Who owes 80 trillion?
2022.12.05 07:17
Who owes 80 trillion?
Budrigannews.com – Pension funds and other “non-bank” financial institutions now have more than $80 trillion in hidden, off-balance sheet dollar debt in the form of FX swaps, according to the Bank for International Settlements (BIS).
In its most recent quarterly report, which also stated that this year’s market upheaval had, in general, been navigated without many major issues, the BIS, which is referred to as the central bank to the world’s central banks, raised the concerns.
It struck a more measured tone this time around and also chose over the ongoing issues in the cryptocurrency market and the turmoil in the UK government bond market in September. Previously, it had repeatedly urged central banks to take strong action to reduce inflation.
However, its primary concern was what it referred to as the “blind spot” in the FX swap debt market that had the potential to blind policymakers.
There have been issues in the past with FX swap markets, where, for instance, a Japanese insurer or Dutch pension fund borrows dollars and lends euros or yen in the “spot leg” before later repaying those loans.
They experienced funding shortages both during the global financial crisis and in March 2020, when the COVID-19 pandemic wreaked havoc and necessitated the intervention of top central banks with dollar swap lines.
The BIS stated that the “hidden” debt estimate of more than $80 trillion is greater than the stocks of dollar Treasury bills, repo, and commercial paper taken together.
Additionally, the churn of deals was almost $5 trillion per day in April, or two thirds of the daily turnover of global foreign exchange.
It estimated that dollar obligations from FX swaps are now double their on-balance sheet dollar debt for non-U.S. banks and “non-banks” (such as pension funds).
The institution with headquarters in Switzerland stated, “The missing dollar debt from FX swaps/forwards and currency swaps is huge.” The main problem was the absence of direct information regarding the scope and location of the issues.
“Politics to restore the smooth flow of short-term dollars in the financial system (such as central bank swap lines) are set in a fog in times of crisis.”
In addition, the report looked at how the market as a whole has changed over the past few months.
As this year’s inflation spike has taken hold, officials at the BIS have been loudly urging central banks to raise interest rates, but this time they took a more measured approach.
Claudio Borio, head of the BIS’ Monetary and Economic Department, was asked if the tightening cycle would end next year. He said it would depend on how things change, noting the complexity of high debt levels and uncertainty about how sensitive borrowers are now to rising rates.
“The straightforward response is that we are closer than we were at the beginning, but we do not know how far central banks will need to go,”
“The foe is an old adversary and is known,” Borio expressed, alluding to expansion. “However, it has been a while since we last waged this battle.
The findings of its most recent global FX market survey were the subject of other sections of the report.
It estimated that issues between counterparties could prevent currency trades worth $2.2 trillion from concluding on any given day, jeopardizing financial stability.
The amount at risk has increased from $1.9 trillion three years ago, when the previous FX survey was conducted, to approximately one third of the total deliverable FX turnover.
Policymakers are being prevented “from appropriately monitoring FX markets,” according to the report, as FX trading moves away from multilateral trading platforms and toward “less visible” venues.
Hyun Song Shin, the bank’s Head of Research and Economic Adviser, compared the recent problems in the cryptocurrency market, such as the collapse of the FTX exchange and the stable coins TerraUSD and Luna, to the majority of banking crashes.
He said that a lot of the crypto coins that were sold were “DINO – decentralized in name only” and that most of the activities related to them were done through traditional middlemen.
Shin stated, “This is people taking in deposits essentially in unregulated banks,” and added that it was primarily about the resolution of large leverage and maturity mismatches, similar to the financial crash that occurred more than a decade ago.
“The episode has demonstrated that despite crypto’s claim to be decentralized, it is quite centralized in many respects,”
