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The world must prepare for its dollar-binge punishment — and it won’t be pretty

Ambrose Evans Pritchard,

The Telegraph 

March 13, 2015

 

 Sitting on the desks of central bank governors and regulators across the world is a scholarly report that explores the vertiginous scale of global debt in U.S. dollars, and gently hints at the horrors in store as the U.S. Federal Reserve turns off the liquidity spigot.

 This dry text is the talk of the hedge fund village in Mayfair, and the stuff of nightmares for those in Singapore or Hong Kong already caught on the wrong side of the biggest currency margin call in financial history. “Everybody is reading it,” said one ex-veteran from the New York Fed.

The scholarly paper — “Global dollar credit: links to US monetary policy and leverage” — was first published by the Bank for International Settlements in January. It shows how zero rates and quantitative easing flooded the emerging world with dollar liquidity, overwhelming all defences.

This abundance enticed Asian and LatinAmerican companies to borrow like never before in dollars — at real rates near 1% — storing up a reckoning for the day when the U.S. monetary cycle should turn, as it is now doing with panache.

 Contrary to popular belief, the world is today more dollarised than ever before. Foreigners have borrowed $9 trillion in U.S. currency outside American jurisdiction, and therefore with no lender-of-resort in extremis. This is up from $2 trillion in 2000.

The emerging market share — mostly Asian — has doubled to $4.5 trillion since the Lehman crisis, if camouflaged lending through banks registered in London, Zurich, or the Cayman Islands, are included.

The result is that the world credit system is acutely sensitive to any shift by the Fed. “Changes in the short-term policy rate are promptly reflected in the cost of $5 trillion in U.S. dollar bank loans,” said the BIS.

 

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