Central banks ‘have run out of ammunition’ to tackle global crisis

GLOBAL debt levels have reached dangerous extremes and central bankers no longer have the ammunition to counter a financial crisis, a top cast of officials has warned in Davos.

Kristalina Georgieva, head of the International Monetary Fund, said there are disturbing signs of an asset bubble and acknowledged the side-effects of ultra-low interest rates and quantitative easing are becoming more treacherous.

Speaking at the World Economic Forum, Mrs Georgieva said global debt has mushroomed to $188trillion (£144trillion) but has failed to lift economies from the deflationary danger zone.

Much of the stimulus has leaked out into asset markets and fed an indiscriminate hunt for yield. François Villeroy de Galhau, governor of the Bank of France, said the European Central Bank cannot continue to hold up the heavens on its own. “We need fiscal stimulus. I would like us central bankers to become less central because we cannot solve the remaining challenge,” he said.

Yet the EU’S Stability Pact and Fiscal Compact remain legally embedded in the eurozone. Counter-cyclical fiscal stimulus remains all but impossible.

Harvard professor Carmen Reinhart said central banks saved the world from a Thirties car crash after the Lehman debacle but are now in a trap.

“Lower for longer is a transfer of money from savers to borrowers. The gap between low policy rates and the ‘actuarial’ interest rate required for the health of pensions is chronically wide,” she said. The implication is a slow disguised default on future pensioners, with insidious social consequences.

“Risks are out there, no question about it,” said Christine Lagarde, the ECB’S new president. One of them is a US-EU trade war. The Brexit shadow still looms large. “We still have a possible cliff-edge in December,” she said.

Olaf Scholz, Germany’s finance minister, played down Brexit risks. The earlier skirmishes had serious effects on business confidence, Mr Scholz said. So long as this is not repeated “it will not have a big impact,” he said. “It will be more difficult for the UK because things will be different.”

How Germany intends to preserve its £45bn trade surplus with the UK was left unsaid. If “out is out”, Germany is in a sense out of the UK market. This contradiction in EU policymaking has yet to be confronted seriously.