BIS' Caruana warns a debt trap 'looms large'

Policy-makers lack a "satisfactory analytical framework" to deal with the interplay between finance and the real economy, Jaime Caruana, the general manager of the Bank for International Settlements (BIS) said in a speech earlier this month but published on Friday.

"Debt has a prominent role in this interplay," Caruana said, but added: "We don't have a good answer to the question: how much debt is too much debt?"

He noted that total global debt (of households, non-financial corporates and governments) has risen to around 235% of GDP from 210% of GDP at the end of 2007. "Deleveraging, what deleveraging?" Caruana asked.

"Polices – fiscal, monetary and prudential – that do not lean sufficiently against the build-up of the financial booms but ease aggressively and persistently against the bust risk entrenching instability and chronic weakness: policy ammunition is progressively eroded while debt levels fail to adjust," Caruana said. "A debt trap looms large."

He added that moving away from the "debt-driven growth model of the last few decades" was "essential in order for the global economy to truly recover from the crisis".