By Hans Bentzien
FRANKFURT (Dow Jones) — Short-term payment obligations in dollars from currency swaps by actors located outside the United States have grown significantly in recent years and represent a statistical blind spot, according to the Bank for International Settlements (BIS). In its latest quarterly report, the BIS notes that the US Federal Reserve had to set up swap lines with foreign central banks in 2008 and 2020, although the extent and location of these commitments was unknown.
“These incidents demonstrate the need for statistics on the geographic distribution of these short-term debt obligations,” says an article co-authored by BIS chief economist Claudio Borio.
Forward currency transactions and currency swaps create off-balance sheet dollar payment obligations and are absent from standard debt statistics. Non-banks outside the US had as much as $25 trillion in such “unknown debt” by mid-2022. In 2016 it was $17 trillion. For banks located outside the US, it was $35 trillion. 70 percent of these payment obligations have a term of one week, with 30 percent it is only one day.
The US dollar is often required as the “vehicle currency” in currency swaps. An investor or bank wishing to perform a currency swap, for example from Swiss francs to Polish zlotys, would swap francs to dollars and then dollars to zlotys. “When dollar lenders pull out of the FX swap market, the squeeze is immediate,” warn Borio and his co-authors Robert McCauley and Patrick McGuire.
According to her, it’s not clear how many analysts are aware of the existence of these large off-balance sheet commitments. This makes it difficult to anticipate the scope and geographic location of payment obligations. “This off-balance sheet dollar debt may be out of sight and unknown to anyone right now – but only until the next time dollar liquidity dries up.”
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(END) Dow Jones Newswires
December 05, 2022 07:00 ET (12:00 GMT)