1) This is the second BIS warning in under six months.
2) It is very dangerous to borrow in a currency other than the one in which you earn your income.
True at retail, true at wholesale.
From The Telegraph:
Bank for International Settlements concerned about underlying health of world economy as dollar loans to emerging markets increase rapidly
Off-shore lending in US dollars has soared to $9 trillion and poses a growing risk to both emerging markets and the world's financial stability, the Bank for International Settlements has warned.
The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at annual rate of 47pc. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars.
A chunk of China's borrowing is disguised as intra-firm financing. This replicates practices by German industrial companies in the 1920s, which hid their real level of exposure as the 1929 debt trauma was building up. "To the extent that these flows are driven by financial operations rather than real activities, they could give rise to financial stability concerns," said the BIS in its quarterly report.
"More than a quantum of fragility underlies the current elevated mood in financial markets," it warned. Officials are disturbed by the "risk-on, risk-off, flip-flopping" by investors. Some of the violent moves lately go beyond stress seen in earlier crises, a sign that markets may be dangerously stretched and that many fund managers do not really believe their own Goldilocks narrative.
"Mid-October’s extreme intraday price movements underscore how sensitive markets have become to even small surprises. On 15 October, the yield on 10-year US Treasury bonds fell almost 37 basis points, more than the drop on 15 September 2008 when Lehman Brothers filed for bankruptcy."
"These fluctuations were large relative to actual economic and policy surprises, as the only notable negative piece of news that day was the release of somewhat weaker than expected retail sales data for the US one hour before the event," it said.
The BIS said 55pc of collateralised debt obligations (CDOs) now being issued are based on leveraged loans, an "unprecedented level". This raises eyebrows because CDOs were pivotal in the 2008 crash.
"Activity in the leveraged loan markets even surpassed the levels recorded before the crisis: average quarterly announcements during the year to end-September 2014 were $250bn," it said.HT: Mike Norman Economics
BIS officials are worried that tightening by the US Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar....MUCH MORE
BIS Quarterly Review, December 2014
*Earlier warning:
June 29, 2014 "BIS: "Overall, it is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments globally"
June 30, 2014 "Trying to Time The Warning From the Bank For International Settlements"
And on borrowing in a foreign currency:
Ha! "Hungary's hard-pressed workforce struggles with unaffordable mortgages"
