BIS warns of release of financial tensions as central banks normalise policy

The recent stockmarket sell-offs reflect the “release of pressure” that built-up along major financial faultlines in the wake of the Great Financial Crisis, the Bank for International Settlements warned on 13 September.

In particular, emerging markets had left themselves exposed by allowing their corporates to accumulate US dollar-denominated debts. The total level of those surpassed the $3trn mark in the first three months of the year.

“We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major faultlines,” the BIS said in its September quarterly outlook.

As the dollar strengthens those debts become more expensive in local currency terms, although the so-called central bank of central banks conceded those levels of foreign debt were lower than in previous financial crises.

“This is  a world in which interest rates have been extraordinarily low for exceptionally long and in which financial markets have worryingly come to depend on central banks’ every word and deed, in turn complicating the needed policy normalisation,” said Claudio Borio, head of the BIS’ Monetary and Economic Department.