Central bank organization warns economic shocks risk replay of 2008-2009 financial crises

BIS: World economy still fragile

GENEVA — An organization bringing together the world’s major central banks warned Monday that the global economy risks a replay of the 2008-2009 financial crisis, with massive public debt in Europe and the United States replacing the private debt that fueled the credit crunch two years ago.

A report by the Bank for International Settlements concluded that policy makers must ensure growth is sustainable and not just fueled by the untenably low interest rates in place in much of the developed world.

“A shock of virtually any size risks a replay of the events we saw in late 2008 and early 2009,” the Basel, Switzerland-based organization said in its 206-page annual report.

“Although private sector debt has started to decline, public debt has taken its place, with sovereign fiscal positions already on an unsustainable path in a number of countries,” the report said — a reference to the severe public funding gap in European countries such as Greece and Spain.

In a stark warning to governments to clean up their finances, the central bankers noted that “macroeconomic policy is in a vastly worse position than it was three years ago, with little capacity to combat a new crisis.”

The report recommended winding down stimulus packages, raising interest rates in the long term and forcing through reforms of the financial system to prevent sudden shocks from causing market-wide collapse as they did two years ago.