There are some problems that not even $10 trillion can solve.
That gargantuan sum of money is what central banks around the world have spent in recent years as they have tried to stimulate their economies and fight financial crises. The tidal wave of cheap money has played a huge role in generating growth in many countries, cutting unemployment and preventing panic.
But it has not been able to do away with days like Monday, when fear again coursed through global financial markets. The main causes of the steep declines in stock and bond markets were announcements out of Greece and Puerto Rico.
And in China, the precipitous declines in its stock market were also a sobering reminder that stubborn problems lurked in the global economy.
Stifling debt loads, for instance, continue to weigh on governments around the world. Greece’s government has repeatedly called for relief from some of its debt obligations, and Puerto Rico’s governor said on Sunday that its debt was “not payable.” Both borrowers are extreme cases, but high borrowing, either by corporations or governments, is also bogging down the globally significant economies of Brazil, Turkey, Italy and China. And economists say that central banks and their whirring printing presses can do only so much to alleviate the burden.
“Monetary policy can only be a palliative,” said Diana Choyleva, chief economist at Lombard Street Research. “It cannot be a cure.”
On Monday, the closing of banks in Greece ignited worries of a messy exit from the euro, and stock markets around the world fell sharply. Adding to the turmoil were expectations that the Greek government would not make a debt repayment to the International Monetary Fund that is due on Tuesday. The Dow Jones industrial average sank 350.33 points, or 1.95 percent, while the benchmark index for investors, the Standard & Poor’s 500-stock index tumbled 2.09 percent, erasing its gain for the year. It was also the first decline of more than 2 percent since October last year.
Wall Street’s avidly watched fear gauge, known as the Vix, spiked to its highest level in months, suggesting more turbulence ahead.
The market turmoil was greater in Europe. The stock markets of Italy and Portugal fell more than 5 percent, while Spain’s was down 4.6 percent. Ominously, each country’s government bonds also sold off, pushing up their yields, which move in the opposite direction of their prices.
In China, stocks fell again on Monday, leaving them down more than 20 percent from their recent peak, in bear market territory.
Investors sought the comparative safety of United States government bonds. Treasury prices rallied, pushing the yield on the benchmark 10-year note down to 2.33 percent.
The return of nervous selling on stock markets raises important questions about the health of the global economy. As central banks like the Federal Reserve and the European Central Bank have printed trillions of dollars and euros, markets in stocks and bonds, as well as other types of assets, have responded optimistically, sometimes reaching highs that were unthinkable seven years ago in the depths of the financial crisis.
Still, when everything is going well, it is easy to forget that there are limits to the power of the central banks, analysts say.
“Basically, they haven’t got as much bang for the buck, or bang per euro, or bang per yen, as they were expecting,” said Ed Yardeni of Yardeni Research.
Central banks can make debt less expensive by pushing down interest rates. Crucially, though, they cannot slash debt levels to bring much quicker relief to borrowers. In fact, lower interest rates can persuade some borrowers to take on more debt.
“Rather than just reflecting the current weakness, low rates may in part have contributed to it by fueling costly financial booms and busts,” the Bank for International Settlements, an organization whose members are the world’s central banks, wrote in a recent analysis of the global economy.
Many countries are now in a position where their governments and companies live in fear of an increase in interest rates. A further rise in the government bond yields of Spain and Italy could cause a contraction in the fiscal policy of those countries, noted Alberto Gallo, head of macro credit research at the Royal Bank of Scotland.
“This ‘involuntary tightening’ is what the E.C.B. does not want,” he wrote in an email, referring to the European Central Bank.
Even faster-growing economies are also vulnerable. Debt in China has soared since the financial crisis of 2008, in part the result of government stimulus efforts. Yet the Chinese economy is growing much more slowly than it was, say, 10 years ago. This has prompted the Chinese government to pursue policies that expose more of the economy to market forces.
“They have realized that they cannot continue like this--and that monetary policy doesn’t solve all problems,” Ms. Choyleva said.
Countries with high-seeming debt totals are not necessarily fragile. The United States government borrowed heavily after the financial crisis. But as the economy recovered, the debt proved to be manageable--and some economists contend that it helped stoke the economic comeback. Japan’s gross debt is equivalent to 234 percent of its gross domestic product. Yet it has had no problems finding buyers for its government bonds over the years, defying gloomy predictions of some Western investors.
And some analysts contend that Europe’s debt problems are particularly acute because of the euro. Unlike Japan and the United States, countries in the common currency cannot unilaterally loosen monetary policy and let their currencies fall to try and generate the growth that would then make it easier to pay off debts.
“Greece needs far easier money than the rest of Europe and it can’t get it because it is locked in with the rest of Europe,” said Joseph E. Gagnon, a senior fellow at the Peterson Institute for International Economics.
Forgiving debts is another way to lighten the dead weight on economies. Writing off debt can hurt banks, but defaults can also clear the system of doubtful loans and accelerate a recovery. Some analysts contend that extinguishing the mortgage debt of households bolstered the United States recovery. But lenders are not always willing to give big breaks to borrowers. Greece’s creditors have so far denied the country’s most recent requests for debt relief.
And, in one of the most stressed countries in Europe, a grim standoff over debt is taking place. Ukraine is moving closer to default after creditors continued lending to the country despite zero growth and a corrupt and opaque political and economic system. Now, some of those creditors, including Franklin Templeton, an American investment firm, have resisted Ukraine’s demand they take a loss on their principal investment, preferring instead to extend the repayment period.
But last week, Ukraine’s finance minister, Natalie Jaresko, said that a default was “theoretically possible.”