BIS veteran says global credit excess worse than pre-Lehman

By on September 15, 2013
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Extreme forms of credit excess across the world have reached or surpassed levels seen shortly before the Lehman crisis five years ago, the Bank for International Settlements has warned.

Extreme forms of credit excess across the world have reached or surpassed levels seen shortly before the Lehman crisis five years ago, the Bank for International Settlements has warned.

The Swiss-based `bank of central banks’ said a hunt for yield was luring investors en masse into high-risk instruments, “a phenomenon reminiscent of exuberance prior to the global financial crisis”.

This is happening just as the US Federal Reserve prepares to wind down stimulus and starts to drain dollar liquidity from global markets, an inflexion point that is fraught with danger and could go badly wrong.

“This looks like to me like 2007 all over again, but even worse,” said William White, the BIS’s former chief economist, famous for flagging the wild behavior in the debt markets before the global storm hit in 2008.

“All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle,” said Mr White, now chairman of the OECD’s Economic Development and Review Committee.

The BIS said in its quarterly review that the issuance of subordinated debt — which leaves lenders exposed to bigger losses if things go wrong — has jumped more than threefold over the last year to $52bn in Europe, and jumped tenfold to $22bn in the US.

The share of “leveraged loans” used by the weakest borrowers in the syndicated loan market has jumped to an all-time high of 45pc, ten percentage points higher than the pre-crisis peak in 2007-2008.

The BIS said investors are snapping up “covenant-lite” loans that offer little protection to creditors, as well as a form of hybrid capital for banks known as CoCos (contingent convertible capital instruments) that switch debt into equity if bank capital ratios fall too low. While CoCos help shield taxpayers from losses in a banking crisis by leaving private creditors with more of the risk, the recent appetite for such an instrument is also a warning sign.

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