BIS fears fresh bank crisis from global bond spike

Soaring bond yields across the world threaten trillion of dollars in losses for investors and a fresh financial crisis unless banks are braced for the shock, the Bank for International Settlements has warned.

The Swiss-based institution said losses on US Treasury securities alone will reach $1 trillion if average yields rise by 300 basis points, with even greater damage in a string of other countries. The loss could range from 15pc to 35pc of GDP in France, Italy, Japan, and the UK. “Such a big upward move can happen relatively fast,” said the BIS in its annual report, citing the 1994 bond crash.

foxenburg: The patient lay in hospital with a gangrenous toe. The Austrian doctor wanted to chop it off, so that the patient could recover. "No, no!" said the other doctors. "Let's try morphine". Now, a year later the patient is a morphine addict and sadly the gangrene has taken over the rest of his body and he will be lucky to live. If he does live, he will lose his limbs and be in much worse condition that had that toe been amputated at the outset.



alanllandrindodwells:  Seaman Staines All the leaders of Lib/Lab/Con certainly bought their qualifications, and their positions, although not from Bombay Market.

drjonathanwilson: Ambrose, So lets get this straight.  70 year old welfare states with increasing handouts to greater numbers of voters results in increasing fiscal deficits - right? To fund these fiscal deficits, welfare based economies increase taxes until productivity growth declines (down from 1.8 to 0.7 over a 25 year period) - in effect tax revenues can no longer meet state expenditures. But the welfare driven fiscal deficits keep on growing, so the now socialist states (yes, now state spending is 40 to +50% of GDP) resort to issuing gilts with their central banks printing money to buy them. Does this economic model look remotely sustainable to you, Ambrose? I think the BIS have spotted the glaringly obvious problem - formally capitalist economies are now thorough going socialist economies. It is time to return to market based economies that only can produce the new wealth needed to climb out of this hole created by the illusion of QE wealth. Jonathan

AsianAdvisor: The true problem is that the value of money has been decoupled from any underlying value that gives the money that we spend any form of value - in effect - fiat money. How is it that the USA has forgotten this simple truth? “If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.” - Thomas Jefferson Or another visionary leader: “The money power preys upon the nation in times of peace and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy.” - Abraham Lincoln Or the killer: “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. No longer a government by free opinion, no longer a government by conviction and vote of majority, but a government by the opinion and duress of a small group of dominant men.” - President Woodrow Wilson (regretting signing into law the Federal Reserve Act) QED.  It is the beginning of the end game which was created just over 100 years ago in the creation of the Federal Reserve. No body knows what the economic result will be or even the social consequences but my bet - flagged many times by Ambrose - is that China will be where the final acts start to reveal themselves.

alanllandrindodwells:  Let the bl***y banks go bust this time and clear the mess like Iceland did. Especially Goldman Sachs.

jimmy1952:  Would have been a good idea, but too late now the Government has committed us to guaranteeing the bankers sub prime loans. The Government should never have made such commitments.  But now it has we have to abide by them.   If Britain had a house price correction like the rest of Europe has, then many taxpayer guaranteed mortgages would be in negative equity. So Osborne is still throwing taxpayers borrowed money at £600k sub prime mortgages to pump up house prices. 

alanllandrindodwells: jimmy1952 It will still be cheaper in the long run. Also the morons can be got rid of with just 12 weeks redundancy money and forfeit the commissions. They can soon find jobs, as there are plenty of vacancies in the care industry.

jimmy1952: You have a funny idea of socialism drjonathanwilson  Or do you just blame everything on so called 'socialism'?   The gap between rich and poor in Britain has been widening since 1979.  Never more so than in the last few years when money printing has reduced the value of cash and increased the price of assets which nearly all belong to the rich.  Agricultural land, for example, has tripled in price since QE began.  Who owns most of that?

Titus__Pullo: In general, I agree with everything you say Jonathan but the bulk of the "welfare" budget goes to pensioners. It's easy to characterise the money going to the DWP as being gobbled up by the workshy sitting at home watching (and appearing on) The Jeremy Kyle show but the reality is that most of the money goes to pay pensions. The truth of the situation is we've over-borrowed from the future and even that source of money is close to being exhausted. If we implemented the approach proposed by the BIS then I'd expect a rapid economic implosion. But I do recognise that QE will also consume us all eventually. Personally, I cannot see how a dramatic global economic event of a magnitude we cannot foresee can be avoided. There's just not going to be enough growth to save us from this. I used to work for the BIS and know well the internal conservative nature of the organisation. That they would publish such a report is truly frightening to me.

dempster: They've got a point haven't they. Because the B.O.E. has been printing money for over four years, but the government hasn't really introduced any serious cuts to public expenditure. 1 year gilts are currently at 0.41%. 10 yr gilts are currently at 2.41% With RPI inflation at 3.1% you are guaranteed to lose by investing in gilts. Surely this cannot go on forever. 

Peter Wilson Close: The money BOE has printed is far less than the money that the banks have destroyed since 2008. That's why [a] we're still in recession and [b] there's no significant inflation other than that caused by spikes through energy and food supply problems. Too few realise that when banks lend they create new money; when they call in loans they destroy money. The money that they receive as deposits or borrow from other banks [who create it to lend to them!] is used [a] to top up their required regulatory reserves [c.8% of the money they create] [b] to "invest" - i.e. gamble with.

dempster: To Peter I understand fractional reserve banking. What I don't understand is exactly how the current crop of career politicos are going to explain to all those reliant on the government teat, that they have to take a large drop in wages, welfare and pensions etc. I just don't see anyone with balls to do it…not even Ed Balls. But if they don't do it, the only way the government can stay solvent is having the B.O.E. print money and hoover up its excess debt. If gilt yields continue to rise, it's looking like the light at the end of the tunnel is an oncoming train. 

bill40: dempster, It's no use claiming to understand something and then proving you don't. the government faces no insolvency issues at all and wages and welfare have suffered grotesque attacks already. The government can set bond yields wherever it wants to. The only action required is to cut the banks down to size. Ever wondered why austerity is not deemed worthy for them?

dempster: The government could face a solvency issue if gilt yields continue to rise.  I hope it doesn't but it's not impossible. And whilst I realise they could then instruct the B.O.E. to print ever increasing amounts of money in an attempt to keep them solvent, they may then enter a self fulling spiral to insolvency. People confuse money with value. A loaf of bread has value, £1 has none, unless it can be converted into something that does.   If the government prints enough money to make it valueless, it's  'insolvent' (i.e. can't actually pay for anything) no matter how much money it has.

bill40: dempster, There is no solvency issue because if the market demands interest rates we don't wish to pay we stop issuing them. There is no spiral to enter except by political choice. What would happen if we didn't issue bonds. Governments can credit accounts at will so why would spending stop? We would own the debt and it would be interest free. What's changed except the bond holders don't get their corporate welfare anymore?

Titus__Pullo:  Bill - you are proposing what seems to be a Paul Krugman-esque position which is basically because we can print money forever and lend it to ourselves at no interest there's no problem. At some point you hit the Zimbabwe-moment and people simply stop believing in the intrinsic value of the vast amount of paper that's been printed.

bill40: Titus, Krugman is good but I prefer Moesler,Wray,Mitchell and of course Michael Hudson. Zimbabwe suffered a supply collapse and foreign debt which caused excessive printing as the currency bought nothing. So, for an advanced economy like the UK when would that moment come and why? The answer is you just made it up (or parroted it) without a single empirical fact to back it up. Stop it, nobody believes you.

Titus__Pullo: @Bill, Krugman is certifiable. Nothing more than a tame Bernanke QE apologist. Printing trillions of Dollars, lending it to yourself to fund unsustainable bubbles in the hope that somehow growth will come through consumer confidence is not a credible economic policy. No currency debasement has ended well so my prognosis is far from "just made up… without an empirical fact". Of course feel free to stump up any example of a country that went hell for leather, rolled the printing presses and  debased its currency to economic success. The moment of enlightenment for the UK bond market is a fairly arbitrary measure. How many tens or hundreds of billions of Pounds of gilts does the Bank of England need to have on its balance sheet before you'll call UK Plc well and truly up Shit Creek? It sounds as if you have a fairly strong stomach for this nonsense. But then again, you think Paul Krugman makes sense. It's not a good sign my friend.

bill40: Titus, I am not Krugmans' greatest fan, I don't support QE but I do support stimulus. Neil Wilson posted this link and I suggest you read it as you don't seem aware of what QE is. I have told you once before (I think) that I cannot name you a single country that has printed hell for leather because no such example exists. In the end it boils down to this. An individual who pays down debt has more disposable income. When the state does it, it and we, have less because the money no longer exists. But you probably didn't know that either.