Settlements bank predicts economy relapse

The Bank of International Settlements has
warned that global economy risked a “relapse” of the crisis that rocked
it a decade ago.

 

It therefore, warned that there was little “medicine” left to treat the patient a second time.

 

“There is little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse.

 

“Things look rather fragile,” BIS chief economist Claudio Borio told reporters in a conference call,’’ it warned.

 

The Basel-based BIS, considered the
central bank for central bank, warned in its annual report that the
recovery after the 2007-2008 global financial crisis had been “highly
unbalanced”, with emerging economies especially facing
mounting pressure.

 

Borio pointed out that central banks
around the world had for years been administering “powerful medicine” to
counter the effects of the crisis, with “unusually and persistently low
interest rates.”

 

This, he said, had helped boost economic activity, “but some side effects were inevitable.”

 

He pointed for instance to the crises
that have recently erupted in Argentina and Turkey, describing them as
“withdrawal symptoms” as the central banks start cutting back the
dosage.

 

After years of ultra-accommodating
monetary policy, the US Federal Reserve has begun hiking interest rates,
while the European Central Bank (ECB) recently announced it would end
its stimulus programme at the end of this year.

 

But amidst this normalisation process,
BIS noted a stark divergence between growth in the US market and the
situation in emerging economies especially.

 

On average, Borio said, global financial markets were doing well.

 

But, he warned, “the average was not particularly meaningful.

 

It was a bit like that proverbial person
whose temperature, on average, was fine, except that their head was on
fire and their feet freezing.”

 

Asset prices in emerging economies have been hit by a stronger dollar, as well as growing global trade tensions, BIS said.

 

Signs of a slowdown in the Chinese
economy, which has become increasingly critical for commodity producers,
were also hitting emerging economies hard, it said.

 

At the same time, risky lending similar to what landed the world in the global financial crisis a decade ago is on the rise.

 

Borio pointed out that US-dollar-lending
to non-banks in emerging economies “has actually more than doubled since
the Great Financial Crisis to some $3.7 trillion.”

 

And he pointed out that this number does
not even include borrowing through so-called foreign exchange swaps,
“which could easily be of a similar order of magnitude.”

 

Borio also voiced concern about the
situation in the United States, pointing to the “red-hot” leveraged loan
market, with banks “off-loading their loans onto an eager investor
base.”

 

Some of the loans, he said, were
off-loaded via collateralised loan obligations (CLOs), which are “close
cousins” of the infamous instruments known as collateralized debt
obligations, or CDOs, and securities backed by residential
mortgages, which sparked the 2008 crisis.

 

But Borio stressed the future was hard to foresee.

 

“Will the patient continue to mend, as
looked likely until the first quarter of this year, or will there be a
relapse?” he asked.

 

“What one can say is that the patient’s
full recovery will not be smooth… Policymakers and market participants
should brace themselves for a lengthy and eventful convalescence.”