Geneva: Heavily indebted industrialised nations must take swift action to cut debt in both the public and private sectors so as to prevent a new disaster, the Bank for International Settlements said Sunday.
And emerging markets should watch against falling into the same trap that triggered the recent financial turmoil, the bank for central banks warned, pointing out that property prices and private sector debt have been soaring in the red-hot economies of China, Brazil and India.
“Fiscal authorities need to act quickly and decisively before disaster strikes again,” said the BIS in its annual report.
“In the countries that were at the centre of the crisis, those imbalances include the lingering indebtedness in the private sector -- households as well as financial and non-financial firms -- which must be cut to levels well below those seen in the middle of the last decade,” it noted.
In addition, countries that have been pursuing growth through leverage should ditch the strategy for a more conservative approach.
The BIS noted that a closer look into the debt situation in countries such as Ireland and Spain indicates that the fiscal deficits are largely structural, and would therefore require greater effort from the governments to fix the problem.
In Ireland, for instance, the country’s fiscal surplus before the crisis was “almost entirely due to the bloated construction sector.” Without the effect of the construction boom, its fiscal position would be close to balance.
In Spain, about a third of the 2007 surplus came from construction.
Therefore with the collapse of the construction sector during the crisis, cutting public costs would be only part of the solution. Governments would have to examine ways to fill the lost revenue gap.
“Other sectors will have to take over from construction and financial intermediation as the engines of growth,” it said.
The bank also suggested adjusting the tax system, such as giving less tax breaks for debt, in order to discourage debt accumulation.
Meanwhile, emerging economies must realise that they are not immune from the crisis even if they generally fared well during the recent financial turmoil, noted the BIS.
“Emerging market economies managed to escape the worst of the crisis, but many now run the risk of building up imbalances very similar to those seen in advanced economies in the lead up to the crisis,” it said.
Credit in Brazil, China and India had grown by over 20% annually between 2006 and 2010, said the report.
“Emerging market policymakers should recognise that the lessons from the financial crisis do not apply only to advanced economies,” it added.