More on the BIS Warnings about the US Dollar

We ran this blog post about the Bank of International Setttlements warnings in their new Quarterly Report just the other day. Now there is a new article in the UK Telegraph by Ambrose Evans-Pritchard expanding on these BIS warnings. The message is that the rise in the US dollar is a threat to global markets and the threat will increase if US interest rates rise. Below are a few quotes from this new article and then a comment.    Please read the full Telegraph article for context.

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"Off-shore lending in US dollars has soared to $9 trillion and poses a growing risk to both emerging markets and the world's financial stability, the Bank for International Settlements has warned. The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at annual rate of 47pc. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars."

"A chunk of China's borrowing is disguised as intra-firm financing. This replicates practices by German industrial companies in the 1920s, which hid their real level of exposure as the 1929 debt trauma was building up. "To the extent that these flows are driven by financial operations rather than real activities, they could give rise to financial stability concerns," said the BIS in its quarterly report."

. . . . . .

"The BIS said 55pc of collateralised debt obligations (CDOs) now being issued are based on leveraged loans, an "unprecedented level". This raises eyebrows because CDOs were pivotal in the 2008 crash."

"BIS officials are worried that tightening by the US Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar."

"The appreciation of the dollar against the backdrop of divergent monetary policies may, if persistent, have a profound impact on the global economy. A continued depreciation of the domestic currency against the dollar could reduce the creditworthiness of many firms, potentially inducing a tightening of financial conditions," it said."

. . . . . .

"Cross-border lending in dollars has tripled to $9 trillion in a decade. Some $7 trillion of this is entirely outside the American regulatory sphere. "Neither a borrower nor a lender is a US resident. The role that the US dollar plays in debt contracts is very important. It is a global currency, and no other currency has this role," he said."

"The implication is that there is no lender-of-last resort standing behind trillions of off-shore dollar bank transactions. This increases the risks of a chain-reaction if it ever goes wrong. China's central bank has ample dollar reserves to bail out its companies - should it wish to do so - but the jury is out on Brazil, Russia, and other countries."

. . . . . .

"The BIS has particular authority since its job is to track global lending. It was the only major body to warn of serious trouble before the Great Recession - and did so clearly, without the usual ifs and buts. It now warns that the world is in many ways even more stretched today than it was in 2008, since emerging markets have been drawn into the global debt morass as well, and some have hit the limits of easy catch-up growth."

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My added comment:

Just one comment on this article. The article says "the implication is that there is no lender-of-last resort standing behind the trillions of off-shore dollar bank transactions." Please keep in mind Jim Rickards statement that "the IMF has the only clean balance sheet left when the next liquidity crisis happens". 

If you follow this at all, the handwriting on the wall gets clearer all the time. The BIS is on record right now that they are concerned about another global financial crisis due to debt problems around the world and a rising US dollar. Their concern goes up as US interest rates go up. This crisis could be a lot bigger than the one in 2008. They are concerned there is "no lender-of-last resort" available this time. This "increases the risk of a chain-reaction it it ever goes wrong."

Are we being conditioned to accept the idea of the IMF stepping in to save the global financial system when the next crisis rolls around?        We report. You decide.


Added note 8-6-15: A full list of systemic risk warnings can be found on this blog page