Overstretched asset valuations and high debt loads across the world are likely to trigger further dramatic turbulence on markets, the head of an influential group of central bankers warned today.
A quarterly review by the Bank for International Settlements (BIS), known as the central bankers’ central bank, warned that markets in advanced economies were strained, and that global market contagion from difficulties in emerging areas could still occur.
Claudio Borio, the head of the BIS’s monetary and economic department, warned that further disruption was a likelihood, saying: “On the financial side, things look rather fragile.
Markets in advanced economies are still overstretched and financial conditions still too easy. Above all, there is too much debt around.”
“With interest rates still unusually low and central banks’ balance sheets still bloated as never before, there is little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse,” he added.
The BIS said Trump’s policies had prompted an increasing divergence between emerging markets and the US economy, with the latter pumped up by fiscal stimuli in the form of unfunded tax breaks for companies.
The BIS warned that surging US stock markets “hid a sense of fragility”, with increased demand for instruments allowing investors to bet against an equity market drop.
Emerging market economies (EMEs) were rocked over the summer as the US dollar gained in strength, putting pressure on countries like Turkey and Argentina with large dollar-denominated debts.
Borio said “the political and social backlash against globalisation and multilateralism” could add to problems in the event of an EME “relapse”.
The review found the rise of protectionism, spurred by the policies of US President Donald Trump, had piled on the pain for emerging markets. The cumulative damage to emerging market economies outweighed that of the 2013 taper tantrum and the 2015 devaluation of the renminbi, the BIS said.
For EME crises the “common thread was the tightening of liquidity conditions linked to the Federal Reserve’s removal of accommodation”, the BIS said.
It said: “the vulnerability of local currency government debt to abrupt swings in the dollar suggests that local currency issuance has not yet succeeded in significantly insulating their financial conditions from exchange rate shifts.”