An end to the cheap money era that has stoked a global boom in takeovers and property threatens financial turbulence for many banks and companies, the Bank for International Settlements said yesterday.

A turn in the credit cycle, as rising interest rates drive up borrowing costs and tighten financial conditions, is inevitable and risks sparking a period of increased upheaval, the BIS said in its annual report.

The warning follows a rising chorus of alarm from regulators and central bankers over lax lending policies and the ever-growing leverage fuelling the takeover boom.

“Given the key role that a benign credit environment has been playing in boosting the performance of the financial sector over the past years, a turn in the credit cycle represents a significant risk to its outlook,” the BIS said.

Unusually favourable credit conditions, supporting the flood of money into leveraged deals, structured credit products, and property, could not last forever, it said: “These conditions could be characterised as exceptional.”

The BIS gave warning that investors had become complacent as the global economy was in the midst of a “sweet spot” of buoyant growth and low interest rates that could end.

“There seems to be a natural tendency in markets for past successes to lead to more risk-taking, more leverage, more funding, higher prices, more collateral and, in turn, more risk-taking,” it said.

Although the BIS expects robust global economic conditions to continue for now, it also expressed concern that risks including a resurgence in inflation and a sharper than expected slowdown in the US had the potential to undermine this.

The BIS also sounded a new warning over leveraged buyouts, where buyout groups load-up acquired companies with debt to make deal financing add up. Yesterday’s report noted that this strategy is dependent on cheap funds that may not remain available.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts