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BIS Warns Of 2023 Black Swan - A Derivatives Time Bomb

Dec 6, 2022

‘Huge, Missing and Growing:’ $65 Trillion in Dollar Debt Sparks Concern

There’s a hidden risk to the global financial system embedded in the $65 trillion of dollar debt being held by non-US institutions via currency derivatives, according to the Bank for International Settlements.

In a paper with the title “huge, missing and growing,” the BIS said a lack of information is making it harder for policy makers to anticipate the next financial crisis. In particular, they raised concern with the fact that the debt is going unrecorded on balance sheets because of accounting conventions on how to track derivative positions.

https://www.bloomberg.com/news/articles/2022-12-05/-missing-65-trillion-in-derivatives-dollar-debt-sparks-concern?leadSource=uverify%20wall

There is no cause for alarm. Get as many boosters as possible and protect yourself in advance.

BIS Warns Of 2023 Black Swan - A Derivatives Time Bomb

https://www.youtube.com/watch?v=fLGMxH9KFa8

FX swaps, forwards and currency swaps create forward dollar payment obligations that do not appear on balance sheets and are missing in standard debt statistics. Non-banks outside the United States owe as much as $25 trillion in such missing debt, up from $17 trillion in 2016. Non-US banks owe upwards of $35 trillion. Much of this debt is very short-term and the resulting rollover needs make for dollar funding squeezes. Policy responses to such squeezes include central bank swap lines that are set in a fog, with little information about the geographic distribution of the missing debt. 1

JEL F31, F34, F41.

Embedded in the foreign exchange (FX) market is huge, unseen dollar borrowing. In an FX swap, for instance, a Dutch pension fund or Japanese insurer borrows dollars and lends euro or yen in the "spot leg", and later repays the dollars and receives euro or yen in the "forward leg". Thus, an FX swap, along with its close cousin, a currency swap, resembles a repurchase agreement, or repo, with a currency rather than a security as "collateral".2 Unlike repo, the payment obligations from these instruments are recorded off-balance sheet, in a blind spot. The $80 trillion-plus in outstanding obligations to pay US dollars in FX swaps/forwards and currency swaps, mostly very short-term, exceeds the stocks of dollar Treasury bills, repo and commercial paper combined. The churn of deals approached $5 trillion per day in April 2022, two thirds of daily global FX turnover.

FX swap markets are vulnerable to funding squeezes. This was evident during the Great Financial Crisis (GFC) and again in March 2020 when the Covid-19 pandemic wrought havoc. For all the differences between 2008 and 2020, swaps emerged in both episodes as flash points, with dollar borrowers forced to pay high rates if they could borrow at all. To restore market functioning, central bank swap lines funnelled dollars to non-US banks offshore, which on-lent to those scrambling for dollars.

https://www.bis.org/publ/qtrpdf/r_qt2212h.htm

Kiss your assets goodbye.


Posted by Conspiracy Cafe on January 22, 2023 at 9:17 AM 47 Views