$80 trillion debt in FX swaps is a huge problem

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$80 trillion debt in FX swaps is a huge problem

There is a huge, missing and growing problem inside the round-the-clock foreign exchange market, and it is one that can't be seen.

The Bank for International Settlements cited trillions of dollars in debt by non-U. S. borrowers contained in FX swaps forwards and currency swaps do not appear on balance sheets and are missing from statistics. S. banks owe more than $35 trillion, while non-bank entities outside the U.S. owe as much as $25 trillion, the BIS said in a quarterly report. The total amount of outstanding obligations inside the foreign-exchange market is closer to $80 trillion-plus, the report said.

According to the report, Claudio Borio, Patrick McGuire, and Robert McCauley, the $80 trillion-plus in outstanding obligations to pay the US dollar in FX swaps forwards and currency swaps is more than double the stocks of dollar Treasury bills, repo and commercial paper.

They said that FX swap markets are vulnerable to funding squeezes and the lack of information about the dollar makes it harder for policy makers to anticipate the scale and geography or dollar rollover needs. Policies to restore the smooth flow of short-term dollars in the financial system eg central bank swap lines are set in a fog in times of crisis. The strong dollar can reverberate around the world because of the global squeeze on dollars. The dollar has been on a tear and wreaking havoc for much of the 2022 year, but it fell dramatically in November - shrinking its gain over the past 12 months to 8.9% from 20.6% in late October, according to the ICE U.S. Dollar Index DXY, The Bank for International Settlements in Basel, Switzerland, is considered the central bank for central banks, with a unique but often overlooked role in the international financial system.