Crisis over? Yes but it could return, global banking body warns

The world clawed its way off a financial precipice two years ago, says a new report, but major nations still have to do some important work to put the global economy on a sound footing.

Thierry Charlier/AP
Greek Prime Minister George Papandreou speaks during a media conference after an EU summit in Brussels on Friday. The European Union said it would help Greece access billions of euros in EU development funds in an attempt to boost the country's struggling economy and sweeten unpopular austerity measures ahead of a tight parliamentary vote.

The world clawed its way off a financial precipice two years ago, but major nations still have to do some important work to put the global economy on a sound footing. If they don’t take steps such as controlling public debt, a new crisis is possible.

So says a report by the Bank for International Settlements, an organization backed by central banks like the Federal Reserve and European Central Bank.

"Addressing overindebtedness, private as well as public, is the key to building a solid foundation" for renewed economic growth, says the report, released Sunday. Otherwise, fiscal problems "could trigger the next crisis."

The report, by itself, doesn't signal anything new about future policies by central banks. But it amplifies many of the concerns they are wrestling with, and comes as the global economy faces significant challenges.

Economic growth has cooled in recent months in key nations including the US. Inflation has revived this year as a global worry, visible in food and oil prices. Governments in Europe are struggling to contain a crisis over whether Greece and other European Union members will be able to finance high public debt.

Related to those immediate trouble signs, in many nations private-sector banks remain under stress, and households carry their own high debt loads.

All this puts pressure on policymakers to navigate toward stable growth and avoid a possible new crisis.

"The consolidation of [government] fiscal accounts has barely started," said the report from the Switzerland-based Bank for International Settlements (BIS). "Highly accommodative monetary policies are fast becoming a threat to price stability." And financial reforms to safeguard the health of commercial banks "have yet to be completed and fully implemented."

Signs of progress and challenge

The report offers a window on signs of both progress and challenge for the global economy, as seen from the vantage point of a high-powered group of economists and financial regulators.

The good news is that the global economy is growing – raising the possibility of a transition from heavy stimulus efforts by policymakers to self-sustaining growth led by consumers and businesses.

But the report comes as a number of challenges have cropped up:

• The European Union has been roiled in recent weeks by efforts to persuade global investors that a credible plan is in place to provide support to Greece, in exchange for austerity measures to curb the nation's debt.

China is scrambling to control inflationary pressures, which threaten the solid growth it has been achieving in recent years.

• In the US, elected officials reached an impasse last week in their heated debate over whether to cut government spending, couple some tax hikes with spending cuts, or postpone fiscal reform.

Some recommendations in the BIS report stand in contrast to a sizable camp of private-sector economists, who argue that the economic recovery still requires government stimulus to encourage consumer spending, in part through tax cuts and government spending policies.

The BIS analysis, while not denying weaknesses in the current economy, called for "driving up private saving," as opposed to private consumption. And it called for "taking substantial action now to reduce deficits in the countries that were at the core of the crisis."

Financial-industry reforms needed

Similarly, the BIS report urges strong follow-through on financial-industry reforms – designed to ensure that big global banks build up larger capital cushions that they could draw on in a future crisis. But those reforms have met with resistance from bankers.

Individual nations have been developing financial reforms, while the BIS has been working to ensure that standards placed on the largest global banks are similar in all the large nations where they operate.

In the US, bankers have complained that the so-called Dodd-Frank law, signed by President Obama, is overly constraining. Republicans have joined the crusade against new rules from regulatory agencies, such as oversight of complex investments called derivatives.

“Anything we can do to slow down, deter, or impede their ability to engage in this kind of oppressive overregulation, which is freezing up our economy, would be good for the country,” Senate Republican leader Mitch McConnell said last week, speaking at a breakfast hosted by The Christian Science Monitor

Federal Reserve Chairman Ben Bernanke has recently come to the defense of tighter rules for banks.

And the BIS report, while it did not comment directly on the Dodd-Frank law, said that new efforts at "improving banking system resilience will yield benefits that far outweigh the costs."

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