Near-zero rates have spurred borrowing and left consumers, businesses and governments at risk, says Basel institution

A new warning has been issued about the growing risk of a “debt trap” if interest rates around the world stay near zero, which has encouraged borrowing by households, businesses and governments.

The Bank for International Settlements – known as the central bankers ‘bank – highlighted the vulnerability of consumer, business and government finances to interest rate increases in its 174-page quarterly report. Claudio Borio, the head of the monetary and economic department, described this as “a defining question for the global economy ”

He noted that since the financial crisis of 2007-08, global debt levels in relation to GDP had continued to go up, raising financial stability risks.

“Debt service ratios are only so low because interest rates have been falling so much,” Borio said.”There is a certain circularity in all this that points to the risk of a debt trap: the protracted decline in interest rates to unusually low levels, regardless of the strength of the underlying economy, creates the conditions that complicate their subsequent return ton more normal levels.

“Against this backdrop, the increase in the percentage of firms unable to cover their interest payments with their earnings – the so -called ‘Zombie’ firms – does not bode well.”

The Basel-based institution has long argued for gradual increases in global interest rates to more normal levels.

The Bank of England has repeatedly expressed concern about mounting consumer debt in the UK. The BIS has ranked the UK among the most vulnerable countries in terms of households’ debt service burdens, especially if interest rates were to be raised rapidly.

On Friday, comments from a member of the Bank of England’s interest rate-setting committee fuelled expectations that the cost of borrowing could rise as early as November. Gertjan Vlieghe, regarded as the most dovish member of the committee and until now wary of raising rates, set out arguments for a rate rise from 0.25%”as early as in the cming months.” It would be the first increase in interest rates since July 2007,.

The BIS is concerned that in countries with a large amount of variable-rate mortgages, rising borrowing costs would eat into household budgets more directly and rapidly, which would result in a slowdown in consumer spending.

Borio noted that corporate debt in the US, one of the countries at the heart of the financial crisis, “is now considerably higher than it was pre-crisis”, although overall private sector debt in relation to GDP had declined.

In a special feature in the report, Borio and his colleagues Robert McCauley and Patrick McGuire analysed what they called “missing debt” – the amount of dollar debt borrowed by non-banks outside the US through foreign exchange derivatives markets, which does not appear on firms’ balance sheets. This is estimated to total about $13tn-14 tn (£9.57tn), exceeding the $10.7 tn (£7.87tn) of dollar debt on balance sheets.

The missing debt is mostly short-term, secured with foreign currency, and usually serves as a hedge for businesses’ foreign exchange exposures, but “can still spark or amplify funding and liquidity problems during periods of stress,” the authors warned.

Another article in the report, by Morten Bech from the BIS and Rodney Garratt from the University of California, Santa Barbara, looked at how central banks might create blockchain-based digital currencies as an alternative to cash. Sweden’s central bank is closest to creating a crypto currency, as use of cash is rapidly declining in the country.