Geneva Bank for International Settlements (BIS), the watchdog for central banks, today warned nations like India and China, where debt is fuelling huge gains in property prices and consumption, that they were running the risk of building up the imbalances that now plague the advanced economies.
Arguing that lessons of the (financial) crisis apply to emerging market economies, BIS said in its 81st annual report that the nations should handle their debt cautiously.
The report also cautioned of global financial mayhem and devastation if investors flee from the sovereign debt of a "major economy" underscoring the need to address "over indebtedness" on a war footing.
With the growing fears of a likely financial contagion if the Greek government defaults over its $300 billion debt, it said "the lessons of the crisis apply to emerging market economies".
Countries like India and China where "debt is fuelling huge gains in property prices and consumption are running the risk of building up the imbalances that now plague the advance economies," it said.
Notwithstanding the bulging foreign exchange currency reserves, India needs to remain vigilant about its growing current account deficit as well as short term debt.
India is also experiencing a sudden drop in invisibles, analysts said.
India must be also careful about placing heavy emphasis on cross-border capital flows to fund its infrastructure in the 12th five year plan as "any reversal" in such flows can inflict damage on financial systems and ultimately on the real economy.
India must be also careful about placing heavy emphasis on cross-border capital flows to fund infrastructure in the 12th five year plan as "any reversal" in such flows can inflict damage on financial systems and ultimately on the real economy.
BIS also warned about emerging global current account imbalances which could result in "disorderly exchange rate adjustments and protectionism.
"We should make no mistake here: the market turbulence surrounding the fiscal crises in Greece, Ireland, and Portugal would pale besides the devastation that would follow a loss of investor confidence in the sovereign debt of a major economy," said BIS.
In what seems to be a pointed reference to the US and other major economies, including Britain, which are "at the core of the crisis," BIS said efforts must be made to to drive up private savings and undertake "substantial action" to reduce deficits.
The report, issued today at the meeting of the central bankers from BIS-member countries, including India, called for coordinated action on several fronts.
More disturbingly, there are imbalances in "gross financial flows" which pose even bigger risks by giving rise to potential financial mismatches.
On the monetary policy side, the report said, "The challenges are intensifying even as central banks extend the already prolonged period of accommodation."
Dwindling economic slack and rising commodity prices have driven up the risk of inflation, which is becoming structural problem.
