THE SWISS based Bank for International Settlements (BIS), the ‘central bank for central banks’, has issued a new warning about the global ‘debt trap’ but like all its previous warnings it has no solution to a crisis that will bring the capitalist financial system crashing down.
The BIS latest report highlighted the huge rise in global debt in relation to the world’s Gross Domestic Product (GDP), the measure of wealth produced, since the onset of the world capitalist crisis in 2007-08.
Back in June the head of the BIS monetary and economics department, Claudio Borio, warned that the next global crash could come ‘with a vengeance’. Just months later the BIS is reporting that the situation is even worse than they thought back then, that global debt has been ‘under-reported’ by $13 trillion.
This unaccounted debt exceeds the acknowledged debt of $10.7 trillion owed by firms and governments. The inescapable fact that the BIS is warning about is that a crash is not only coming with a vengeance but is inevitable in the very near future, that debt is ‘a defining question for the global economy’.
Borio, speaking about the latest report, said: ‘Debt service ratios are only so low because interest rates have been falling so much.’ He went on: ‘There is a certain circularity in all this that points to the risk of a debt trap: the protracted decline in interest rates to unusually low levels, regardless of the strength of the underlying economy, creates the conditions that complicate their subsequent return to more normal levels.’
He added: ‘Against this backdrop, the increase in the percentage of firms unable to cover their interest payments with their earnings – the so-called “zombie” firms – does not bode well.’ For a long time the BIS has been urging central banks in the US, Britain and the EU to reign in all the pumping of trillions of dollars, pounds and euros into the financial system through various quantitative easing programmes and making this money available to the banks and companies at near zero interest rates.
This free money has created a giant bubble in the world’s stock exchanges with company shares trading at many times the actual value they produce. These are the ‘zombie companies’ Borio is warning about, companies that scarcely make a profit but which command record share prices.
At the same time entire governments across the world have feasted on this free money confident that they can just about manage the interest repayments courtesy of near-zero interest rates. This has created the time bomb that is terrifying the Swiss bankers. If the free money and near zero rates continue then the debt bubble will explode crashing the world financial system.
Giant corporations, companies and even governments will be bankrupted overnight. But the contradiction is that raising interest rates to anything near normal will mean that those companies and countries that have run up trillions of dollars of debt will no longer be able to repay even the interest and go bust. It is not just the giant corporations or share holders that will face bankruptcy.
Under the wage cutting austerity war against the working class by the Tories millions of workers and their families have only survived by running up more and more personal debt. The BIS has ranked Britain as among the most vulnerable countries to any increase in interest rates as household debt is amongst the highest in the world especially with the large amount of variable-rate mortgages that working people have taken on as the only way of affording a home.
Even the small increase in the interest rates being contemplated by the Bank of England will be enough to tip millions of workers over the edge and facing default on their debts. The message from the BIS is clear, with no way out from catastrophic crash world capitalism is a system that is bankrupt and on the verge of collapse, it can hold no future for the working class except poverty and destitution.
The only way forward for workers is to put this bankrupt capitalist system out of its misery through the victory of the world socialist revolution.
