Global liquidity: changing instrument and currency patterns
BIS Quarterly Review | September 2018 | 23 September 2018
by Iñaki Aldasoro and Torsten Ehlers
International (cross-border and foreign currency) credit, a key indicator of global liquidity, has continued to expand in recent years to 38% of global GDP. This growth has been driven by international debt securities issuance, while the role of banks has diminished – both as lenders and as investors in debt securities. The aggregate trend has been more pronounced for advanced economy than emerging market borrowers. For individual countries, however, the growth of bank loans and that of debt securities have tended to move in tandem, highlighting the cyclical nature of global liquidity. The US dollar has become even more dominant as an international funding currency – in particular for emerging market borrowers. However, dollar exposures in emerging market economies vary substantially across countries and sectors.
Global liquidity – the ease of financing in international financial markets – remains at the centre of policy debates (Cohen et al (2017), CGFS (2011), Borio et al (2011)). In the run-up to the 2007-09 Great Financial Crisis (GFC), the supply of international credit – comprising cross-border credit and credit in foreign currency whether or not it crosses a border – expanded rapidly. When the crisis hit, international credit evaporated, exposing financial vulnerabilities in both advanced and emerging market economies (EMEs).2 Against the backdrop of major central banks’ highly accommodative monetary policies, this key indicator of global liquidity picked up markedly since 2010, in particular in EMEs.
In contrast to the pre-GFC period, the increase in international credit since 2010 has been driven primarily by debt securities rather than bank loans (Avdjiev et al (2017), Turner (2013)). At the same time, the US dollar has become even more dominant as the prime currency of denomination since the GFC (Maggiori et al (2018)). This “second phase” of global liquidity implies that global financing conditions have become more sensitive to developments in the bond market, and even more tightly linked to US monetary policy (Shin (2013)). EME borrowers may be particularly vulnerable if they have relied heavily on US dollar-denominated debt securities, as international bond investors tend to retreat quickly when US rates rise. But EMEs’ US dollar debt exposures can differ substantially not only across countries but also across sectors. In some EMEs the private corporate sector has been the main borrower of US dollars, while in others it has been the sovereign.