World economy just as vulnerable to crisis as it was in 2007

Graham_Devon

According to the head of the BIS. Infact, in may ways, the world economy is even more fragile now due to the increase in debt ratios.

The world economy is just as vulnerable to a financial crisis as it was in 2007, with the added danger that debt ratios are now far higher and emerging markets have been drawn into the fire as well, the Bank for International Settlements has warned.

Jaime Caruana, head of the Swiss-based financial watchdog, said investors were ignoring the risk of monetary tightening in their voracious hunt for yield.

“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 told The Telegraph.

Mr 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 275pc 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 40pc of syndicated loans are to sub-investment grade borrowers, a higher ratio than in 2007, with ever fewer protection covenants for creditors.

http://www.telegraph.co.uk/finance/markets/10965052/Bank-for-International-Settlements-fears-fresh-Lehman-crisis-from-worldwide-debt-surge.html

Seabee42

The debt is higher and the income is not so yeah no surprise. Loads of zombie business still out there as well.

IronWolf

I dont think investors are ignoring it, it always happens that asset prices rise as interest rates fall. The problem for many big investors like Insurance co's and pension funds is that they have to invest despite low interest rates because the alternative is cash which earns nothing.

Most of them will be acting smartly and only investing in short duration bonds which they will hold to maturity and hope interest rates rise in the future.

Also he mentions corporate lending is increasing, I dont see how that is a problem as most of it will be on fixed interest rates e.g. bonds. I can think of a few big US players that have been borrowing heavily to buyback shares but the debt load isn't excessive.

Also with the tight restrictions on banks they are getting 'safer' by the day and I just can't see another Lehmans happening. Remember that the crisis set off by Lehmans was mainly because the US government refused to prop it up, I don't think they'll make that mistake again.

Policy makers still haven't come up with a way to handle failing banks though, rescuing them creates moral hazard, and letting them go bankrupt causes global financial crisis. They need an inbetween solution, like the Central bank takes over the bank, sacks all senior management and then winds the bank down using its own liquidity to prevent capital markets from seizing up.

carslet

I am not convinced by this so called recovery and house prices going up by 10% or more per year, and wages staying static. everything to me is in a mess

Generali

IronWolf wrote: »

I dont think investors are ignoring it, it always happens that asset prices rise as interest rates fall. The problem for many big investors like Insurance co's and pension funds is that they have to invest despite low interest rates because the alternative is cash which earns nothing.

Most of them will be acting smartly and only investing in short duration bonds which they will hold to maturity and hope interest rates rise in the future.

That's what we're doing. We've moved to a much short duration for the most part.

IronWolf wrote: »

Also he mentions corporate lending is increasing, I dont see how that is a problem as most of it will be on fixed interest rates e.g. bonds. I can think of a few big US players that have been borrowing heavily to buyback shares but the debt load isn't excessive.

It's a bit odd that banks are being criticised at the moment for lending to little and too much all at the same time!

http://www.bankofengland.co.uk/publications/Documents/other/monetary/trendsapril14.pdf

According to the BoE, unsecured lending to individuals was down 2.1% in the year to Feb 2014 and lending to businesses down 2.2% over the same period. Net lending to businesses also fell. Secured lending to individuals was up about a percent but that isn't enough for the stock of mortgage lending to keep up with inflation.

IronWolf wrote: »

Also with the tight restrictions on banks they are getting 'safer' by the day and I just can't see another Lehmans happening. Remember that the crisis set off by Lehmans was mainly because the US government refused to prop it up, I don't think they'll make that mistake again.

Policy makers still haven't come up with a way to handle failing banks though, rescuing them creates moral hazard, and letting them go bankrupt causes global financial crisis. They need an inbetween solution, like the Central bank takes over the bank, sacks all senior management and then winds the bank down using its own liquidity to prevent capital markets from seizing up.

I suspect that any failing banks in future will get something closer to the Northern Rock treatment than the RBS one.

mayonnaise

Bump.

Yes, I know this thread is 2 years old, but it's relevant as the Bank for International Settlements has once again predicted impending doom.

I wonder why Graham hasn't made a new thread about it.

Oh.. he has. :rotfl:

Graham_Devon

mayonnaise wrote: »

Yes, I know this thread is 2 years old

It's not.

but it's relevant as the Bank for International Settlements has once again predicted impending doom.

It's not really relevant to anything bar you thinking it somehow makes me look like a fool.

I wonder why Graham hasn't made a new thread about it.

Oh.. he has. :rotfl:

Yes. Which made you run off searching for this thread in excitement.

Can I ask a question? How do you feel you have made me look stupid here? And what's so funny? :undecided

caronoel

Graham_Devon wrote: »

It's not.

It's not really relevant to anything bar you thinking it somehow makes me look like a fool.

Yes. Which made you run off searching for this thread in excitement.

Can I ask a question? How do you feel you have made me look stupid here? And what's so funny? :undecided

Wow Graham - you really thrive on bad news. You must be a right laugh in real life.

You've been ranting and raving on here for years - predicting doom and looking increasingly desperate and stupid and then get irked when others call you out on it.