Tuesday July 10, 2007

BIS warns of Great Depression dangers from credit spree

telegraph.co.uk

The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood. "Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived", said the bank.

The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system. "Behind each set of concerns lurks the common factor of highly accommodating financial conditions. Tail events affecting the global economy might at some point have much higher costs than is commonly supposed," it said.

The BIS said China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity. "The Chinese economy seems to be demonstrating very similar, disquieting symptoms," it said, citing ballooning credit, an asset boom, and "massive investments" in heavy industry. Some 40% of China's state-owned enterprises are loss-making, exposing the banking system to likely stress in a downturn. It said China's growth was "unstable, unbalanced, uncoordinated and unsustainable", borrowing a line from Chinese premier Wen Jiabao.

The BIS said last year's record issuance of $470bn in collateralized debt obligations (CDO), and a further $524bn in "synthetic" CDOs had effectively opened the lending taps even further. "Mortgage credit has become more available and on easier terms to borrowers almost everywhere. Only in recent months has the downside become more apparent," it said. CDO's are bond-like packages of mortgages and other forms of debt. The BIS said banks transfer the exposure to buyers of the securities, giving them little incentive to assess risk or carry out due diligence. "Sooner or later the credit cycle will turn and default rates will begin to rise," said the bank.

- The contrarian community has been sounding the alarms on this debt and mortgage thing for years. Now that the mainstream is starting to pick it up, it will be quite interesting to see what is "on the other side", so to speak.

We are quite close now. Some commentators say we have, maybe, weeks. The S&P 500 seems to be building up a triple-top formation. "Look out below"? Perhaps this MBS/CDO business might be the trigger event.

See also :

1. How professionals dump their toxic waste on you

(2007-07-10 12:45:31 SGT) [Biz] Permalink

Most popular blog postings on lowem.log :

1. Singapore SIBOR interest rates fall to 1.5%, lowest since Dec 2004
2. Singapore SIBOR rate falls to 1.31%, lowest since Nov 2004
3. Live spot gold price quotes chart on COMEX
4. Fuel prices seen stoking Malaysia inflation in 2008
5. 2010 Honda Civic Hybrid preliminary specifications released
6. Singapore SIBOR rate fell to 1.25% in Apr 2008, lowest since Aug 2004
7. Malaysia inflation rate jumps to 7.7% in Jun 2008, a 26-year record high
8. Singapore : electricity tariffs to increase April 2008 on rising oil prices

Featured articles on lowem.log :

1. ABC Guide to Beating Inflation in Singapore and Elsewhere
2. Singapore inflation rate hits new 26-year high of 7.5% in Apr 2008
3. Singapore : Bread price inflation continues
4. 2010 Honda Civic Hybrid preliminary specifications released
5. Peakoiler buys 2008 Honda Civic Hybrid FD3
6. How to insert currency exchange rates into Google Spreadsheets
7. Singapore SIBOR rate falls to 0.94% in Nov 2008, lowest since Jul 2004
8. Singapore : Inflation erodes away bank savings