{"id":30438,"date":"2012-06-24T10:00:00","date_gmt":"2012-06-24T14:00:00","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/06\/bis-fix-banks-to-break-the-vicious-economic-cycles\/"},"modified":"2012-06-24T10:00:00","modified_gmt":"2012-06-24T14:00:00","slug":"bis-fix-banks-to-break-the-vicious-economic-cycles","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/06\/24\/bis-fix-banks-to-break-the-vicious-economic-cycles\/","title":{"rendered":"BIS: Fix banks to break the vicious economic cycles"},"content":{"rendered":"

By Central Bank News
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    The global economy is trapped in a maelstrom of vicious cycles and the best way to halt this downward spiral is to recapitalize banks so they no longer burden governments and can return to their role of supporting economic growth, the Bank for International Settlements (BIS) said.<\/span><\/div>\n
    Major parts of the economy – households and firms, governments and banks \u2013 must improve their financial positions but they are stuck in vicious cycles: As households and firms cut debt, it hampers the recovery of governments and banks. As governments cut spending, it hurts households and banks, and as banks recognize losses, they have less money to lend.<\/o:p><\/span><\/div>\n
    \u201cEach sector\u2019s burdens and efforts to adjust are worsening the position of the other two,\u201d said BIS, known as the central bankers\u2019 bank, in its annual report.<\/span><\/div>\n

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    <\/span><\/o:p>Central banks have been called to the rescue, slashing the cost of money to historic lows and making sure there is plenty to go around. Real interest rates are negative in most major economies and the balance sheets of central banks has risen to some 30 percent of global economic output, double the level a decade ago, as they print money to buy government bonds and keep interest rates low.<\/div>\n
    \u201cCentral banks 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,\u201d BIS said.<\/o:p><\/span><\/div>\n
    But the effects of central banks\u2019 loose monetary policy is limited as households and banks are taking advantage of the stimulus to pay off debts rather than boost spending, holding back the recovery.<\/o:p><\/span><\/div>\n
    \u201cBy itself, easy monetary policy cannot solve underlying solvency or deeper structural problems. It can buy time, but may actually make it easier to waste that time, thus possibly delaying the return to a self-sustaining recovery,\u201d it said.<\/o:p><\/span><\/div>\n
    BIS\u2019 call for banks to shore up their balance sheets comes as Spain is set to make a formal request to euro zone finance ministers for as much as $100 billion to recapitalize its banks, which financed a huge building boom that went bust.<\/o:p><\/span><\/div>\n
    Illustrating the destructive feedback between banks and sovereigns, Madrid\u2019s bailout of its banks has put pressure on its own finances, leading to speculation that Spain may join Greece, Portugal and Ireland in restructuring its debt.<\/o:p><\/span><\/div>\n
    With financial markets gyrating with each new twist in the dance of euro zone politicians, BIS cautioned that other countries around the world could face the same fate if they fail to take action.<\/o:p><\/span><\/div>\n
    \u201cBut at its root the European crisis is a potential harbinger, a virulent and advanced convergence of the problems to be expected elsewhere if policy fails to break the vicious cycles generated by the global weaknesses,\u201d BIS said.<\/o:p><\/span><\/div>\n
    <\/o:p><\/span><\/div>\n
    EXPLODING GOVERNMENT DEBT<\/o:p><\/span><\/div>\n
    While the first step in breaking the vicious cycles is to recapitalize banks, governments can no longer postpone the arduous task of slashing debt.<\/o:p><\/span><\/div>\n
    \u201cUnsustainable debts were ultimately the source of the financial crisis, and there is little evidence that the situation has become much better since,\u201d BIS said.<\/o:p><\/span><\/div>\n
     Government debt in advanced countries has on average exploded to more than 110 percent of annual economic output from some 75 percent in 2007, and annual deficits are now 6.5 percent of output on average, up from 1.5 percent.<\/o:p><\/span><\/div>\n
     The strain on government coffers has lead to the loss of a risk-free status for many sovereigns, distorting markets and raising the cost for private borrowers.<\/o:p><\/span><\/div>\n
    \u201cIn most advanced economies, the fiscal budget excluding interest payments would need 20 consecutive years of surpluses exceeding 2% of GDP \u2013 starting now \u2013 just to bring the debt-to-GDP ratio back to its pre-crisis level. And every additional year that budgets continue in deficit makes the recovery period longer,\u201d BIS cautioned.<\/o:p><\/span><\/div>\n
    Aware of the political sensitivity of the issue, BIS tiptoed around the question of how governments should cut deficits but added that long-term measures should be forceful and credible, even if that means painful measures now.<\/o:p><\/span><\/div>\n
    \u201dGovernments in the advanced economies will have to convincingly show that they will adequately manage the costs for pensions and health care as their populations grow older. Spending cuts and revenue increases may be necessary in the near term as well,\u201d BIS said.<\/o:p><\/span><\/div>\n
    Countries in the deepest financial hole will have to be much more aggressive and quickly reform their public sectors to regain the trust of financial markets.<\/o:p><\/span><\/div>\n
    \u201cThe road back to risk-free status for sovereigns is a long one. Some countries have already run out of options and will have no choice but to take immediate steps to restore fiscal balance. Others will need to strike the right balance between long- and short-term measures to be successful. A key challenge for governments as they strive for that balance is to avoid losing the confidence of investors,\u201d BIS said.<\/o:p><\/span><\/div>\n
    <\/o:p><\/span><\/div>\n
    THREAT TO EMERGING MARKETS <\/o:p><\/span><\/div>\n
    The intractability of the three, connected cycles is hindering reform, not only in advanced economies but also in emerging economies, where rapid growth is masking underlying weaknesses in their government accounts, much as they did in advanced economies before the financial crisis. <\/o:p><\/span><\/div>\n
    \u201cIf recent signs of a slowdown persist, the fiscal horizon of emerging market economies could darken quickly,\u201d BIS said.<\/o:p><\/span><\/div>\n
    Emerging economies could soon face their own version of a boom and bust cycle if they don\u2019t shift their reliance on exports and credit towards domestic demand, especially now that exports are likely to be less buoyant.<\/o:p><\/span><\/div>\n
    Unfortunately, there are no quick fixes to the daunting challenge of solving deep structural problems, something many investors and consumers realize.<\/o:p><\/span><\/div>\n
    \u201cAll of this is understood by advanced economy consumers who are reducing debts and are reluctant to spend; it is understood by firms postponing investment and hiring; and it is understood by investors wary of the weak and risky outlook \u2013 why else would they accept negative real interest rates on government bonds in many advanced economies?\u201d<\/o:p><\/span><\/div>\n
    And yet, BIS sees a ray of hope on the horizon, even in Europe, where BIS admitted the crises of confidence makes it even tougher to solve the problems.<\/div>\n
    \u201cFixing structural problems during a confidence crisis is both more difficult and more important than it is in better times. It is more difficult because unemployment is already high and public funding that could mitigate short-term adjustment costs is scarcer. It is more important because confidence is unlikely to return until authorities have got to grips with structural weaknesses,\u201d BIS said.<\/o:p><\/span><\/div>\n
    It called for the euro zone to implement a banking union with unified bank regulation, supervision, deposit insurance and resolution to complement the existing pan-European financial market and pan-European central bank. <\/o:p><\/span><\/div>\n
    \u201cThat approach will decisively break the damaging feedback between weak sovereigns and weak banks, delivering the financial normality that will allow time for further development of the euro area\u2019s institutional framework,\u201d BIS said, adding its support to the European Central Bank.<\/o:p><\/span><\/div>\n
    Restoring the health of the banking sector in Europe and elsewhere is critical to end the \u201cdestructive interaction\u201d with households and governments, BIS said, adding that a healthy banking sector would clear the way for governments and households to tackle their debt pile.   <\/o:p><\/span><\/div>\n
     \u201cOnly 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,\u201d BIS said.<\/o:p><\/span><\/div>\n
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 <\/span><\/o:p>Click<\/a> to read the BIS 82nd annual report<\/div>\n
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www.CentralBankNews.info<\/a><\/o:p><\/span><\/div>\n
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By Central Bank News     The global economy is trapped in a maelstrom of vicious cycles and the best way to halt this downward spiral is to recapitalize banks so they no longer burden governments and can return to their role of supporting economic growth, the Bank for International Settlements (BIS) said.     Major parts … <\/p>\n

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