Structured product alert
Seeds of next crisis
Using this metric, it finds that the asset to GDP ratio shows a large positive deviation of 9 percentage points from its long-term trend in the G7. This highlights the risk that unless growth accelerates significantly in the future, economic growth may not create sufficient resources to service the developed world’s huge pool of assets, whose value will therefore have to correct at some point.
The decline in secondary market liquidity due to the reduction in the banks’ market making capacity since the crisis could, the IIF warns, magnify a bond market correction, making it disorderly and contagious. Volatility would return with a vengeance.
The IIF’s warning feeds into existing concerns about the impending normalisation of monetary policy and of central bank balance sheets in the US and UK. The only (faintly) reassuring thing about this particular systemic risk is that macroprudential policy makers are well aware of it.
The writer is an FT columnist