The Bank for International Settlements (BIS) is sounding the alarm over off-balance sheet dollar debt. The global regulator, known as the central bank to the world’s central banks, released its latest quarterly report today, which included a major warning. ⚠️
On a positive note, it says that this year’s market volatility has not caused significant market issues. It’s also taken a more moderate tone toward inflation after telling central banks to act swiftly to bring it down last year.
However, its primary concern this year is the FX swap debt ballooning to concerning levels. They describe it as a “blind spot” that risks leaving policymakers in a “fog.” 😶🌫️
It estimates that the $80 trillion debt exceeds the amount of dollar Treasury bills, repo, and commercial paper combined. And much of it is owned by pension funds and other ‘non-bank’ financial firms where there’s reduced visibility and regulation. The churn of FX swap deals was almost $5 trillion a day in April, representing two-thirds of the daily global FX turnover. That’s a lot of volume.
In English, the concern is that if issues arose and liquidity dried up, settlement of these swaps could cause instability in other areas of the global financial system.
This wouldn’t be the first time this asset class experienced problems. During the financial crisis and the COVID-19 pandemic, central banks had to intervene with dollar swap lines to keep the market liquid and prevent contagion. 📆
More broadly, they’re concerned that FX trading continues to move into “less visible” venues, which prevents policymakers from monitoring FX market conditions and risk. And while things are functioning well now, the notional value of these swaps sets the table for problems to occur.
On another gloomy note, Britain’s Confederation of Business Industry warned that the country’s economy is set to shrink by 0.4% next year. Inflation remains too high, and companies have put investments on hold given the macroeconomic uncertainty.
In other words, they believe stagflation has arrived in Britain, setting the country for a ‘lost decade.’ 🙃