The world’s top financial watchdog has uncovered US$14 trillion of global dollar debt hidden in derivatives and swap contracts, a startling sum that doubles the underlying levels of offshore dollar credit in the international system.
The scale of this lending greatly increases the risk of a future funding crisis if inflation ever forces the U.S. Federal Reserve to tighten in earnest and drain worldwide liquidity, potentially triggering a dollar surge.
A forensic study by the Bank for International Settlements (BIS) says enormous liabilities have accrued through FX swaps, currency swaps, and “forwards.” The data is tucked away in the “footnotes” of bank reports. “Contracts worth tens of trillions of dollars stand open and trillions change hands daily. Yet one cannot find these amounts on balance sheets. This debt is, in effect, missing,” said the BIS analysis, written by the team under Claudio Borio, the chief economist.
“These transactions are functionally equivalent to borrowing …