Posted by: John Gilmore | September 15, 2006

BIS Warns Countries Over Debt – June 28 2010

Here we see the people behind the New World Order telling us what’s coming – a global ‘double-dip’ recession/depression.  You know we’re nearing something significant if we see quotes like this in mainstream media.

“To put it bluntly, the combination of remaining vulnerabilities in the financial system and the side effects of such a long period of intensive care threaten to send the patient into relapse,” the BIS said.

Let’s apply some truth to the statement above.  What are the ‘remaining vulnerabilities’?  That would be a world monetary system saturated with debt.  What is the ‘intensive care’ mentioned above?  That would be all of the various government ‘stimulus’ packages that have done nothing but prolong the inevitable collapse of the system while increasing sovereign debt around the world by massive amounts.

This is like pulling a drowning man out of the water – giving him a few moments to breathe – and then tossing him back in the water.  Thanks for the help.

Basically, you and I are being told that the nations of the world are in a no-win situation – compliments of the world’s current monetary system.  Get ready for some ‘solutions’ that will replace the current system.  It’s only a matter of time.

On the latter, it cautioned that a continued deterioration in the public finances could result in political pressure on central banks to tolerate stronger price growth and inflate away the public debts. In an extreme case, high and rising debts could make investors less willing to hold government bonds, forcing the central bank to step in. In such a case, raising interest rates may no longer act on inflation, since any rate rises would boost debt-interest payments and increase the debt further.

jg – June 28, 2010

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JUNE 28, 2010, 8:40 A.M. ET

BIS Warns Countries Over Debt

By NATASHA BRERETON

Wall St. Journal

BASEL, Switzerland—Global policy makers face a “daunting” task to balance their support for still-fragile economies and markets, while avoiding unwanted side effects from long-standing stimulus policies, the Bank for International Settlements said Monday.

In its annual report, the bank for central banks highlighted the risks posed by high public-debt levels, concerns about which are already jeopardizing recovery in the euro zone, and in the longer term could curb potential growth and make it harder to keep inflation low and stable.

Central banks will have to take the impact of much-needed fiscal tightening into consideration when judging their appropriate policy stance, but they must also be aware of the dangerous distortions that can occur from keeping interest rates extremely low for an extended period, it warned.

“To put it bluntly, the combination of remaining vulnerabilities in the financial system and the side effects of such a long period of intensive care threaten to send the patient into relapse,” the BIS said.

European Union finance ministers and the International Monetary Fund agreed last month to commit €750 billion ($928.95 billion) to support euro-zone governments that have difficulty borrowing in the international bond markets, after investors’ fears about Greece’s creditworthiness spread to other countries.

The European Central Bank began to buy euro-zone government bonds in an effort to bring down borrowing costs, while the U.S. Federal Reserve also simultaneously reopened dollar swap lines with several major central banks.

The BIS said that events in Greece underscored the risk that highly indebted governments now have hardly any financial room for maneuver, and may not be able to act as buyers of last resort to save their banks in a crisis.

Unless countries take resolute action to address their fiscal problems, there’s a “key risk” that investor concerns will worsen and engulf other countries, it warned. “The sovereign debt crisis in Greece is clearly jeopardizing Europe’s nascent recovery from the deep recession brought on by the earlier crisis,” it said.

The BIS also noted that persistently higher levels of public debt over the longer run could make economies more vulnerable to adverse shocks, reduce their growth potential and endanger prospects for monetary stability.

On the latter, it cautioned that a continued deterioration in the public finances could result in political pressure on central banks to tolerate stronger price growth and inflate away the public debts. In an extreme case, high and rising debts could make investors less willing to hold government bonds, forcing the central bank to step in. In such a case, raising interest rates may no longer act on inflation, since any rate rises would boost debt-interest payments and increase the debt further.

While acknowledging that such scenarios are unlikely in the near-term, a greater likelihood that they might come to pass could push up public inflation expectations, prompt investors to demand greater compensation for inflation risk and cause medium- and long-term interest rates to rise.

“So far, there is no evidence that inflation expectations have become unanchored,” the BIS said. “However, a failure by governments to make headway in restoring fiscal sustainability increases the risk that inflation expectations may abruptly and unexpectedly change.”

The BIS also warned that while recovery in the large advanced economies is “far from self-sustained,” the longer emergency policy measures are maintained, the greater the risk of creating unhealthy distortions.

“Such powerful measures have strong side effects, and their dangers are beginning to become apparent,” it said, adding that such direct support was delaying essential post-crisis adjustments and “runs the risk of creating zombie financial and non-financial firms.”

Still-fragile market and economic conditions continue to make tightening risky in many places. But “we cannot ignore the fact that the culminating side effects themselves pose a danger that, at the very least, implies exiting sooner than may be comfortable for many,” the BIS said.

“A prolonged period of exceptionally low real interest rates alters investment decisions, postpones the recognition of losses, increases risk-taking in the ensuing search for yield and encourages high levels of borrowing,” it warned.

An additional risk for central banks is that although output in the countries that were worst affected by the crisis is still well below potential, the amount of economic slack could be smaller than conventional measures of the output gap suggest, the BIS said.

The buildup of imbalances before the crisis suggests that potential output growth wasn’t as high as was commonly believed, it said, and noted that financial disruption and the lost skills of the long-term unemployed could reduce potential output. “Inflationary pressures could therefore reappear earlier than anticipated,” it warned.

The BIS noted that while implementation of macroprudential policy measures should improve the resilience of the financial system, monetary policy needs to play a greater role in leaning against the buildup of systemic financial vulnerabilities during booms.

“A monetary policy strategy narrowly focused on stabilizing inflation, looking out over a short horizon of about two years, is not sufficiently forward-looking to ensure financial stability and is thus not sufficient to stabilize inflation over the longer term,” the BIS said.

It added that since credit and asset prices have boomed, even during times of low and stable inflation, there is a risk that monetary policy could accommodate or even contribute to the buildup of financial vulnerabilities.

“Adding a few years to the monetary policy framework, beyond the two years ahead commonly focused upon, would help monetary policy makers to weigh longer-term threats to financial stability, including the impact of interest-rate settings, against nearer-term inflation,” it said.

Additionally, the BIS predicted further “substantial” declines in household debt in the U.S., U.K. and Spain.

It also expressed doubts about the sustainability of bank profits, citing potential for further asset writedowns, high exposure to sovereign risk, possible difficulties refinancing and a renewed squeeze on dollar funding. It noted that in 2009, profits at many U.S. and European banks were heavily based on volatile fixed-income and currency markets, while credit extended to the private sector shrank, and loan-to-deposit ratios for many international banks fell. Furthermore, the trend toward investing in longer-dated securities could also backfire if the yield curves flattens, it said.

Write to Natasha Brereton at natasha.brereton@dowjones.com

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