Bank for International Settlements warns of “frothy” markets and high debt levels

    In their quarterly financial check, the Bank for International Settlements (BIS) has warned of rising consumer debts and “unsustainable” financial markets.

    The global body for central banks has compared the current financial situation to the pre-2008 crash era.

    “The vulnerabilities that have built around the globe during the long period of unusually low interest rates have not gone away. High debt levels, in both domestic and foreign currency, are still there. And so are frothy valuation,” said head of the BIS, Claudio Borio.

    “What’s more, the longer the risk-taking continues, the higher the underlying balance sheet exposures may become. Short-run calm comes at the expense of possible long-run turbulence,”

    The body said that the growing global economy is encouraging investors to forget the concerns of growing asset bubbles and high debt levels.

    The warning from the BIS comes at the same time as the founder of Woodford Investment Management warning of the high danger of stock markets crashing.

    Neil Woodford has warned that asset prices are at unsustainable levels and the market is at a risk of experiencing a repeat of the early 2000s crash.

    “Ten years on from the global financial crisis, we are witnessing the product of the biggest monetary policy experiment in history,”

    “Investors have forgotten about risk and this is playing out in inflated asset prices and inflated valuations. There are so many lights flashing red that I am losing count.”

    The quarterly report also expressed fear over the high debt levels and the impacts this could have, particularly for the UK which has been ranked as one of the most vulnerable countries. 

    BIS’s economic adviser, Hyun Song Shin, said: “Higher borrowing tends to boost economic activity in the short run, but there is evidence that it acts as a drag on growth at horizons of three years or more,”

    “Household debt also has direct (through loan exposures) and indirect (through the impact of debt on GDP) effects on financial stability.”

    The BIS was one of the few organizations to warn of instability before the 2008 crash.