BIS: Dr. Greenspan, in the Ballroom, with a Printing Press

BIS points finger at easy credit
Monday, 30 June 2008 11:46
RTÉ Ireland

The world's top central banking body has said the world economy could be in for an unexpectedly severe downturn. The Bank for International Settlements blamed lax credit for fuelling the current financial crisis.

The bank, known as the central bankers' central bank, suggested that interest rates should tend towards vigilance even in good times in order to discourage excessive borrowing.

While it was difficult to predict the severity of a downturn, it appeared that a 'deeper and more protracted global downturn than the consensus view seems to expect' was on the way, the BIS said.

It dampened hopes that booming emerging markets would offset the slowdown, saying that many of these markets were significantly dependent on external demand, notably from the world's largest economy the US.

The BIS argued that the sub-prime mortgage market - loans given to borrowers with poor credit ratings - was not a root cause of the turmoil on financial markets, but only a trigger.

The bank said years of cheap borrowing had led to an extraordinary accumulation of debt. It pointed out that in the US, the ratio of household savings to disposable income was about 7.5% in 1992. The ratio fell sharply in the early 2000s. By 2005, it had plunged to almost zero.