The Bank for International Settlements is warning that we are headed towards a new financial crisis. And unlike three years ago, we are less equipped to deal with it.
In its annual report, the BIS says the world will struggle to deal with the crisis because interest rates are close to zero.
The report says: "The financial disruptions in the first half of 2010 have brought the fragility of the industrial world's financial system into stark relief: a shock of virtually any size risks a replay of the events we saw in late 2008 and early 2009. The sovereign debt crisis in Greece is clearly jeopardising Europe's nascent recovery from the deep recession brought on by the earlier crisis. Unlike then, however, we have hardly any room for manoeuvre. Policy rates are already at zero and central bank balance sheets are bloated. Although private sector debt has started to decline, public debt has taken its place, with sovereign fiscal positions already on an unsustainable path in a number of countries. In short, macroeconomic policy is in a vastly worse position than it was three years ago, with little capacity to combat a new crisis – it will be difficult to find a source of further treatment should another emergency arise."
This means banks around the world will need to lift interest rates. If they don't, it will risk an even bigger crisis.
Following the G20 summit, banks will be required to hoard more cash to avert a new crisis. If the BIS is right, that won't be enough.
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