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Speech by Mr Jaime Caruana, General Manager of the BIS, on the occasion of the International Finance Forum 2014 Annual Global Conference.
Debt as a share of GDP has risen by 20 percentage points globally since the global financial crisis, driven primarily by the expansion of public sector debt in the advanced economies and the rapid rise in private sector debt in the emerging market economies.
The debt problem usually does not come alone. Most obviously, the build-up of leverage can increase the vulnerability of the financial sector, induce adverse market dynamics and result in growth-impeding debt overhangs. Less obviously, but no less importantly, credit booms tend to be associated with overinvestment in certain sectors, ie a misallocation of resources in the real economy. And last but not least, the feel-good effect of credit booms can mask the distortions and weaknesses that are already in place, resulting in their not being detected and addressed in a timely manner.
Mr. Caruana said: “The combination of these three types of debt-related phenomenon together with policies that neglect the power of financial cycles can give rise to serious risks in the long term. A sequence of such boom-bust cycles can sap strength from the global economy. And polices –fiscal, monetary and prudential –that do not lean sufficiently against the build-up of the financial booms but ease aggressively and persistently against the bust risk entrenching instability and chronic weakness: policy ammunition is progressively eroded while debt levels fail to adjust. A debt trap looms large.”
The global economy needs to move away from the debt-driven growth model of the last few decades in order to truly recover from the crisis. This requires not only efforts to restore the resilience and reliability of the financial sector, but also a rebalancing of economic policies to support greater flexibility and productivity in the real economy.