BIS Warns That "Uneasy Calm" In Markets May Be Shattered By Fed Hike Imperiling $3.3 Trillion In EM Debt

Tyler Durden's picture

Claudio Borio has been pounding the table on complacency and mounting market risk for quite some time. 

It was exactly one year ago that the BIS’ Head of the Monetary and Economic Department penned the following warning about the market’s dependence on central bank omnipotence: 

To my mind, these events underline the fragility - dare I say growing fragility? - hidden beneath the markets' buoyancy. Small pieces of news can generate outsize effects. This, in turn, can amplify mood swings. And it would be imprudent to ignore that markets did not fully stabilise by themselves. Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions. Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets' buoyancy hinges on central banks' every word and deed.

Then, in March, he spoke out about the dangers of increasingly illiquid secondary markets for corporate bonds:

As a result, market liquidity may increasingly come to depend on the portfolio allocation decisions of only a few large institutions. And, more broadly, investors may find that liquidating positions proves more difficult than expected, particularly in the context of an adverse shift in market sentiment.


What do the changes in market-making described here mean for markets and policy? There are at least two key issues. First, reduced market-making supply and increased demand imply upward pressure on trading costs, reduced secondary market liquidity, and potentially higher financing costs in new-issue markets. Second is the question of how markets will behave under stress - that is, whether they will be able to function in an orderly fashion in response shocks or broad changes in market sentiment... 

Finally, in September, Borio delivered the following rather dramatic assessment of an overleveraged world hooked on central bank stimulus: 

Hence a world in which debt levels are too high, productivity growth too weak and financial risks too threatening. This is also 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. It is unrealistic and dangerous to expect that monetary policy can cure all the global economy's ills.

Well, perhaps because the market thinks there’s something unsavory and altogether disingenuous about the BIS criticizing the same people who make up its board of directors, or perhaps investors are just clueless and complacent, but whatever the case, no one has listened to poor Claudio. But that doesn’t mean the BIS is set to rein in the doom and gloom and in the bank’s latest quarterly review, Borio and co. are back at it and coincidentally, one of the key topics is EM debt, which we covered on Saturday in “Will 2017 Be The Year Of The EM Corporate Debt Crisis?.” 

Unlike Deutsche Bank, the BIS doesn’t see anything “benign” about the situation.

“In general, the leading indicators of economic activity [in EM] pointed to weakness ahead [as] countries in the throes of a severe recession, such as Brazil and Russia, struggled on [and] activity in China showed little signs of strengthening,” Borio says, concurring with our assessment from Saturday. “And, as the period wore on, commodity prices, including those for oil, copper and iron ore, plunged towards new depths,” he adds. 

That would be bad enough on its own, but set against that rather abysmal backdrop is a USD-denominated debt pile that amounts to some $3 trillion. “The financial vulnerabilities in EMEs have not gone away,” Borio continues. “The stock of dollar-denominated debt, which has roughly doubled since early 2009 to over $3 trillion, is still there [and] in fact, its value in domestic currency terms has grown in line with the US dollar's appreciation, weighing on financial conditions and weakening balance sheets.”

Again, the nightmare situation is that you accumulate an enormous amount of foreign currency liabilities only to see your currency crash just as market demand for EM assets dries up. 

Drilling down further, the bank notes that of the $9.8 trillion in non-bank, USD dollar debt outstanding, more than a third ($3.3 trillion) is concentrated in EM. “Since high overall dollar debt can leave borrowers vulnerable to rising dollar yields and dollar appreciation, dollar debt aggregates bear watching,” Robert Neil McCauley, Patrick McGuire and Vladyslav Sushko warn. The right pane here gives you an idea of how quickly borrowers’ ability to service that debt is deteriorating.

"Any further appreciation of the dollar would additionally test the debt servicing capacity of EME corporates, many of which have borrowed heavily in US dollars in recent years," Borio reiterates, ahead of the December Fed meeting at which the FOMC is set to hike just to prove it's actually still possible. 

