Hey everyone, get excited because it's time to talk about the most thrilling subject ever: FX SWAPS!
I know, I know, it's about as thrilling as watching a chess match.
So let's dive in, huh?
The Bank for International Settlements (BIS) recently dropped a bombshell report on the use of FX swaps, forwards, and currency swaps.
In case you're not familiar with these financial instruments, they create forward dollar payment obligations that are not reflected on balance sheets and are therefore "missing" in standard debt statistics.
Now, you might be thinking, "Missing debt? How's that even possible?"
According to the BIS, non-banks outside the US owe a mind-blowing $25 trillion in missing debt. And if that wasn't enough, non-US banks owe an additional $35 trillion. That's a lot of zeroes!
But here's the thing: a lot of this missing debt has a short-term maturity, which can lead to funding squeezes where borrowers may struggle to come up with the necessary funds to meet their payment obligations. It's like trying to pay off your credit card bill before your paycheck arrives.
In times of financial crisis, central banks have to get creative in order to keep the wheels of the global economy turning. One solution they've come up with is the mysterious and elusive "swap line."
But what exactly is a swap line, you ask?
Well, it's essentially a financial lifeline that allows banks to exchange their local currency for dollars in times of need. You see, there's this thing called "missing debt" in the world of FX swaps, forwards, and currency swaps (say that three times fast) that can lead to funding squeezes. In layman's terms, that means companies are struggling to come up with the cash to pay their bills.
Now, you might be thinking, "$80 trillion in missing debt? That's a lot of missing dough!" And you'd be right. In fact, it's more than the combined total of US dollar Treasury bills, repurchase agreements, and commercial paper. And if that wasn't enough, this missing debt often totals around $5 trillion per day, accounting for two-thirds of daily global FX turnover. Yikes.
But here's the thing: the lack of information about this missing debt makes it hard for policymakers to anticipate the scale and location of funding needs, which can create challenges in responding to financial crises. And that's where swap lines come in. They provide a way for central banks to funnel dollars to non-US banks offshore, which can then be lent to those in need of some extra cash.
Overall, the missing dollar debt from FX swaps, forwards, and currency swaps is a significant issue that adds to the vulnerabilities created by the visible dollar debts of non-US borrowers.
Overview of FX swaps, forwards, and currency swaps
The payment obligations resulting from FX swaps, forwards, and currency swaps are enormous. At the end of June 2022, the total outstanding amount was $97 trillion, up from $67 trillion in 2016. This amount is equivalent to the global GDP in 2021 ($96 trillion) and is three times the amount of global trade ($29 trillion). It also exceeds global external portfolio investment ($81 trillion) and international bank claims ($40 trillion) at the end of 2021.
So where is all the missing dollar debt?
According to BIS most of this missing dollar debt is likely owed by entities outside the United States, where the dollar is a foreign currency. You see, businesses and organizations in other countries borrow dollars to hedge against their dollar investments and receivables. After all, the dollar is the dominant international currency, and everyone wants a piece of the action.
On the other hand, non-bank financial institutions in the U.S. tend to hedge their foreign currency assets by lending dollars through FX swaps, rather than borrowing them. And U.S. businesses don't have many foreign currency payables to hedge in the first place.
Some projections state that by the end of June 2022, dealer banks would have a staggering $52 trillion in open dollar positions with clients. Non-banks held $26 trillion in liabilities in dollars, which is still a sizable amount. And this amount has been rising gradually; non-banks alone have seen an increase from $17 trillion in 2016.
Banks headquartered outside the U.S., including some FX swap dealers, have even larger missing dollar obligations. And these banks deserve extra attention because they don't have the same access to the Federal Reserve's discount window for dollars as U.S. banks do. In fact, their estimated off-balance sheet dollar obligations of $39 trillion at the end of June 2022 were much higher than their on-balance sheet debt of $15 trillion, and almost half the size of their total liabilities.
So next time you're wondering where all the missing dollar debt is, just remember: it's probably outside the U.S., and it's probably a lot bigger than you think.
And let's be real, it's not like these off-balance sheet obligations are going to just magically disappear. They're like the elephant in the room that no one wants to talk about, but everyone knows is there. Eventually, the hidden leverage and maturity mismatch in pension funds and insurance companies' portfolios (which are generally supposed to be long-only) is going to come back to haunt us.
So what's the solution? I think it's time for some transparency. It's time for statistics that track the geography of outstanding short-term dollar payment obligations so that we can at least see what we're dealing with. Because let's be honest, trying to navigate through a policy fog without any visibility is about as fun as a root canal.
If you're interested in staying up-to-date with economical & crypto news, I would really appreciate it if you could consider subscribing.
