Global Slowdown Drives BIS Warning That Crash May Be Near

July 1, 2019 (EIRNS)—The reports of manufacturing declining around the world, in indices released today, suggest that the Bank for International Settlements (BIS) warning of a serious leveraged-loan danger to the major trans-Atlantic banks is linked to potential corporate default waves coming in the recession. The BIS June 30 Annual Economic Report said, “If anything, the slowdown appears to be worsening and spreading.”

In this context, the BIS “central bank of central banks” noted,

“One ... vulnerability is high household debt in many advanced economies, especially those not directly affected by the Great Financial Crisis. These historically high debt levels limit the scope for households to drive economic activity. Another vulnerability is clear signs of overheating in the corporate sector in a number of advanced countries. Following high growth, the leveraged loan market is now some $3 trillion in size, comparable to the collateralized debt obligations that amplified the subprime crisis. Structured products such as collateralized loan obligations (CLOs) have surged. Credit standards have been declining as investors have searched for yield.”

It continues:

“Should the leveraged loans sector deteriorate [with defaults], the economic impact could be amplified through the banking system and other parts of the financial system that hold leveraged loans and CLOs. There could be sharp price adjustments and funding tensions. These risks should be seen in the broader context of the longer-term deterioration in credit quality and the generally high corporate leverage in many advanced economies. High levels of debt also point to vulnerabilities in a number of emerging market economies. In some cases, these are in the household sector. Most often, they are in the corporate sector, not least as foreign currency debt has expanded strongly since the crisis.”