June 23, 2013
Central Banks Criticize Europe for Political Gridlock on Economy
By JACK EWING and JAMES KANTER
Their failure early Saturday to agree on a crucial pillar of the euro zone’s new banking architecture, despite 18 hours of haggling, occurred just as the world’s central bankers were about to criticize politicians for exactly that kind of dithering.
The Bank for International Settlements, a group representing central banks including the Federal Reserve and the European Central Bank, warned political leaders on Sunday that they should not expect central banks’ cheap-money policy to hold the global economy together forever. The organization, based in Basel, Switzerland, said in its annual report that politicians should do their share of “the hard but essential work of adjustment.”
“Returning to stability and prosperity is a shared responsibility,” Jaime Caruana, the general manager of the organization, said Sunday in Basel, according to a text of his remarks. “Monetary policy has done its part.”
The report was published a day after a political leaders’ meeting in Luxembourg had provided a vivid example of what the central bankers were complaining about. Despite debating well into the early morning on Saturday, European Union finance ministers could not agree on new rules to reduce the chances of taxpayers bearing the burden if commercial banks collapsed.
“We ran out of time,” Michael Noonan, the Irish finance minister, told reporters as he left the meeting at about 4 a.m. “There are still core issues outstanding, so we’ll need a full meeting next week, and there’s no guarantee it will reach conclusion.”
The message from the group in Basel was that central banks cannot enable such inaction indefinitely. “The balance between costs and benefits is deteriorating,” said Stephen Cecchetti, head of the monetary and economic department of the Bank for International Settlements, referring to central bank policies that have flooded the world with cheap money since the financial crisis began in 2008.
There are already clear signs of central bank retrenchment. The Federal Reserve chairman, Ben S. Bernanke, indicated last week that the American central bank was likely to wind down the purchases of bonds it has used to push down market interest rates. The European Central Bank seems to be running out of ways to stimulate the euro zone, and there is doubt about whether the Bank of Japan can maintain an ambitious policy to flood the economy with money and achieve 2 percent inflation.
As long ago as last summer, Mario Draghi, the European bank president, was publicly lamenting the limits of the central bank’s ability to address the broader problems of the European economy and calling upon political leaders to pursue structural solutions.
Jörg Asmussen, a member of the policy-making executive board of the central bank, reiterated that point in a speech on Sunday in Kiel, Germany. “The global reform agenda has lost momentum, as the sense of urgency imposed by the crisis has vanished,” he said.
But there did not seem to be any awareness of the limits of central bank forbearance among the 17 finance ministers in Luxembourg. The ministers pulled an all-nighter to complete their assignment — in this case, to establish a system to ensure that taxpayers never again have to pay so much for the mistakes of bankers.
The ministers have scheduled another meeting for Wednesday, a day before the leaders of the European Union’s 27 member states gather for a summit meeting in Brussels, their last scheduled meeting before the summer hiatus. The leaders have been expected to endorse the finance ministers’ decision — if there is one.
The 18-hour marathon was aimed at breaking the so-called doom loop, in which struggling governments go deeper into debt to save their banking systems, only to face sky-high borrowing costs. That vicious circle was largely the reason that Ireland and Cyprus required international bailouts, while Spain has struggled to avoid being sucked into a similar vortex.
But since agreeing in principle last year to centralize bank supervision in the euro zone and create a system to wind down terminally ill banks, the finance ministers have been snagged on various issues, including how to share the cost.
The ministers initially agreed in Luxembourg on Thursday night to let the euro zone’s emergency fund — the European Stability Mechanism — pump money directly into failing banks, on a case-by-case basis in the latter part of 2014. But then, on Friday, the talks broke down on technical issues, such as whether countries would have the discretion to protect some classes of bank creditors in a crisis.
The failure to reach a deal could further unsettle investors who were already anxious about the lingering recession in the euro zone, turbulence on global markets, renewed political instability in Greece and hints that Cypriot leaders are balking at their bailout agreement.
The Bank for International Settlements acts as a financial clearinghouse for most large central banks, including the Fed and the E.C.B., and as a forum for central bankers to discuss policy issues. It uses its annual report to take stock of the global economy.
While the organization has criticized politicians in the past, its verdict this year was unusually harsh, and implicitly aimed at Europe, where the central bank has already cut interest rates to a record 0.5 percent. Mr. Draghi, reiterated last week that the central bank for the euro zone remained “ready to act.”
The Bank for International Settlements also had some harsh words for commercial bankers, particularly in Europe, saying they had failed to make an honest accounting of bad loans and other problems. It urged bankers to sell off damaged assets and raise fresh capital, so that they are able to resume providing credit to businesses and consumers.
“Continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system,” the organization said.
The organization also disputed claims made by some banks that they have become safer because they have increased the size of the capital they hold as a cushion against losses. Much of the improvement in the amount of capital that banks’ have reported recently was “window dressing,” achieved by manipulating the way that risk is measured, the organization said.
“Uncertainty about asset quality remains a greater concern in Europe,” the organization said. On average, banks in Britain, France, Germany, Spain and Switzerland are barely profitable, according to its data, while banks in Italy are losing money. It is difficult for commercial banks to raise capital unless they are profitable, which suggested that some will either need government help or go out of business.
The Bank for International Settlements also weighed in on the debate about how quickly countries should cut debt, offering support to a pair of prominent American economists whose work linked excess debt to poor economic performance.
That research, by Kenneth S. Rogoff and Carmen M. Reinhart of Harvard, was used to justify policies that imposed harsh austerity in countries like Greece. But a study published in April by economists at the University of Massachusetts found flaws in the data that had been used to arrive at those conclusions.
The Bank for International Settlements said its own research supported the broad thesis that too much government debt is a brake on growth.
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