BIS Finds Global Debt May Be Underreported by $14 Trillion

The comments above & below is an edited and abridged synopsis of an article by Tyler Durden

Total nominal global debt has risen to a new high of $217 trillion, or 327% of global GDP, largely due to an unprecedented increase in emerging market leverage.

Debt within the developed world has peaked in the last 5 years. However, contrary to speculation of deleveraging among emerging market nations, it seems that developed nations have been piling on just as much debt in the form of swaps and forwards.

Non-bank institutions outside the US owe large sums of dollars off-balance sheet through FX swaps and forwards. The BIS calculates that the total is of a size similar to, and probably exceeding, the $10.7 trillion of on-balance sheet dollar debt, potentially as much as $13-14 trillion.

The BIS provides substantial background data on who, where and how FX swaps (as both a lender and borrower) are used, as well as where this missing debt can be found.

Resorting to derivatives is precisely for obscurity. Further complicating matters is the ongoing debate of what happens when gross derivative notional collapses to net, and where the liability lies.

In terms of currency distribution, it’s all about the US dollar. With more than $50 trillion in total notional FX derivatives, it isn’t surprising that daily trading volumes are massive.

Attempting to mask exposure complicates any assessment of the missing debt’s total amount and distribution. The message is that the next time a US dollar funding crisis strikes, in addition to the trillions in dollar exposure already known, the world will be faced with a dollar shortfall potentially as great as $14 trillion. All that would be needed is a sharp repricing in the US dollar, which in turn would be catalyzed by another financial crisis.

The only difference is that next time, the total dollar injection required will be far, far greater.