| LONDON, June 23
LONDON, June 23 Bondholders in the United States
alone would lose more than $1 trillion if yields leap, showing
how urgent it is for governments to put their finances in order,
the Bank for International Settlements said on Sunday.
The Basel-based BIS lambasted firms and households as well
as the public sector for not making good use of the time bought
by ultra-loose monetary policy, which it said had ended up
creating new financial strains and delaying rather than
encouraging necessary economic adjustments.
The BIS, a grouping of central banks, was one of the few
organisations to foresee the global financial crisis that
erupted in 2008.
Since then, government bond yields have sunk as investors
seek a traditionally safe place to park funds, regulators tell
banks to hold more bonds and central banks buy bonds as a means
of pumping money into vulnerable economies.
The BIS said in its annual report that a rise in bond yields
of 3 percentage points across the maturity spectrum would
inflict losses on U.S. bond investors - excluding the Federal
Reserve - of more than $1 trillion, or 8 percent of U.S. gross
The potential loss of value in government debt as a share of
GDP is at a record high for most advanced economies, ranging
from about 15 percent to 35 percent in France, Italy, Japan and
"As foreign and domestic banks would be among those
experiencing the losses, interest rate increases pose risks to
the stability of the financial system if not executed with great
care," the BIS said.
"Clear central bank communication well in advance of any
moves to tighten will be critical in this regard."
Underlining the BIS's warning, U.S. bond prices slumped
after Fed Chairman Ben Bernanke said on Wednesday that the U.S.
central bank expected to reduce its pace of bond buying, now $85
billion a month, and cease purchases completely by mid-2014 if
the economy continues to improve.
The BIS acknowledged that bond yields were unlikely to rise
3 percentage points overnight. But it noted that big moves can
happen quickly: in 1994 yields in many advanced economies rose
by about 2 percentage points in the course of a year.
JUST GET ON WITH IT
Brushing aside the contention that austerity is
counterproductive, the BIS said countries must redouble their
efforts to make their debt manageable because growth alone will
not do the job.
"Over indebtedness is one of the major barriers on the path
to growth after a financial crisis. Borrowing more year after
year is not the cure," the report said.
The fiscal adjustments required in rich countries are
especially sizeable when projected increases in age-related
spending are taken into account. Indeed, the adjustments are so
large that governments are likely instead to water down
entitlements such as pensions, the report said.
Not only has the debt of households, firms and governments
increased as a share of GDP in most countries since 2007, but
debt-service ratios are now higher in most rich countries than
the 1995-2007 average - despite low interest rates. The country
with the highest debt ratio is Sweden.
And governments have balked at labour and product market
reforms, despite overwhelming evidence that making it cheaper to
lay off workers and reducing the barriers to competition in
sectors such as retailing would deliver a big boost to growth.
Expecting monetary policy to solve these problems is a
recipe for failure, the BIS said.
Stephen Cecchetti, the BIS's chief economist, said central
banks could not do more without compounding the risks they have
"It is others that need to act, speeding up the hard but
essential reform and repair work to unlock productivity and
employment growth. Continuing to wait will not make things any
easier, particularly as public support and patience erode," he
said on a conference call.