Money

Global Regulator BIS Warns FX Swap Debt is a $80T 'Blind Spot'

DEC 5 2022·Updated DEC 6 2022

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Image credit: Reuters

The Facts

The Bank for International Settlements (BIS) published on Monday its quarterly review, stressing that more than $80T in "outstanding obligations to pay US dollars in foreign exchange (FX) swaps and forwards and currency swaps" are missing from standard debt statistics.
BIS
This hidden leverage comes due to accounting conventions on how to track derivative positions and was found based on data from a survey on global currency markets earlier this year.
Bloomberg.com
According to the institution — dubbed the central bank to the world's central banks — this off-balance sheet dollar debt exceeds the stock of dollar Treasury bills, repo, and commercial paper combined. It also said that a failure to factor in this debt could restrict policymakers' ability to effectively monitor markets.
Reuters
BIS officials estimate that non-bank entities outside the US owe as much as $26T in this hidden debt, and non-US banks as much as $39T. Residing outside the US, many of these firms do not have access to a lender of last resort that can provide dollar liquidity.
Central Banking
They also warned that this debt, "may remain out of sight and out of mind—but only until the next time dollar funding liquidity is squeezed." The officials continued, saying: "the hidden leverage in pension funds and insurance companies’ portfolios could pose a policy challenge."
www.ft.com
Analysts and credit rating agencies are unable to track these liabilities, and it is unclear how many people are aware of the off-balance sheet obligations. In the past, funding scares have been "flash points" of the COVID market meltdown and Great Financial Crisis.
Forbes

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The Spin

Establishment-critical narrative

The world is heading toward the mother of all stagflationary debt crises and there is little policymakers can do to prevent this from happening after years of ultra-loose fiscal, monetary, and credit policies that have encouraged debt over equity. Governments do not want to raise taxes or cut spending to reduce the deficit, and they will eventually give up fighting inflation in the wake of the looming crash.

The Asset

Pro-establishment narrative

Ultra-low interest rates, along with the aggressive tact of investors, have indeed driven leverage higher, but rising rates would only make it more dangerous because it would likely promote further instability across the global financial system. Solving this hidden debt challenge requires more transparency in the exposure of the banking system.

The Washington Post

Metaculus Prediction

There's a 50% chance that the next great financial crisis in the US will occur by November 2028, according to the Metaculus prediction community.