Missing Trillions : The Bank for International Settlements report
Missing Trillions : The Bank for International Settlements report
Missing Trillions : The Bank for International Settlements report
VIDEO VERSION HERE
Hey everyone, get excited because it's time to talk about the most thrilling subject ever: FX SWAPS!
I know, I know, it's about as thrilling as watching a chess match.
So let's dive in, huh?
The Bank for International Settlements (BIS) recently dropped a bombshell report on the use of FX swaps, forwards, and currency swaps.
In case you're not familiar with these financial instruments, they create forward dollar payment obligations that are not reflected on balance sheets and are therefore "missing" in standard debt statistics.
Now, you might be thinking, "Missing debt? How's that even possible?"
According to the BIS, non-banks outside the US owe a mind-blowing $25 trillion in missing debt. And if that wasn't enough, non-US banks owe an additional $35 trillion. That's a lot of zeroes!
But here's the thing: a lot of this missing debt has a short-term maturity, which can lead to funding squeezes where borrowers may struggle to come up with the necessary funds to meet their payment obligations. It's like trying to pay off your credit card bill before your paycheck arrives.
In times of financial crisis, central banks have to get creative in order to keep the wheels of the global economy turning. One solution they've come up with is the mysterious and elusive "swap line."
But what exactly is a swap line, you ask?
Well, it's essentially a financial lifeline that allows banks to exchange their local currency for dollars in times of need. You see, there's this thing called "missing debt" in the world of FX swaps, forwards, and currency swaps (say that three times fast) that can lead to funding squeezes. In layman's terms, that means companies are struggling to come up with the cash to pay their bills.
Now, you might be thinking, "$80 trillion in missing debt? That's a lot of missing dough!" And you'd be right. In fact, it's more than the combined total of US dollar Treasury bills, repurchase agreements, and commercial paper. And if that wasn't enough, this missing debt often totals around $5 trillion per day, accounting for two-thirds of daily global FX turnover. Yikes.
But here's the thing: the lack of information about this missing debt makes it hard for policymakers to anticipate the scale and location of funding needs, which can create challenges in responding to financial crises. And that's where swap lines come in. They provide a way for central banks to funnel dollars to non-US banks offshore, which can then be lent to those in need of some extra cash.
Overall, the missing dollar debt from FX swaps, forwards, and currency swaps is a significant issue that adds to the vulnerabilities created by the visible dollar debts of non-US borrowers.
Overview of FX swaps, forwards, and currency swaps
The payment obligations resulting from FX swaps, forwards, and currency swaps are enormous. At the end of June 2022, the total outstanding amount was $97 trillion, up from $67 trillion in 2016. This amount is equivalent to the global GDP in 2021 ($96 trillion) and is three times the amount of global trade ($29 trillion). It also exceeds global external portfolio investment ($81 trillion) and international bank claims ($40 trillion) at the end of 2021.
So where is all the missing dollar debt?
According to BIS most of this missing dollar debt is likely owed by entities outside the United States, where the dollar is a foreign currency. You see, businesses and organizations in other countries borrow dollars to hedge against their dollar investments and receivables. After all, the dollar is the dominant international currency, and everyone wants a piece of the action.
On the other hand, non-bank financial institutions in the U.S. tend to hedge their foreign currency assets by lending dollars through FX swaps, rather than borrowing them. And U.S. businesses don't have many foreign currency payables to hedge in the first place.
Some projections state that by the end of June 2022, dealer banks would have a staggering $52 trillion in open dollar positions with clients. Non-banks held $26 trillion in liabilities in dollars, which is still a sizable amount. And this amount has been rising gradually; non-banks alone have seen an increase from $17 trillion in 2016.
Banks headquartered outside the U.S., including some FX swap dealers, have even larger missing dollar obligations. And these banks deserve extra attention because they don't have the same access to the Federal Reserve's discount window for dollars as U.S. banks do. In fact, their estimated off-balance sheet dollar obligations of $39 trillion at the end of June 2022 were much higher than their on-balance sheet debt of $15 trillion, and almost half the size of their total liabilities.
So next time you're wondering where all the missing dollar debt is, just remember: it's probably outside the U.S., and it's probably a lot bigger than you think.
And let's be real, it's not like these off-balance sheet obligations are going to just magically disappear. They're like the elephant in the room that no one wants to talk about, but everyone knows is there. Eventually, the hidden leverage and maturity mismatch in pension funds and insurance companies' portfolios (which are generally supposed to be long-only) is going to come back to haunt us.
So what's the solution? I think it's time for some transparency. It's time for statistics that track the geography of outstanding short-term dollar payment obligations so that we can at least see what we're dealing with. Because let's be honest, trying to navigate through a policy fog without any visibility is about as fun as a root canal.
If you're interested in staying up-to-date with economical & crypto news, I would really appreciate it if you could consider subscribing.
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