All in all, central banks have managed to preserve an "uneasy calm," Borio concludes, but "very much in evidence, once more, has been the perennial contrast between the hectic rhythm of markets and the slow motion of the deeper economic forces that really matter." In other words: the market is increasingly disconnected from fundamentals and the rather violent reaction to a not-as-dovish-as-expected Mario Draghi proves that everyone still "hangs on the words and deeds" of central banks. 

In the end, Borio is telling the same story he's been telling for over a year now. Namely that the myth of central banker omnipotence is just that, a myth, and given the abysmal economic backdrop, the market risks a severe snapback if and when that myth is exposed. One of the pressure points is EM, where sovereigns may have avoided "original sin" (borrowing heavily in FX), but corporates have not. With $3.3 trillion in outstanding USD debt, a rate hike tantrum could spell disaster especially given the fact that the long-term, the fundamental outlook for EM continues to darken. 

Borio's summary: "At some point, [this] will [all] have to be resolved. Markets can remain calm for much longer than we think. Until they no longer can."

Thanks for your honesty Claudio, now just tell your Board:

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order66's picture

Central Bank Money Printing => World Flooded With Liquidity => Emerging Markets Take Huge Risks Like Everyone Else => Doomsday Levels of Misallocated Capital => Fed Lifts .25 => All Other Central Banks Co-Ordinate and Print More Money => Everyone Smiles => More Capital is Misallocated.

FireBrander's picture

Bernanke was certain he could raise rates to "curb the frothiness" of the markets...he curbed it alright!

IF Old Yella raises rates, it will be for one reason and one reason only...PEER PRESSURE!

Main Street, Wall Street, Politicians...all will be sent into the chipper if that is what it takes to maintain the "reputation" of the FED.

Overlay these two charts:

1. Likelihood of FED rate hike (or any other FED move).

2. PUBLIC criticism of FED policy by their peers.

100% positive correlation.


Escrava Isaura's picture



Again, I think every nation should read MEFOBILLS at Zero Hedge:

“Never let you debt pointing outside of your law .” 




“Brace yourself! The American Empire is over. The descent is going to be horrifying!” Chris Hedges


Cant’ say that you did not get proper warning when your hear the nonsense of: “It came from nowhere” “Nobody saw it coming”



Soul Glow's picture

The BIS knows the Fed motive is to trip up the markets and the BIS likes to be right.  They are afterall the bank behind all banks.

cheka's picture

look at that list of bis directors

add it to the bailouts + currency swaps that frbny did with foreign central banks

and people still buy the 'currency war' crap?

be healed!

Butter_cup's picture
Butter_cup (not verified) order66 Dec 6, 2015 3:48 PM

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Somewhat Evolved Monkey's picture
Somewhat Evolved Monkey (not verified) Dec 6, 2015 10:19 AM

"Markets can remain calm for much longer than we think. Until they no longer can."


Wow. Such fantastic analysis. What sort of knowledge base is required to work at the BIS? A 3rd grade education?


Perhaps 3rd graders would do a better job. Their minds aren't clouded with harebrained academic economic lies.

Kina's picture

Obviously not going to affect the top 1%

MillionDollarAnus's picture

Who fucking wrote this article, Yoda?

LawsofPhysics's picture

That which cannot be sustained, won't be.

I suspect this will go on for a lot longer (generations) with the "official" numbers getting much better while the world slowly turns back into a feudal society with the majority of people getting a third world experience...

evolve or die motherfuckers!

same as it ever was.

mvsjcl's picture

Isn't that devolve or die?

Amish Hacker's picture

The inescapable fact is that the world's dollar-denominated debts, which were already unpayable in 2008, have doubled since then. 

Your move, Janet Yellen.

FireBrander's picture

"Doubled since 2008"..."your move Janet"...ok then, let's triple them and see if that works.

fowlerja's picture

Oh my gosh...if the Fed raises rates by .25%..the world is going to do they know?...I guess they can see the future...anyway if .25% is too much about .1875632%...would that work?

FireBrander's picture

It's not just a .25% rate's many multiples of's called LEVERAGE!

This is a 35 year LEVERAGE game that is 100% dependent upon DECREASING rates...if you raise rates, GAME OVER...see 2008...Bernanke thought he could raise rates...WRONGO!...he tanked the system and IMMEDIATELY reversed course and started heading for ZERO rates to "recapitalize" the banks and keep the game alive...Bernanke took us to ZERO, then handed it over to she thinks she can raise rates! ROTFLMYFA!

Savyindallas's picture

Yeah but leverage has allowed te .001% to get filthy rich at the expense of the rest of us. Let it all collapse and see what Americans do when the banks cry to Congress demanding a $10 trillion dollar baillout. They'll get it too. The collapse of the whole world is at stake. There is still much more money to steal from the American sheeple - actually there is not -but we can all collectively handle another $10 trillion in future debt  -there is still plenty of phones, busineses, pensions funds and 401ks to be transferred from the serfs to their masters. Feudalism is our future. Americans are too drugged out on flouride, GMOs, sex, drugs and Rock N Roll to put up much of a fight. Our leaders are mere corrupt puppets  -the Deep State shadow government is in control. 

max2205's picture

Bailout or print argument......same money


They will print cause it's less drama

Unix's picture
Unix (not verified) fowlerja Dec 6, 2015 10:46 AM

fowl, this issue is that they can't raise rates even a basis point, without imploding the casino, can't have that you know, they would lose too much's not just about the servicing of the debt, it is about keeping the ponzi going...

nah, in time they will go to NIRP or way more QE. That is really their only option at this point, or moar war!

What do I know, TPTB are in control, we're just along for he ride, until we stop riding!

Unix's picture
Unix (not verified) Dec 6, 2015 10:28 AM

Where is the mention of derivatives in this equation? Do I assume that is part of EM debt? I dunno, but if they raise rates, they will not be able to service the debt, period. Also, there will be giant holes in the ground when the derivatives explode, and on the other side, there will be some rich fuckers!

It's a game to them, pure and simple, costing the livelyhoods of billions of people.

It's a big fucking club and you ain't in it!

HoserF16's picture

BIS is the Yin to Yellen's Yang

yogibear's picture

Let's get to part one where the fed raises rates.

The Fed has been touting a rate increase for over a year. Hasn't happened yet.

Fed's scared to change.

Perhaps the Fed raises rates and then lowers them again.


margincall575's picture
margincall575 (not verified) Dec 6, 2015 10:38 AM

oh please. Did this person see that biggest farce yet, ahead of 10/2 or not? As far as just trading goes i cant read any more of this nonsense.  All markets and the normal effect of outside forces and compeltly controlled. The goal of 2008 guarantee the funding for TGIP. When or if they ever stop this criminal fraud i doubt ill get the memo i let my Odigo account run dry

jeff forsythe's picture

The U.S.A. and the rest of the World needs to revaluate the heinous Chinese Communist Party, this time using its heart, not its wallet. People living in the West have no idea of what a brutal regime the Chinese Communist Party truly is. Since 1949, the CCP has murdered eighty million of its own people and  is still torturing, enslaving,  harvesting organs from and murdering the tens of millions of innocent Falun Gong practitioners who live in China. None of the atrocities are ever reported by Western media because big business doesn't care and does not want us to be informed because of its insatiable greed.

Atomizer's picture

Not completely true, there are two sets of economic theory within. Both bolster subsidizing by new emerging markets. See my posting from lastnight. 

The Bank For International Settlements

Atomizer's picture

Lastly, dependency theory 

Dependency theory - YouTube


Ask POTUS Uncle Tom which side he prefers. He won't answer the question, he'll be figured out immediately. If Obama states, he's a centrist balancing power. The fucker is lying. 

8PM tonight. The lying ratbastard at work. 

max2205's picture

The Fed has been printing since 1965


They just don't want you to know

MrBoompi's picture

Fucking great world we live in where a .25% rate hike causes an economic collapse.  I guess we'll never be able to expect any return on a savings account again.  It's obvious if anyone tries to destroy their gravy train, they'll take the rest of the goddamn world down with them if they can.  

