Jaime Caruana, head of the Swiss-based financial watchdog, said investors were ignoring the risk of monetary tightening in their voracious hunt for yield, the Telegraph reports.
“Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a very long time, and may be taking more assurance than central banks wish to give,” he said.
Caruana said the international system is in many ways more fragile than it was in the build-up to the Lehman crisis.
Debt ratios in the developed economies have risen by 20 percentage points to 275% of GDP since then.
Credit spreads have fallen to to wafer-thin levels.
Companies are borrowing heavily to buy back their own shares.
The BIS said 40% of syndicated loans are to sub-investment grade borrowers, a higher ratio than in 2007, with ever fewer protection covenants for creditors.
The disturbing twist in this cycle is that China, Brazil, Turkey and other emerging economies have succumbed to private credit booms of their own, partly as a spill-over from quantitative easing in the West.
Their debt ratios have risen 20% to 175%. Average borrowing rates for five-years is 1% in real terms. This is extemely low, and could reverse suddenly.
“We are watching this closely. If we were concerned by excessive leverage in 2007, we cannot be more relaxed today,” he said.
“It may be the case that the debt is better distributed because some highly-indebted countries have deleveraged, like the private sector in the US or Spain, and banks are better capitalized. But there is also now more sensitivity to interest rate movements.”
The BIS warned it is annual report two weeks ago that equity markets had become “euphoric”.
