.
annual report says: "The overall impression is that the global economy is healing but remains
unbalanced. Growth has picked up, but long-term prospects are not that bright.
Financial markets are euphoric, but progress in strengthening banks' balance
sheets has been uneven and private debt keeps growing. Macroeconomic policy has
little room for manoeuvre to deal with any untoward surprises that might be
sprung, including a normal recession."
The Wall Street Journal reported on Saturday:
From stocks to bonds to commodities, world financial markets have rallied in
unison during the first half of 2014, a feat not seen in more than 20 years and
a reflection of investors' optimism that central-bank policies will boost
Six closely tracked gauges of world stock, bond and commodity performance are
headed for gains in the first six months of the year, the first time they have
done so since 1993. The Dow Jones Industrial Average is up 1.7% for the year,
putting it on pace for its fourth-straight first-half rise.
Through Friday, gold was up 9.7%, the Dow Jones UBS Commodity Index 8.1%, the
10-year U.S. Treasury note 6.4%, the MSCI World Index of developed-world shares
4.8% and the MSCI Emerging Markets Index 4.3%."
"Financial markets are euphoric, in the grip of an aggressive search for
yield…and yet investment in the real economy remains weak while the
macroeconomic and geopolitical outlook is still highly uncertain," said Claudio
Borio, the head of the BIS's monetary and economic department.
The BIS said growth is still below its precrisis levels and while the world
economy expanded 3% in the first quarter of 2014 compared with a year earlier --
weaker than the 3.9% average growth rate between 1996 and 2006, in some advanced
economies, output, productivity and employment remain below their precrisis
“Good policy is less a question of seeking to pump up growth at all costs
than of removing the obstacles that hold it back,” the bank said pointing to the
recent upturn in the global economy as a precious opportunity for reform while
warning that policy needed to become more symmetrical in responding to both
booms and busts.
Global markets are currently “under the spell” of central banks and their
unprecedented accommodative monetary policies, it said and warned that returning
to normal monetary policy too slowly could also be dangerous for government
"Keeping interest rates unusually low for an unusually long period can lull
governments into a false sense of security that delays the needed
consolidation," it said, as the glut of cash encourages cheap government
Jaime Caruana, general manager of the BIS gave
on Sunday at the annual meeting of central bank governors.
Jaime Caruana was governor of the Bank of Spain in 2000-2006 and in 2004 he
gave into pressure to relax the requirement on the main banks to make special
'rainy day' provisions during the good times - - Charlie McCreevy, the European
Commission's financial services commissioner who was a former Irish finance
minister, also pushed for a relaxation of the rules.
Caruana decamped to Washington DC in 2006 to take a job at
the IMF where
Rodrigo Rato, a former Spanish finance minister, was managing director. He then
moved onto Basel in 2009 and his IMF job as financial counsellor and director of the
Monetary and Capital Markets Department was given to José Viñals, a former Bank
of Spain colleague.
So two leading executives of the boomtime Bank of Spain have been lecturing
on prudence since the bust but like the sinning preacher while the credibility
should be tarnished, the warnings of pestilence maybe merited!
Caruana said on Sunday:
Since 2007, in the G20 economies, the ratio of total non-financial sector
debt to GDP has risen by more than one fifth. This is the legacy of the massive
fiscal stimulus during the Great Recession in the advanced economies and the
significant new issuance of debt by corporates in EMEs. Since then, the advanced
economies have made some progress in reducing their fiscal deficits. But the
upshot is that aggregate debt levels continue to grow. Overall, debt-to-GDP
ratios are now 275% in the advanced economies and 175% in EMEs.
A negative aspect of this debt-driven growth pattern is the relative weakness in
investment in advanced economies. True, at the global level, total fixed
investment as a share of GDP has continued to rise thanks to rapid growth in the
EMEs. It is also true that, in some countries, a correction of
overinvestment in housing and construction was overdue. But other investment
patterns do not bode well for future growth. In many advanced economies, for
example, companies are holding back on investment in plant and equipment.
Infrastructure investment is also languishing, particularly in a
number of EMEs but also in some advanced economies.
Most importantly, if they persist too long, ultra-low rates could validate
and entrench a highly
undesirable type of equilibrium – one of high debt, low interest rates and