Graphic: bis annual report 2014
The world in the financial cycle: brazil, china, india, switzerland and turkey most at risk
The current annual report of the "bank for international settlements" once again proves to be an astonishing and probably the best "official" source on the world’s financial interception (the bis is owned by the rough central banks and is considered the "central bank of central banks"). And even though the bis has been exercising the noble restraint common in central banking circles, its rather harsh criticism of its annual report has once again made headlines.
Just as it did in 2000 and 2008, just before the collapse of the new-economy and the. Of the world financial system had come, the bis this time again took the opportunity to marvel at the amazing tranquility in the financial sector – which is what central bank-speak sounds like:
Volatility in equity, fixed income and foreign exchange markets has fallen to historic lows. Obviously, market participants are hardly pricing in any risks.
By analogy, this leads to the fear that the record chase of the dax and wall street will soon come to a sad end.
The most important analytical innovation of the annual report, however, may be the realization that the well-known business cycles, which seldom last longer than eight years, can vary from "financial cycles" these cycles have finally had to be taken into account by policymakers. These financial cycles have been "about 15 to 20 years" the economic downturns, which will last for several economic cycles and were caused by misguided policies, will ultimately – if no countermeasures are taken – lead to an economic crisis "debt trap" . This approach, which had previously been pursued by only a few heterodox economists, was first made known to the broader financial community by bis general manager jaime caruana two years ago (ways out of the debt crisis?). The current annual report deepens this analysis, which in any case does not only concern monetary policy.
The report therefore emphasizes already in the introduction that the most recent world financial crisis "not only a decisive moment in economic history" was, "but also a turning point "in our thinking" represents. For what is needed is "long-term prospects", the "go far beyond the time span of the business cycles that dominate economic thinking". Thus the "the financial cycle since the crisis has, to a large extent, the same causes as the crisis itself" these lie "in a collective failure to get a grip on the financial cycle".
The bis’s work of persuasion is, however, made more difficult by the fact that, for the "financial cycle" so far none "general definition" and the bis is apparently only at the beginning of this process. In any case "joint fluctuations of multiple quantitative and price-related financial variables", where "credit aggregates – as a measure of indebtedness – and real estate prices – as a measure of available collateral – play a particularly important role". The feedback effects are likely to be important here, for example, when a rapid increase in mortgage lending boosts house prices and the private sector has a higher volume of credit available due to the rise in the value of collateral: "it is this mutually reinforcing interaction between financing conditions, valuations, and estimated risk that has led to very serious economic turmoil in the past", concludes the bis.
To adequately represent these dynamics with the smallest possible set of variables, the bis considers real credit growth, the credit-to-gdp ratio, and real house price growth to be sufficient, although this does provide some "bias" and ensures that the chosen method ignores the stock booms of recent years and perceives only the real estate booms.
At least, that’s what the graph of the u.S. Financial cycle since 1970 suggests, showing that the financial cycle has swelled considerably over the past five decades. It is also clear that output and financial variables can move in different directions for a long time, except that when a financial, "when a financial boom ends, the link between the two cycles is usually all the stronger". This then often coincides with banking crises and much deeper recessions – balance sheet recessions – than is usual in an average business cycle". According to the bis, at least "partly" also that "phanomenon of unfinished recessions" be explained:
For example, monetary policy in the u.S. Was loosened significantly after the 1987 and 2000 borsencrashes, even though the financial cycle was in an upswing. Trimmed by lower interest rates, housing prices and credit volumes did not decline, but increased, only to collapse several years later.
What is at stake, then, is an over-cycle "asymmetric policies", which is only short-term oriented and neglects the long-term consequences:
Policymakers do not oppose booms, but they do loosen the reins vigorously in downturns and for longer periods of time. This triggers a wait-and-see tendency in interest rates and a wait-and-see tendency in debt levels, which in turn makes it difficult to raise interest rates without affecting the economy – a debt trap.
"Early warning indicators" show "worrying signals" in some countries
According to the bis, since the crisis of 2007/08, financial cycles have developed in stark contrast internationally. Thus, most western industrialized countries have experienced financial downturns, while major emerging economies have experienced upturns. Eurozone countries such as greece and spain, which were hit hardest by the financial crisis and the subsequent european sovereign debt crisis after a prolonged boom, have seen real credit volumes and property prices slump by an average of 5-10% per year in recent years, although the decline in credit volumes and residential property prices has recently slowed down.
The u.S.A. May even have already bottomed out; for example, asset prices, which plummeted after the crash, and borrowing in the corporate sector have not been on a downward trend since as early as 2011. Household borrowing also picked up again in 2013. Similarly, the bis experts also find signs of a turnaround in the united kingdom and many countries in central and eastern europe – which had also experienced boom-bust cycles in the past decade – as the pace of deleveraging is now slowing and real estate prices are rising there as well "omnibus" were on the rise again.
