Global Regulator BIS Warns FX Swap Debt is a $80T 'Blind Spot'
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.
- 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.
- 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.
- 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.
- 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."
- 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.
Sources: BIS, Bloomberg, Reuters, Central Banking, Financial Times, and Forbes.
Narratives
- Establishment-critical narrative, as provided by The Asset. 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.
- Pro-establishment narrative, as provided by The Washington Post. 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 they 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.