DontWorry's picture

By my calculations the required reverse repo and liquidity removal of a 0.25% rate increase will cause a 20% drop in the S&P 500

dsty's picture

turkeygreece should be one country

it just sounds better

Bangin7GramRocks's picture

How about a full 1%! Lets just rip that bandaid off in one pull. It shouldn't be a big deal. Cramerica says that the economy is full on kicking ass. Let's get back to normal, restart those factories in our great cities like Detroit, Cleveland and Trenton. I'll bet if we all work together, we can make this country great again. USA! USA! USA!

I Write Code's picture

Even a full 1% wouldn't be so bad, but even that would be just a start, I want my 5% money market funds back, with maybe 8% long money.  What was overnight back then, 2-4% depending on the curve?

But I suppose it's probably better to blip it up slowly and gently, I'd be perfectly happy with 0.25% twice a year for the next six years or so.  Of course the problem is it should have started in 2010 and we'd be home by how.  Well better late than never.

Demdere's picture

Your assumption, the frame, of your comment is 'normal system, nothing to worry about, the debt weill be repaid'.

No government in the world will generate enough in taxes to even maintain interest payments if the rate goes to 5%. The next stage is catastrophe, and our kleptocracy Israeli-Neocon Deep State are depending on that for the next stage of their coup.

9/11 was a False Flag operation by the Israeli-Neocons in the US Government

Seasmoke's picture

Be very careful helping a drowning man. They will take you down with them in a panic. Gold and Silver are your life vests.

I Write Code's picture

Bite me.  Holders of long-term debt had yuuuge runups as the unnatural ZIRP took hold seven years ago, and now they're crying that they might lose some as ZIRP is loosened even a tiny bit?  Man up, BIS.

the grateful unemployed's picture

+100) Welch was considered an extremist, most of what he says was GOP boilerplate, which W Bush ran on, but promptly destroyed embracing the NWO his father spoke about.

Albertarocks's picture

+100 Thanks.  That speech by Robert Welch is absolutely mind blowing.  I encourage everyone to watch it.

Atomizer's picture

Thanks to both of you. I wasn't even born. Spread the link. 

Atomizer's picture

I receive daily BIS updates. Haven't looked at since December 1,2015. They have great videos to watch. Q&A is the most brutal.

Dig into articles, you'll find videos. 

earleflorida's picture

this is a zero-sum game for all parties involved...

if predisposed at 25bps/hike semi-annual for two years 

cornflakesdisease's picture

The FED will now up interest hikes and so many emerging markets will be scrambling to pay back their loans in Dollars they can't find, the robber barrons will steal even more.

Last of the Middle Class's picture

They would imperil 4 trillion in a heartbeat to maintain the meme that the economy is recovering, thus the rate hike. This is about money and power, not right and wrong.

Amish Hacker's picture

IMO the Fed is totally hosed, and they know it. The plan was to keep pretending that the economy was recovering until eventually it did, but it's now clear that time will run out on QE and ZIRP and the whole freaking world economy long before any real recovery happens.

The Fed has doubled down for the last time. They're "all in" now, and the world is about to find out that they've been bluffing the whole time. I do think Yellen will raise rates, but only because when you can't do what's right, you have to do what's left.

bentaxle's picture

The Fed knows the commercial banks are dying. The payments system they run is something that cannot operate without a government backstop. The creeping level of control is not going to stop. The flow of funds around the system cannot be allowed to stop, not even for a few hours. Eventually US citizens will likely ALL become customers of The Fed. Ideas put forward involve alternative currencies, the e-dollar, and blockchain as a way to bypass the commercial banks payment services. Interesting idea I found here:

The BIS is disconnecting itself from commercial banks, (i.e throwing commercial banks under the bus,) leaving just the BIS and Central Banks to run things. If true the days of commercial banks and their losses are numbered.

Youri Carma's picture

Smart cookie that Borio.

frankly scarlet's picture

all debts wil be repaid!... unless they can't....or the system could rain liquidity on those with the debts, which will then be able to repay those that issued the debt. This new money will be extinguished on repayment and the game can start again. the only limit being that of the planets resources.