Executive Intelligence Review

FROM EIR DAILY ALERT


Bank of England Warns Corporate Debt Is Dangerous; Fed Keeps to Rate Hikes

Oct. 17, 2018 (EIRNS)—The Bank of England’s Financial Policy Committee, from its latest meeting Oct. 8-9, issued a warning about the dangerous growth of leveraged loans and collateralized loan obligations (CLOs).

“The global leveraged loan market is already larger than—and growing as quickly as—the U.S. subprime mortgage market had been in 2006.... [The committee] is concerned by the rapid growth of leveraged lending,”

it said, according to “Wolf Street” correspondent Don Quijones Oct. 10.

The committee put leverage lending—in other words, lending to zombie companies, and quite separate from junk bonds—at $1.3 trillion for the United States and U.K. economies alone ($1.1 trillion is the United States issuance, doubled since 2013). It seems there was $38 billion new U.K. issuance in 2017, and $39 billion in the first eight months of 2018; it appears to be doubling yearly. U.S. issuance in 2017 was put at $58 billion by Nomi Prins in an Oct. 12 article. Quijones writes,

“These loans are considered too risky for banks to keep on their books. Instead, banks sell them to loan funds, or they package them into highly rated collateralized loan obligations and sell them to CLO funds and other institutional investors.”

CLOs, often insured by, and/or partly made of credit default swaps (CDS), were notorious accelerants of the 2008 financial crash. “Wolf Street” quotes Douglas Diamond, a finance professor at the University of Chicago Booth School of Business, who told Bloomberg about their spread to banks’ books:

“The borrowing they [the risk-chasing investors] do is usually from a bank. ... They buy a loan from a bank, they borrow money from the bank to buy the loan from the bank—not necessarily the same bank. So the risk would ultimately get back to the bank balance sheets.’ ”

Another accelerant of the corporate debt crisis, central bank interest rate increases, may accelerate. The Federal Reserve minutes from the Federal Open Market Committee (FOMC) Sept. 25-26 meeting, released today, say:

“With regard to the outlook for monetary policy beyond this meeting, participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2% over the medium term.”

The FOMC members discussed the possibility of going “beyond normalization of rates and into a more restrictive stance”; i.e., raising rates faster.

T