The Terrifying Case Of $65 Trillion In ‘Missing US Dollar Debt’
"Off-balance sheet dollar debt may remain out of sight and out of mind, but only until the next time dollar funding liquidity is squeezed," the BIS warned on Monday.
The bank's cautionary remarks, penned by Claudio Borio, Robert McCauley and Patrick McGuire, weren't actually written Monday, but that's when they were released, as part of the BIS's quarterly review.
Quarterlies from the "central bank for central banks" are always worth a read. I used to recap them here as a matter of course, but
This is certainly concerning to read. I’m reminded of the CDS debt that took down the global economy in 2008. This sounds much larger and more alarming than that even was.
There is double counting, there has to be. Re-hypothecation of synthetic (ie. derivative-based) debt and collateral instruments would produce plenty of duplicative entries. I’ve heard there is a lot of that going on but I can only guess.
Probably so…but an 800 pound gorilla is still one imposing ape even if actual weight proves to be only 4…5…or 600.
Last week the VisualCapitalist.com produced a chart of global financial market sizes. The notional value of the derivatives market was $800 Trillion. Nobody knows how that might unwind, even a little bit.
On this topic, any ETF or open-ended index fund (especially fixed income funds) outside the US that is tracking a FX-hedged version of the benchmark indexes would probably be rolling 1-month or 3-month FX-forwards (i.e. executing a FX swap on the roll, which is usually on month-end for most benchmark indexes), which would comprise part of the $25 trillion in non-bank US dollar obligations the BIS paper cites. As indexing and benchmark-aware investing continues to grow and assuming the USD dominates as the currency for global bond issuance, we should expect that the size of non-bank USD obligations via FX swaps will also grow due to the growing needs of funds hedging back to the underlying USD asset exposure to local currency.
Assuming this is accurate, it’s much appreciated. Thanks for posting.
Agreed. Thanks.
I traded all kinds of derivatives starting in 1983. I still find off balance sheet offensive.. I think if you borrow short and lend long you need to be transparent and you need to be regulated. Remeber the book fiasco? I do…