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Containing the Dollar Credit Crunch

As the full implications of the COVID-19 pandemic have slowly become clear, private liquidity has begun to drain out of global markets. As a result, the record-high level of dollar-denominated debt held by non-banking entities outside of the United States has become a problem that central banks simply cannot ignore.

BASEL – With markets already in turmoil, a dollar credit crunch now threatens the world economy. Companies dependent on international trade have seen their earnings collapse, and many will be unable to service their dollar-denominated debts. International banks are facing severe pressure.

The world has learned about the costs of delaying measures to fight a contagious virus. Likewise, the many instruments governments and central banks have to tackle the economic consequences of this health crisis also become less effective the longer policymakers dither.

A looming credit crunch was evident even before the COVID-19 pandemic. In December 2019, a report from Robert Triffin International noted that every metric of dollar exposure outside the United States was flashing red. “The dollar debt of non-banks outside the United States is at a new record,” the authors warned, and “currency mismatches and leverage in the private sector have increased. The dollar funding of non-US banks looks fragile.”

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