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`A Valid Warning':
BIS Warns of Worse Crunch To Come

June 30, 2008 (EIRNS)—City of London mouthpiece Ambrose Evans-Pritchard of the Daily Telegraph commented on the new annual report of the Bank for International Settlements (BIS) today, saying that its aim is to "face challenges last seen during the onset of the Great Depression."

Evans-Pritchard's report is a "valid warning shot of the sudden change in the world financial situation for the worse which is in process," commented Lyndon LaRouche.

Written by departing chief economist Bill White, the BIS's 78th Annual Report, released today, states: "The current market turmoil is without precedent in the postwar period. With a significant risk of recession in the U.S., compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point," it said. "These fears are not groundless. The magnitude of the problems yet to be faced could be much greater than many now perceive. It is not impossible that the unwinding of the credit bubble could, after a temporary period of higher inflation, culminate in a deflation that might be hard to manage, all the more so given the high debt levels."

Pritchard comments that the European banks have suffered worse losses on U.S. property than American banks, with net dollar liabilities totalling $900 billion, mostly short-term loans that have to be rolled over, The BIS report cautions the European Central Bank to handle its lending data with great care. "The statistics may understate the contraction in the supply of credit," it said.

The report then points to Eastern Europe where short-term foreign debt is 120% of reserves, mostly in euros and Swiss francs, and where current account deficits are 14.6% of GDP. It also points to the vulnerability of China, given that 20% of its exports go to the U.S.

Global banks—with loans of $37 trillion in 2007, or 70% of world GDP—are still in the eye of the storm. "Inter-bank money markets have failed to recover." Of greatest concern at the moment is that still tighter credit conditions will be imposed on non-financial borrowers. "In a number of countries, commercial property prices are beginning to soften, traditionally bad news for lenders. These real-financial interactions are potentially both complex and dangerous," it said. "Explicit and implicit debts of governments are already so high as to raise doubts about whether all non-contractual commitments will be fully honored."

The report then notes that the sub-prime crisis was only the "trigger," not the cause of the disaster, the cause being loose credit of the Greenspan years and the securitization: "It cannot be denied that the originate-to-distribute model (CDOs, CLOs, etc.) has had calamitous side-effects. Loans of increasingly poor quality have been made and then sold to the gullible and the greedy," he said.

White writes that there will be more bailouts of banks but the " 'socialized risks' should be taken on by political systems, and not dumped on the books of central banks." The report concludes: "Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off. To deny this through the use of gimmicks and palliatives will only make things worse in the end."