BIS Quarterly Report: “If I were you, I wouldn’t start from here.”

The latest BIS quarterly report can be found here:


Relative to the IMF, World Bank and national central banks around the world, the BIS has taken a consistently sound position on global monetary policy. Claudio Borio’s remarks can be seen here:


Borio said:

Taking an even longer-term perspective, as argued in detail in the latest BIS Annual Report, all this points to weaknesses in domestic and international policy arrangements – arrangements that have so far been unable to constrain sufficiently the build-up and unwinding of hugely damaging financial booms and busts across countries. Hence a world in which debt levels are too high, productivity growth too weak and financial risks too threatening. This is also a world in which interest rates have been extraordinarily low for exceptionally long and in which financial markets have worryingly come to depend on central banks’ every word and deed, in turn complicating the needed policy normalisation. It is unrealistic and dangerous to expect that monetary policy can cure all the global economy’s ills.

All this is reminiscent of the old joke about the stranded tourist who, having asked for directions, was told: “If I were you, I wouldn’t start from here.”


Hyun Song Shin (their Economic Adviser & Head of Research) goes into the preposterous effects now occurring as a result of the ECB taking the ultra-easy monetary policy mantle from the Fed:


  • Especially noteworthy in the advanced economies has been the pickup in euro-denominated financing activity which has coincided with the asset purchase programme of the ECB.

  • One example of the increase in euro-denominated borrowing has been the growth of euro-denominated bonds issued by non-financial corporates from the United States – the so-called “reverse yankee bonds”. Net issuance in the first half of 2015 was almost $40 billion, which is more than three times the pace of issuance in the same period last year.

  • It is true that euro-denominated borrowing from outside the euro area is still small compared with the equivalent US dollar amount, but it is now perhaps large enough to be associated with deleveraging episodes during periods of market turbulence. For instance, we saw during August that the euro strengthened when markets were in a “risk-off” mode. The flip side of this is that a weaker euro is associated with greater risk-taking, with associated cross-border spillover effects.


This now represents a form of Gresham’s Law in the credit markets. It will end badly.