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Central bankers issue strong warning on asset bubbles

Jaime Caruana, head of the Bank for International Settlements, says debt levels remain high in Europe.
Jaime Caruana, head of the Bank for International Settlements, says debt levels remain high in Europe.Georgios Kefalas/EPA/File 2014

FRANKFURT — An organization representing the world’s main central banks warned Sunday that dangerous new asset bubbles are forming, even before the global economy has finished recovering from the last round of financial excess.

Investors, desperate to earn returns when official interest rates are at or near record lows, have been driving up the prices of stocks and other assets with little regard for the risks, the Bank for International Settlements in Basel, Switzerland, said in its annual report, published Sunday.

Recovery from the financial crisis that began in 2007 could take several more years, Jaime Caruana, general manager of the BIS, said at the organization’s annual meeting in Basel on Sunday. The recovery could be especially slow in Europe, he said, because debt levels remain high.


“During the boom, resources were misallocated on a huge scale,’’ Caruana said, according to a text of his speech, “and it will take time to move them to new and more productive uses.”

The BIS provides financial services to national central banks and acts as a setting where central bankers can discuss monetary policy and other issues like financial stability and bank regulation.

The board of directors includes Janet L. Yellen, chairwoman of the Federal Reserve; Mario Draghi, president of the European Central Bank; and the heads of central banks from Japan, China, India, and other countries.

The organization, which reflects a widespread view among central bankers that they are bearing more than their share of the burden of fixing the global economy, often uses its annual reports to send a message to political leaders, commercial bankers, and investors.

But the BIS’s language in the 2014 edition was unusually direct, as was its warning that the world could be hurtling toward a new crisis.

“There is a disappointing element of déjà vu in all this,” Claudio Borio, head of the monetary and economic department at the BIS, said in an interview ahead of Sunday’s release of the report, which he described as “a call to action.”


The organization said governments should do more to improve the performance of their economies, such as reducing restrictions on hiring and firing. The report also urged banks to raise more capital as a cushion against risk and to speed efforts to deal with past problems. Countries that are growing quickly, like some emerging markets, must be alert to the danger of overheating, the group said.

“The signs of financial imbalances are there,” Borio said. “That’s why we are emphasizing it is important to take further action while the time is still there.”

The BIS report said debt levels in many emerging markets, as well as in Switzerland, “are well above the threshold that indicates potential trouble.”

Yet investors show no sign of being deterred. This month, for example, investors snapped up $1.5 billion worth of bonds sold by the government of Kenya. The debt paid an interest rate of 6.875 percent, very low for a country that has deep economic problems and has been rocked by terrorist bombings.

In contrast to many economists and analysts, the BIS played down the risk of deflation, a downward spiral in prices that can have devastating economic effects. When deflation takes hold, people stop spending because they expect prices to fall further. Company profits slump, and unemployment rises.

In Europe, an intense debate has taken place about whether the region could slip into deflation and whether the European Central Bank should be pumping more money into the eurozone’s economy as a countermeasure.


Borio said that it was unlikely there would be a repeat of the kind of catastrophic deflation that occurred during the Great Depression.

He noted that prices have been falling in Switzerland for several years, but the country has continued to grow, and unemployment is low.

The organization also had harsh words for corporations, which it said were not taking advantage of booming stock markets to step up investment.