Bank for International Settlements sounds alarm over dollar
Claire Jones in Frankfurt and Sam Fleming in London
Global financial policy makers have sounded the alarm about the impact of a resurgent US dollar on emerging markets, where companies have racked up large debts denominated in the American currency.
The Bank for International Settlements, known as the central bankers’ bank, warned on Sunday in its Quarterly Review that a prolonged rally in the dollar could expose financial vulnerabilities in emerging markets by damaging some companies’ creditworthiness.
The Basel-based organisation added that there were increasing signs of fragility in financial markets, despite renewed hopes for economic growth, pointing to the recent stress in the $12.3tn US Treasury market that serves as the bedrock of the global financial system.
“To my mind, these events underline the fragility — dare I say growing fragility — hidden beneath the markets’ buoyancy,” said Claudio Borio, the head of the BIS’s monetary and economic department.
The dollar hit post-recession highs against some currencies on Friday after a blockbuster employment report that showed 321,000 jobs had been created in November.
Emerging market companies have been borrowing heavily via the issuance of dollar securities, a phenomenon the BIS has been following closely.
It said emerging market borrowers had issued a total of $2.6tn of international debt securities, of which three-quarters were denominated in dollars. International banks’ cross-border loans to emerging market economies amounted to $3.1tn in mid-2014, mainly in US dollars, the BIS added.
Mr Borio said: “Should the US dollar, the dominant international currency, continue its ascent this could expose currency and funding mismatches by raising debt burdens. The corresponding tightening of financial conditions could only worsen once interest rates in the US normalise.”
Flows of credit across borders have risen substantially for the first time in three years, the report also found. Overseas lending, an important marker of confidence among banks, rose $401bn to $30tn over the second quarter of this year.
The 1.2 per cent annual rise, from June 2013 to June 2014, was the first since late 2011, and was accompanied with more lending to Asian emerging markets.
Mr Borio described the rise in lending to China by foreign banks as extraordinary, with outstanding loans to China doubling between the end of 2012 and June of this year to $1.1 trillion.
The BIS noted that the sharp, intraday fall in US Treasury yields on October 15 coincided with no negative economic news other than “somewhat weaker than expected” US retail sales data.
While markets quickly adjusted to the shock, the BIS said this stabilisation was down to the actions of policy makers. “Markets did not stabilise fully by themselves,” said Mr Borio, adding that the nature of the rebound “highlighted once more the degree to which markets are relying on central banks”.
He added: “The markets’ buoyancy hinges on central banks’ every word and deed.”
While investors are speculating about US interest rate increases in 2015, conditions in other major economies remain subdued. Since mid-October the Bank of Japan has upped the size of its asset buying as part of its quantitative easing programme, while the European Central Bank has dropped big hints that it will unveil its own package of sovereign debt purchases early next year.
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