World risks fresh credit bubble, Switzerland’s BIS warns

Asset prices across the world have risen to heady levels not seen since the credit boom five years ago and may be losing touch with economic reality yet again, the Bank for International Settlements has warned.

The venerable Swiss-based institution – almost alone in warning of a global debt crisis in the build-up to the Great Recession – said it is rare for markets to gather steam at a time when the major forecasters are turning gloomy.

The International Monetary Fund and the OECD have downgraded their outlooks for 2012 and 2013, with sharp cuts for much of Europe as well as for Brazil, China, and India.

This echoes events from 2006 to 2008 when the “savings glut” flooded the world with cheap capital, compressing yields and putting pressure on insurance companies and pension funds to buy mispriced Greek or Icelandic debt for a few extra points of yield in order to match their future liabilities.

The bank said the rally was largely driven by relief that the European Central Bank had taken on the role of lender-of-last-resort, vastly reducing the risk of eurozone break-up or a sovereign bond meltdown.

Full article: World risks fresh credit bubble, Switzerland’s BIS warns (The Telegraph)

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