The unpleasant combination of high levels of debt in the oil sector and a strong drop in the price of the commodity has a huge effect on the global economy. At least, that is what the economists of the Bank of International Settlements (BIS) say.

The Bank of International Settlements is known as the central bank of central banks and is also one of the few organizations that predicted the financial crisis of 2008. New research coming from the BIS now shows that total debt in the oil and gas sector worldwide amounts to about 2.5 billion dollars. That is 2.5 times as much as at the end of 2006.

Sell-off in bonds

Now that the oil price has dropped 60 percent compared the middle of June 2014, the bank underlines that the value of most of the collateral for the debt in the sector also significantly decreased. The authors of the report, economists Dietrich Domanski, Jonathan Kearns, Marco Lombardi and Hyun Song Shin, state that long-term investors could possibly lose interest fast and that the effect could be a sell-off in bonds.

Because they are capable of weathering losses, long-term bond investors have always been seen as a source of stability for the financial markets. Nevertheless, recent findings confirm that even long-term investors do not feel like losing anymore and that will possibly join the sell side.

Contagious

A sell-off in the market for corporate debt in the oil sector could be contagious on the wider corporate bond market, because many investors are looking to decrease risk in their portfolio. The fact that debt of oil and gas companies represents a big share of the market only underlines the relevance of the developments.