BIS: Balance Sheets Threaten Sustained Global Growth (Charts)

Source: BIS (from below)
The Bank for International Settlements had its 2012 annual meeting in Basel, Switzerland this weekend and released its 82nd Annual Report, which pointed out that public and private sector balance sheets need to be managed appropriately during this deleveraging cycle or they will put global growth at risk. So, how long will advanced economies stay at the zero bound? Here's more from the press release (It's time to break the vicious cycles, says BIS in 82nd Annual Report):

"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.""

BIS General Manager Jaime Caruana delivered a speech that had charts showing how public and private sector balance sheets threaten global growth, but mainly advanced economies.

"The main roadblock to sustained growth is not a lack of economic stimulus. Instead, it is a vicious cycle of adverse feedbacks between three fundamental weaknesses, all related to balance sheets:

  • First, the financial sector is still fragile. Despite some progress, many banks remain overleveraged, and uncertainty about the quality of their assets prevents many banks from borrowing in unsecured markets. Government bond yields have soared for some sovereign borrowers in Europe as they have found it harder to attract foreign investors. The fragmentation of bank and bond markets along national lines is a cause of deep concern.
  • Second, large structural imbalances that existed well before the crisis still weigh on households and firms. In many advanced economies, their debt burdens remain too high. In some countries, the real estate sector is still adjusting; and in some others, growth remains too dependent on exports.
  • And third, government debt is unsustainably high in most industrial countries."

Source: BIS
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