The global economy risks a “relapse” of the crisis that rocked it a decade ago, the Bank of International Settlements (BIS) said on Sunday, warning there is little “medicine” left to treat the patient a second time.
“Things look rather fragile,” BIS chief economist Claudio Borio told reporters in a conference call. “There is little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse.”
The Basel-based institution, considered the central bank for central banks, warned in its annual report that the recovery after the 2007-2008 global financial crisis has been “highly unbalanced,” with emerging economies especially facing mounting pressure.
Central banks around the world have for years administered “powerful medicine” to counter the effects of the crisis, with “unusually and persistently low interest rates,” Borio said, adding that it has helped boost economic activity, “but some side effects were inevitable.”
The crises that have erupted in Argentina and Turkey are “withdrawal symptoms” as central banks start cutting back the dosage, he said.
After years of ultra-accommodating monetary policy, the US Federal Reserve has begun hiking interest rates, while the European Central Bank has announced that it would end its stimulus program by the end of the year.
However, amid the normalization process, the BIS noted a stark divergence between growth in the US market and the situation in emerging economies.
On average, global financial markets are doing well, but “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,” the bank said.
Asset prices in emerging economies have been hit by a stronger US dollar, as well as growing global trade tensions, the BIS said.
Signs of a slowdown in the Chinese economy, which has become an increasingly critical buyer for commodity producers, are 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.
US dollar lending to non-banks in emerging economies “has actually more than doubled since the Great Financial Crisis to some US$3.7 trillion,” Borio said, adding that the number does not 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 US, pointing to the “red-hot” leveraged loan market, with banks “offloading their loans onto an eager investor base.”
Some of the loans are offloaded via collateralized loan obligations, which are “close cousins” of the infamous instruments known as collateralized debt obligations, and securities backed by residential mortgages, which sparked the 2008 crisis, Borio said.
The future was hard to foresee, he said: “Will the patient continue to mend, as looked likely until the first quarter of this year, or will there be a relapse?”
“What one can say is that the patient’s full recovery will not be smooth,” Borio said. “Policymakers and market participants should brace themselves for a lengthy and eventful convalescence.”
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