INSUBCONTINENT EXCLUSIVE:
The current run-up in US Treasury yields and the dollar poses a major stress test for a global financial system that has become even more
dependent on the American currency since the last credit conflagration.
Mehul Daya and Neels Heyneke, strategists at South Africa’s
who have analyzed the role of the greenback’s liquidity in past crises, argued that “a stronger US dollar and the global cost of capital
rising is the perfect cocktail, in our opinion, for a liquidity crunch” in a note Thursday.
A key feature of the global financial crisis a
decade ago was a chronic shortage of dollars that eventually spurred the Federal Reserve to set up swap lines with more than a dozen central
banks to ease funding pressures.
Yet the world has doubled down since then: dollar credit to borrowers outside the US — excluding banks
— climbed to 14 per cent of global gross domestic product by March, from 9.5 per cent at the end of 2007, according to estimates cited in
a Bank for International Settlements paper.
Growth of credit in dollars has outpaced that of other foreign currencies in all major
emergingmarket regions, BIS economists Inaki Aldasoro and Torsten Ehlers wrote in a paper last month
That’s a danger given that “international bond investors tend to retreat quickly when US rates rise,” they wrote
An appreciating dollar also “increases tail risks” for fund managers holding emerging-market assets, they said.
For their part, Daya and
Heyneke concluded in a separate note last month that “as the global economy and financial system have become more systemically leveraged,
their sensitivity to changes in the cost of global capital has increased; hence, we believe the next downturn may be more serious than
