Global economic policy urgently needs rebalancing, the Bank for International Settlements (BIS) said recently, as the world faces a “risky trinity” of high debt, low productivity growth and dwindling firepower at the world’s big central banks.

The BIS, an umbrella body for major central banks, said in its annual report that the global economy was highly exposed even before the vote by Britain to leave the European Union.

“There are worrying developments, a sort of ‘risky trinity,’ that bear watching,” said the head of the BIS monetary and economic department, Claudio Borio.

“Productivity growth that is unusually low, casting a shadow over future improvements in living standards; global debt levels that are historically high, raising financial stability risks; and room for policy maneuver that is remarkably narrow.”

He said the global economy cannot afford to rely any longer on the debt-fueled growth model that has brought it to the current juncture.

Despite sub-zero interest rates and trillions of dollars of stimulus, Europe and Japan’s central banks are struggling to lift inflation and growth. Markets have grown accustomed to that support, but they are growing concerned the firepower is mostly spent.

“Should this situation be stretched to the point of shaking public confidence in policymaking, the consequences for financial markets and the economy could be serious,” said Borio.

In a separate speech, BIS head Jaime Caruana said major central banks would limit market turbulence as much as possible after Britain voted to leave the European Union.

Change in attitude needed

“There is likely to be a period of uncertainty and adjustment,” Caruana said. “With good cooperation at the global level, I am confident that uncertainty can be contained and that adjustments will proceed as smoothly as possible.”

In an apparent nudge to the U.S. Federal Reserve, the BIS said in its report that policymakers needed to put more focus on raising rates when they have the chance so that they have room to cut them again when the next downturn comes.

“This is especially important for large jurisdictions with international currencies, as they set the tone for monetary policy in the rest of the world,” the BIS said.

More broadly, it urged a global change in attitude in both fiscal and monetary policy. Fiscal policy should be designed to cope with financial boom and bust more systematically; monetary policy is needed to monitor booms and busts from a systemic risk view, to keep the financial side of the economy on an even keel.

“There is an urgent need to rebalance policy in order to shift to a more robust, balanced and sustainable expansion,” said the BIS.

“We need to abandon the debt-fueled growth model that has brought us to this predicament. It is essential to relieve monetary policy, which has been overburdened for far too long.”

Bank warnings

Leaning toward Europe, the report also called for crisis-hit countries to reform their banks, via dividend cuts or even injections of taxpayer money, and for a wave of mergers to reduce excess capacity.

An early warning was also flashing red for China’s banks — the deficits in the ratios of credit to gross domestic product and debt service if interest rates were to jump. Canada and Turkey were in those danger zones, too.

Separate figures showed Germany was the only country last year whose big banks saw a decline in net income as a percentage of total assets.

The BIS’s foreign exchange reserves data, which are considered the most accurate in the world, showed a $668 billion decline globally last year. China accounted for $513 billion of that, presumably as it sought to sure up the yuan.

Middle East countries burnt through $140 billion of their reserves as oil prices dropped. Japan and Malaysia, which saw big currency declines last year, of $20 billion and $21 billion.

Another section of the report showed that while exchange rate declines could help lift growth in some countries, in others, such as emerging markets where debt is high and in a foreign currency like the dollar, it can do the opposite.

“As the saying goes: It’s the stocks, not the shocks,” said BIS’s head of research, Hyun Song Shin. “Addressing the overhang of foreign currency-denominated debt stocks would be one element of securing better macro outcomes in emerging market economies.”