BIS - It’s time for the world to end its debt-fueled growth model

by Mat Clinch
CNBC
June 22, 2016

The organization commonly known as the central bank of central banks has called for an end of boom-and-bust cycles that have plagued the global economy, urging lawmakers quickly to adjust current policy.

"The global economy cannot afford to rely any longer on the debt-fueled growth model that has brought it to the current juncture." the Bank for International Settlements (BIS) warns in a new annual report published on Sunday.

Debt levels are too high, productivity growth is too low, and the room for policy maneuver is too narrow, the BIS warned. Adding that the most "conspicuous" sign of this predicament is interest rates that continue to be persistently and exceptionally low.

Central banks around the world have leapt into action following the global financial crisis of 2008 and the sovereign debt crisis in the euro zone. Several institutions have introduced bond-buying programs and cut benchmark rates in an effort to stimulate lending. Some have even pushed rates below zero with a negative rate effectively charging banks who park cash at a central bank.

The European Central Bank (ECB), the Danish National Bank (DNB), the Swedish Riksbank, and the Swiss National Bank (SNB) have all pushed key short-term policy rates into negative territory. This has suppressed bond yields in wider asset markets with BIS estimating that a record of close to $8 trillion in sovereign debt was trading at negative yields at the end of May.

Nonetheless, the Basel-based BIS - which was one of the few organizations to foresee the 2008 crash - says that this monetary policy has been "overburdened for far too long."

"Prudential, fiscal and, above all, structural policies must come to the fore," it said in the report Wednesday, adding that it's essential to avoid the temptation to succumb to "quick fixes or shortcuts."

"The measures must retain a firm long-run orientation. We need policies that we will not once again regret when the future becomes today," it added.

The BIS calls for the completion of banking rules on capital buffers to help in times of stress, and stresses that "stronger banks lend more." It also calls on governments to adjust their fiscal - or budgetary - rules to make them more countercyclical and reduce implicit guarantees, which may encourage risk-taking. Another policy that deserves consideration, according to BIS, is to use the tax code to restrict or eliminate the bias of debt over equity or reduce the effect of financial cycles

The organization is renowned for its analysis of central banking and has regularly warned over the effects of stimuli such as quantitative easing. However, it was moderately upbeat on the global economy with regards to growth.

"Judged by standard benchmarks, the global economy is not doing as badly as the rhetoric sometimes suggests," it said.

"Global growth continues to disappoint expectations but is in line with pre-crisis historical averages, and unemployment continues to decline."