By Norma Cohen in London
Economic conditions among developed economies have ?deteriorated considerably? in recent months, according to the Bank for International Settlements, whose chief economist said that the only solution to growing fragility was for sovereign governments to get their fiscal affairs in order.
Stephen Cecchetti, chief economist for the BIS, in unveiling the Bank?s latest quarterly review, said that there was very little that central banks could do to address the financing crisis that is emerging across Europe.
?Additional monetary stimulus in our view will not help,? Mr Cecchetti said. ?What we face today is not a monetary policy problem.?
He added that the problem is sovereign debt and the risks that these pose to the banks that hold those securities. ?Governments need to state how they will solve the problems of their banking systems,? Mr Cecchetti said.
A recent BIS discussion document highlighted the negative feedback loop between banks and governments in countries where investors are beginning to price in the possibility of a sovereign default. As investors abandon debt securities of these countries, rates rise and prices fall. The domestic banks that hold the sovereign debt then see their asset base reduced as value is wiped out, making them vulnerable to failure themselves. And because national governments face straitened finances, they are less able to prop up their banking systems.
In his public remarks, Mr Cecchetti did not direct his comments to monetary policy discussions in any particular country. However, it is understood that the BIS?s concerns focus on eurozone members whose banks have had the greatest difficulty in raising finance – Greece, Portugal and Ireland, and to a lesser extent, Spain and Italy – rather than on the UK or the US where the possibility of further monetary easing appears to be under discussion.
The latest BIS report highlights the extent to which weakened eurozone banks are losing liquidity, with foreign loans to euro area borrowers falling by $51bn or 0.7 per cent during the first quarter of 2011. The overall decline was primarily caused by a $69bn (3.1 per cent) decline in interbank claims. By contrast, loans to the public sector rose by $21bn or 1.4 per cent. However, the BIS noted that while large, the changes in movement were relatively modest given the historical volatility of lending.
In the first quarter of 2011, overall cross-border claims of BIS-area reporting banks rose, mainly as a result of a significant increase in lending to borrowers in the US. Lending to emerging markets also rose.
? The Financial Times Limited 2011