Probably Nothing...BIS warns of $80 trillion of hidden FX swap debt

[NowsTheTime]

https://www.reuters.com/markets/currencies/global-markets-bis-urgent-2022-12-05/

Beyond me to understand this.....

[Miguelito Loveless]

1. Likewise

But it sounds like traditional banks have been investing in cryptocurrencies in world economy shattering amounts.

[cloudbase]

2. No doubt some people are making bank on the churn. n/t

[Irish_Dem]

3. Exactly. Someone is getting quite rich from this.

[dutch777]

4. My guess is it is a potential liquidity issue where debt payments may get held up

due to lack of enough dollars to cover all the debt required to be paid in US $. If a debtor owes payment in dollars but largely does business in say yen, at some point if it doesn't actually have dollars on hand, it has to exchange yen to dollars to pay the debt. So if for some reason a whole lot of entities get into a payment crunch due to some economic crisis, and the exchange doesn't have enough US $ to cover all the requested exchanges, could cause some into technical default. Depends on how big and widespread the larger economic issue is but could lead to a series of cascading business failures like we saw at the start of the Great Recession.

I am amazed after all the off books shenanigans that got the world into financial trouble in 2008, that there are still all these creative financial mechanisms that have no meaningful government regulatory oversight or adequate transparency and yet could cause an economic contagion that could affect us all quite negatively. I keep wondering why governments tolerate crypto for example where it essentially competes for legitimacy with government printed currency, has no backing or basis in real value (like a stock or real estate) and can be used for all sorts of off the books, tax and law evading business or financial schemes and could bankrupt everyone who has invested too much in it overnight.

[albacore]

5. I turned this one over to a friend who is in finance... for translation.

I'll get back to this if he has a translation for us regular folks.

[mathematic]

6. Inflation & rising rates have increased the cost of FX swaps so higher total value isn't surprising

The details of these things beyond the headlines matter, of course, but the headline itself isn't really a thing that's worrisome. It does make GREAT fodder for financial doomers on the internet. I know the financial death cult surrounding Gamestop stock has already latched onto this story, as if it has anything to do with a failing brick & mortar video game retailer.

As a high level overview of the topic, here's an example of how FX swaps are used.

If you're japanese and want to buy US Treasuries (which are in US dollars) while still guaranteeing your your return relative to the yen, you would want to buy the treasury and an FX swap. Using hypothetical rates, let's say last year you bought a 2% bond and paid 1% for the FX swap (for a yen return of 1%) and this year, due to higher rates and greater currency fluctuation you buy a 4% bond and pay 3% for the FX swap (also for a yen return of 1%). Even though the yen return is the same in both cases, the amount of future dollars owed has increased. This increase is entirely offset by the increase in income from the bond yield.

So it's not enough to say $80T in swap debt and conclude you've got a disaster brewing. You actually need to dig into the details.

[NowsTheTime]

7. Appreciate all the responses!