Published March 17, 2013
FRANKFURT – The Bank for International Settlements raised concern that buoyant financial markets are getting too dependent on monetary and fiscal stimulus, discouraging governments from pushing through reforms.
Central banks in the United States, Europe and Japan have calmed financial markets with lower interest rates and asset purchase programs, buying governments time to implement reforms that make their economies more competitive.
And while stock markets rallied, volatility diminished and corporate bond spreads tightened over the past six months, the outlook of the real economy had not improved, mainly because of monetary and fiscal accommodative policies, the BIS said.
"The fact that market dynamics have become ever more dependent on central bank and government stimulus is a cause for concern," Stephen Cecchetti, BIS economic adviser and head of the monetary and economic department, said in a conference call, presenting the BIS quarterly report on Sunday.
There were clear limits to what policy could achieve, Cecchetti said, "importantly, expansionary policy, especially central bank accommodation, cannot solve structural problems".
Global debt - held by households, non-financial enterprises and governments combined - had risen by 30 trillion dollars or 40 percent of the global gross domestic product (GDP) since 2007, and further borrowing would not be the answer to the current problems, Cecchetti said.
"With monetary and fiscal policies reaching their own limits, it is important to lay the foundation for strong sustainable growth," he said, referring to reducing the barriers to reallocating capital and to the movement of workers across sectors, as well as addressing the problems in pension, healthcare and education systems.
"The payoffs of these structural reforms will only accrue over time. So we have to get started as soon as possible," Cecchetti said.
"Increasing public and private debt ever further until we are not able to fund it is not a substitute for these reforms."
(Reporting by Eva Kuehnen; editing by Ron Askew)