The threat is lurking in the foreign exchange debt swap market, which is so complex few understand it and there is little control over its workings.
Reuters reports that pension funds and other “non-bank” financial firms have more than $80trillion of hidden, off-balance sheet dollar debt in FX swaps.
BIS described as the FX swap debt market as a “blind spot” that risks leaving policymakers in a total “fog”, the latest BIS quarterly report said.
A Dutch pension fund or Japanese insurer could use borrow dollars then lend them as euros or Japanese yen, before later repaying them.
The FX swap market has a history of problems, including funding squeezes during both the global financial crisis and again in the early days of the Covid pandemic, before the Federal Reserve raced to the rescue.
Terrifyingly, the $80trillion-plus “hidden” debt estimate is greater than the total stocks of US dollar Treasury bills, repo and commercial paper in circulation combined, BIS said.
In other words, it’s bigger than the mighty dollar.
It has grown from $55trillion to $80trillion in a decade, with daily FX swap deals totalling a massive $5 trillion a day.
Non-US banks and pensions funds have twice as much FX swap dollar obligations as the amount of dollar debt that is listed on their balance sheets.
“The missing dollar debt from FX swaps/forwards and currency swaps is huge,” BIS said.
Yet nobody knows where this debt is and how much it is worth in total.
