A fragile calm in global financial markets has given way to all-out turbulence, the Bank of International Settlements has said, warning of a “gathering storm” which has long been brewing.
In its latest quarterly report, watched closely by investors, the BIS – which is known as the central bank of central banks – also warned that investors were concerned governments around the world were running out of policy options.
BIS chief Claudio Borio said the “uneasy calm” of previous months had given way to turbulence and a “gathering storm” in the global economy.
“The tension between the markets’ tranquillity and the underlying economic vulnerabilities had to be resolved at some point. In the recent quarter, we may have been witnessing the beginning of its resolution,” he added.
“We may not be seeing isolated bolts from the blue, but the signs of a gathering storm that has been building for a long time,” he warned.
Although Asian markets enjoyed another broadly positive day on Monday and continued to claw back the losses of January, the report said said that investors were concerned about what central banks could do in the event of another crisis.
“Underlying some of the turbulence was market participants’ growing concern over the dwindling options for policy support in the face of the weakening growth outlook,” the report said. “With fiscal space tight and structural policies largely dormant, central bank measures were seen to be approaching their limits.”
Borio surveyed the major disruptions over the last three months, from the first post-crisis interest rate hike by the US Federal Reserve in December, to accumulating signs of China’s slowdown.
In what he termed the second phase of turbulence in the last quarter, Borio said markets were plagued by fears about the health of global banks and the Bank of Japan’s shock decision to impose negative policy rates.
Persistently weak oil prices drove turbulence throughout the quarter, he said.
Seeking to find a common threat for the various trends at play in the global economy, Borio said “debt is what helps us understand apparently unrelated developments.”
“Against the backdrop of a long-term, crisis-exacerbated decline in productivity growth, the stock of global debt has continued to rise and the room for policy manoeuvre has continued to narrow,” he said.
Public sector debt has risen broadly, while private sector debt rises have been concentrated in emerging markets, he added.
He argued that debt also offered a “hint” on the continuing weakness of oil prices as “highly indebted oil-producing firms come under pressure to keep the spigots open to meet their service burdens.”