The Bank for International Settlements, the central banks' central bank, out with their Quarterly Review and highlighting emerging market vulnerability in particular

  • wild market ructions of recent weeks and capital outflows from China are warning signs that the massive build-up in credit is coming back to haunt, compounded by worries that policy makers may be struggling to control events

BIS chief economist Claudio Borio says:

"We are not seeing isolated tremors but the release of pressure that has gradually accumulated over the years along major fault lines"

  • total debt ratios are now significantly higher than they were at the peak of the last credit cycle in 2007, just ahead of the financial crisis
  • overall emerging market debt has spiked 50 points to 167% and even higher in China at 235%
  • USD loans to emerging markets have doubled since the Lehman crisis to $3trln, much of it borrowed at abnormally low real interest rates
  • offshore borrowing in USD has reached a record $9.6trln
  • cross-border loans fell by $52bln in Q1 chiefly due to deleveraging by Chinese companies
  • capital outflows from China totalled $109bln in Q1
  • there are risks stemming from the build-up of trillions of USD-denominated debt in the corporate sector across the developing world and to related booms in asset prices
  • global banks in London also appear to be borrowing huge sums of euros to fund investment activities, pushing offshore euro liabilities to a record €2.8 trln

Says Borio:

"It is unrealistic and dangerous to expect that monetary policy can cure all the global economy's ills"

The warning this time is nothing new from the BIS who have repeatedly expressed concern notably ahead of the Lehman crisis, but their publication of this latest report is timely ahead of the FOMC meeting this week.

As I/we have highlighted here on many occasions there is a perfect storm brewing with vast potential fall-out if rates are hiked in the US or indeed UK anytime soon. Equally there are severe dangers in prolonged periods of cheap money.

Full review from the BIS here

Bank for International Settlements out with another timely warning