Bank of England Governor Mervyn King said the global recovery is faltering and “time is running out” for authorities to reduce imbalances and strengthen banks.
“In 2008-09, it was easy to coordinate international action in the Group of 20 economies,” King said in a speech late yesterday in Liverpool, England.
“In the face of a collapse in world trade even faster than that in the 1930s, countries needed no persuasion of the necessity of policy stimulus. But it has proved much harder to form a consensus on how to tackle the underlying problems.”
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King said monetary policy is limited in its capacity to revive the U.K.’s “reluctant recovery” as governments delay dealing with underlying imbalances between countries with current account surpluses and deficits. As European leaders prepare for a summit on the Greek crisis on Oct. 23 before G-20 leaders meet on Nov. 3, King said the global economy needs a “bold response.”
“Without a rebalancing of spending in the world economy, a struggle between debtor and creditor countries will inflict economic pain on everyone,” he said. “We acted together in 2009: we can do so again.”
King also said there have been “renewed concerns about the adequacy of the capital” in euro-area banks. The Bloomberg Europe Banks Index has fallen 31 percent this year, more than twice the decline recorded by the Stoxx Europe 600 Index.
“A transparent recognition of losses and a substantial injection of additional capital are necessary to restore market confidence,” King said.
As the euro-area debt crisis roiled financial markets, the Bank of England raised the ceiling for so-called quantitative easing to 275 billion pounds ($430 billion) from 200 billion pounds on Oct. 6.
King justified the expansion by arguing that while inflation accelerated to 5.2 percent in September, it will slow “sharply” next year as the impact from oil prices and a sales- tax increase fade. Minutes of this month’s decision, showing how policy makers voted, will be published at 9:30 a.m. in London.
“Without monetary stimulus -- low interest rates and large asset purchases -- there is a risk that growth will stall and inflation fall below our symmetric 2 percent target,” King said. “For the time being, a significant degree of policy stimulus is appropriate to support demand.”
While the central bank’s buying of government bonds will benefit all companies, King said the Bank of England and the U.K. Treasury are examining measures aimed at boosting credit to small and medium-sized businesses.
Group of 20 finance ministers and central banks have set the Oct. 23 summit of European leaders in Brussels as the deadline to agree on a plan to avoid a Greek default, bolster banks and curb contagion.
King said some governments in Asia and the euro area “significantly” contributed to the problems in the global economy over the last two decades by trying to fix exchange rates “without putting in place mechanisms to ensure that competitiveness could be rebalanced by other means.”
“Surplus countries, a group which includes three of the world’s largest four economies, share a major responsibility to respond to our present dilemma,” King said. “Domestic spending must be raised in the surplus countries and lowered in the deficit countries, relative to current trends.”
King said officials should aim at returning interest rates to normal and lowering budget deficits, though turmoil in Europe and slower global growth will delay the process. While stimulus measures after the collapse of Lehman Brothers Holdings Inc. in 2008 “bought time,” lenders in Europe remain inadequately capitalized and governments must do more to tackle the underlying “debt problem,” he said.
“There is a long journey ahead before the world economy returns to a sustainable equilibrium,” he said.
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