By contrast, mixed signals came from western commodity exporters such as australia and canada, and from europe’s nordic countries. Although they had also experienced pronounced financial booms in the late 2000s, these were dampened by the global financial crisis and the european sovereign debt crisis, with the sharp rise in commodity prices in recent years preventing a full trend reversal and only asset prices and corporate credit declining. However, households continued to borrow, albeit at a reduced pace, with growth in real house prices and (total) lending recovering recently.
By contrast, emerging economies such as china, brazil, and turkey, where credit and asset price growth slowed in 2008 and 2009, are clearly experiencing booms since then. For example, credit to the private sector had been expanding at an average rate of about 10% per year from 2010 onward, but the rise in real estate prices in brazil was already slowing and there were rising defaults in china’s real estate sector, which already pointed to a coming downturn in surveillance.
This depends in no small part on developments in the west, where the sharp easing of monetary policy has led to a surge in global liquidity that has enabled emerging economies to raise more than two trillion dollars in new foreign debt since 2008. Moreover, these loans were almost exclusively denominated in foreign currency, with debt ied by foreign affiliates in offshore financial centers not even included in these (balance of payments-based) statistics, which, according to the bis, increased the total by more than a third.
On the positive side, external financing in emerging markets, which before the crisis had been channelled mainly through bank loans, has since been channelled mainly through the bond markets, which means longer maturities and, above all, lower interest rates. Because due to the "global hunt for risk" the average nominal long-term bond yield had fallen from around 8% at the beginning of 2005 to around 5% in may 2013, which, adjusted for inflation, corresponds to a real long-term yield of just one percent.
By contrast, the bis seems to be satisfied with the "anpangen" not being entirely satisfied in the current downturn either. For example, in the united states, the united kingdom, and spain, although the private sector debt-to-gdp ratio has fallen by an impressive 20 percentage points from its recent highs, the decline lags behind both previous increases and the average decline of 38 percentage points recorded after some historical crises in these countries, suggesting that the decline in debt as a share of income is not yet complete in at least some of these countries, and especially in spain: "in the usa, nominal debt fell in 2009 and 2010, but has risen again since then. In contrast to spain, the main factor driving debt reduction was nominal gdp growth. In the united kingdom, both a reduction in indebtedness and nominal gdp growth were mabindigenous." however, the bis does not consider what has been achieved so far in any of the countries to be sufficient to return to a healthy growth path.
In a next step, the bis has therefore calculated the growth rate of the euro area from the deviation of house prices and loans from their long-term averages, as well as from the share of the interest burden in income "early warning indicators" according to the bis, these have already been achieved in a number of countries "worrying signals" . For example, the gap in credit ratios (d.H. The deviation of the credit-to-gdp ratio from its long-term trend) in many emerging market economies and switzerland is well above the threshold set by the bis at 10, which indicates potential problems in reaching the "serious problems in the banking sector generally followed within three years". Record holder china has already reached a threatening 23.6, turkey follows with 17.4, followed by brazil (13.7) and switzerland (13.1), which also leads in the housing price gap. For comparison: germany comes despite the youngest real estate price increases here only on a value of 5,5, whereby with -8,8 no credit gap exists but the germans appear today clearly less indebted than in the long-term average.
Ideally, the over-indebted countries would now grow out of their debts, but according to the bis, this is not a realistic option, not least for demographic reasons. Reduce the debt by repayments exceed new borrowing, would be another "natural and important way to get started, but it may not be enough". Rather, the "unsustainable levels of debt could be addressed directly and, for example, write-offs made. Of course, this means that someone has to bear the corresponding losses" – by which can only be meant the banks.
Compared with the alternatives, however, this was less painful, of which the bis said the nordic countries could offer a good example. There, the problem of unsustainably high debt levels was solved at the beginning of the 1990s, "by forcing banks to write off losses and to address distressed assets with determination, if necessary through asset forfeiture. In addition, the authorities reduced overcapacity in the financial system and recapitalized the banks, subject to a rigorous review of their viability. This laid a solid foundation for the recovery of the economy, which occurred relatively quickly."
In this context, low global interest rates have played a highly ambiguous role: on the one hand, lower interest rates reduce the burden of debt service and reduce asset prices. Sie konnen die kreditnehmer jedoch auch veranlassen, sich noch starker zu verschulden, was eine letztlich vorzunehmende zinsanhebung noch kostspieliger mache und ein land in die schuldenfalle fuhren konne.
The debt trap, according to a scenario analysis for countries like the u.S. And the u.K "not at all a remote possibility". For example, the bis has run the future development path under four different interest rate scenarios and found that the debt service burden there will increase regardless of whether policy rates rise or remain low, with the estimated paths for korea and brazil looking similar.