Is the global financial system about to experience a meltdown?
If so, it might be a result of the foreign exchange market.
According to a new report from the Bank for International Settlements (BIS), the 24/7 FX market is facing trillions of dollars in debt by non-U.S. borrowers that are situated in FX swaps and currency swaps that are not listed on balance sheets. The BIS added that non-US. banks owe as much as $35 trillion, and non-bank organizations outside the United States owe as much as $25 trillion.
So, there are more than $80 trillion in outstanding obligations, the so-called central bank for central banks noted.
“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,” according to the quarterly report authored by Claudio Borio, Patrick McGuire, and Robert McCauley.
This is dangerous because forex swap markets are vulnerable to a paucity of information surrounding U.S. dollar debt and the possibility of funding squeezes.
Next year should be a fascinating time.
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