Bank for International Settlements Warns of Imminent Debt Blowout
Feb. 6, 2016 (EIRNS)—The Basel-based Bank for International Settlements (BIS), commonly referred to as the central banks’ central bank, is warning that the international financial system is about to blow apart.
BIS general manager Jaime Caruana, speaking at a recent forum at the London School of Economics, warned that the ongoing oil price collapse could prick the entire global debt bubble. Daily Telegraph International Business Editor Ambrose Evans-Pritchard wrote on Jan. 5:
"Mr. Caruana said an ‘illusion of sustainability’ has blinded borrowers and debtors, lulling them into a false security when credit was easy and asset prices were rising. This illusion can die in the blink of an eye. ‘The turning of the financial cycle can be quite abrupt,’ he said."
Oil producers have responded to the price collapse by producing more oil, not less, and the oil industry is now scrambling to figure out how to service $3 trillion in debt, a tripling over less than a decade, Caruana warned. Risk spreads on high-yield energy bonds have jumped from 330 basis points to 1,600 over the past 18 months. Caruana also sound the alarm about the carry trade, fueled by massive global quantitative easing (QE) since the 2008 crisis, which has now sharply shifted into reverse flows. Evans-Pritchard colorfully remarked that "what looked like a one-way bet has proved to be a Faustian Pact, now that the Fed is turning off the spigot... We may be approaching the eye of the storm."
Caruana then warned against precisely the policy that Wall Street and London have desperately resorted to over the last 6-8 weeks: more QE, and a stampede to negative interest rates.
"The temptation may be to try to keep the financial boom going, or to give them a new lease of life, but this will be just a palliative unless the stock of debt is adjusted,"
Caruana said. Evans-Pritchard concluded:
"The BIS seems to be telling us that reckoning can still be orderly if we face up to reality, or end in a chaotic wave of defaults if we do not. Either way, the debt must clear."
BIS is not only in its panic. Citibank strategic Jonathan Stubbs reported to investors in a Jan. 4 note, that "the world appears to be trapped in a circular reference death spiral." Although he focussed narrowly on what he called "Oilmaggedon," a self-feeding spiral of plunging oil prices, strengthening dollar, and economic "recession," Stubbs warned: "This is fundamental to avoiding a proper/full global recession and dangerous disorder across financial markets. The stakes are high, perhaps higher than they have ever been in the post-World War II era," CNBC reported Jan. 5.