Watchdog fears fresh Lehman's crisis from global debt surge

[Zero Liability]

Jaime Caruana, head of the Swiss-based financial watchdog, said investors were ignoring the risk of monetary tightening in their voracious hunt for yield, the Telegraph reports.
"Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a very long time, and may be taking more assurance than central banks wish to give," he said.
Caruana said the international system is in many ways more fragile than it was in the build-up to the Lehman crisis.
Debt ratios in the developed economies have risen by 20 percentage points to 275% of GDP since then.
Credit spreads have fallen to to wafer-thin levels.
Companies are borrowing heavily to buy back their own shares.
The BIS said 40% of syndicated loans are to sub-investment grade borrowers, a higher ratio than in 2007, with ever fewer protection covenants for creditors.
The disturbing twist in this cycle is that China, Brazil, Turkey and other emerging economies have succumbed to private credit booms of their own, partly as a spill-over from quantitative easing in the West.
Their debt ratios have risen 20% to 175%. Average borrowing rates for five-years is 1% in real terms. This is extemely low, and could reverse suddenly.
"We are watching this closely. If we were concerned by excessive leverage in 2007, we cannot be more relaxed today," he said.
"It may be the case that the debt is better distributed because some highly-indebted countries have deleveraged, like the private sector in the US or Spain, and banks are better capitalized. But there is also now more sensitivity to interest rate movements."
The BIS warned it is annual report two weeks ago that equity markets had become "euphoric".

Source. Further commentary.

I wonder what tricks the central bankers will pull out of their collective clown hat next. Of course they can continue denying the obvious and dig their heads further up their arses, perhaps even hand the problem to their successors if they keep it going long enough. Bernanke managed to do so.

[BrilloPad]

Of course they can continue denying the obvious and dig their heads further up their arses, perhaps even hand the problem to their successors if they keep it going long enough. Bernanke managed to do so.

They will do this. The question is how long they can do this until the plebs realize you can borrow as much as you want without fear of a comeback.

I reckon still decades to go - let the party roll on.

[Zero Liability]

I wonder when they'll get round to quantifying the sheer amount of waste and economic destruction this "hunt for yield" has caused. But I suspect you're right, there's an awful lot of wealth to squander, so they may be able to keep this going for decades. It's very much a con game, dependent on the confidence of market participants in central bank and "private" bank proclamations, so we'll see how long it can go before that confidence collapses. It's interesting, though, that the BIS is very much alert to the problems caused by the spiralling credit expansion. At the moment, it's caused a few asset mini-bubbles here and there, but by and large the banks and corporations are just sitting on the cash they hold. The only money that is really entering the economy is that being created to service interest on govt debt, and to keep it cheap.