Bondholders in the United States alone would lose more than $1 trillion if yields leap, showing how urgent it is for governments to put their finances in order, the Bank for International Settlements said on Sunday.

The Basel-based BIS lambasted firms and households as well as the public sector for not making good use of the time bought by ultra-loose monetary policy, which it said had ended up creating new financial strains and delaying rather than encouraging necessary economic adjustments.

The BIS, a grouping of central banks, was one of the few organizations to foresee the global financial crisis that erupted in 2008.

Since then, government bond yields have sunk as investors seek a traditionally safe place to park funds, regulators tell banks to hold more bonds and central banks buy bonds as a means of pumping money into vulnerable economies.

The BIS said in its annual report that a rise in bond yields of 3 percentage points across the maturity spectrum would inflict losses on U.S. bond investors—excluding the Federal Reserve—of more than $1 trillion, or 8 percent of U.S. gross domestic product.

The potential loss of value in government debt as a share of GDP is at a record high for most advanced economies, ranging from about 15 percent to 35 percent in France, Italy, Japan and Britain.

“As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care,” the BIS said.

“Clear central bank communication well in advance of any moves to tighten will be critical in this regard.”

Underlining the BIS’s warning, U.S. bond prices slumped after Fed Chairman Ben Bernanke said on Wednesday that the U.S. central bank expected to reduce its pace of bond buying, now $85 billion a month, and cease purchases completely by mid-2014 if the economy continues to improve.

The BIS acknowledged that bond yields were unlikely to rise 3 percentage points overnight. But it noted that big moves can happen quickly: in 1994 yields in many advanced economies rose by about 2 percentage points in the course of a year.

Just Get On With It

Brushing aside the contention that austerity is counterproductive, the BIS said countries must redouble their efforts to make their debt manageable because growth alone will not do the job.

“Over indebtedness is one of the major barriers on the path to growth after a financial crisis. Borrowing more year after year is not the cure,” the report said.

The fiscal adjustments required in rich countries are especially sizeable when projected increases in age-related spending are taken into account. Indeed, the adjustments are so large that governments are likely instead to water down entitlements such as pensions, the report said.

Not only has the debt of households, firms and governments increased as a share of GDP in most countries since 2007, but debt-service ratios are now higher in most rich countries than the 1995-2007 average—despite low interest rates. The country with the highest debt ratio is Sweden.

And governments have balked at labor and product market reforms, despite overwhelming evidence that making it cheaper to lay off workers and reducing the barriers to competition in sectors such as retailing would deliver a big boost to growth.

Expecting monetary policy to solve these problems is a recipe for failure, the BIS said.

Stephen Cecchetti, the BIS’s chief economist, said central banks could not do more without compounding the risks they have already created.

“It is others that need to act, speeding up the hard but essential reform and repair work to unlock productivity and employment growth. Continuing to wait will not make things any easier, particularly as public support and patience erode,” he said on a conference call.