BIS data allow one to see where foreign leverage is building up, and in what currency. Over
half of cross-border banking claims are in USD, which represents a large structural short
for the USD. Any financial panic that spreads globally is highly likely to kickstart a scramble
for dollars to cover positions. Today, total USD cross-border claims are $13.7 trillion,
which is 18% of global GDP. The country that has the largest of these relative to its GDP
(excluding the major offshore banking centres of Hong Kong and Singapore) is Brazil (top-left
chart). Despite the improvement in Brazil’s current account, this still represents a major
structural vulnerability, and highlights Brazil’s reliance on being able to earn USD from selling
commodities.
Turning to cross-border euro leverage (which represents 28% of total claims), we can see
Turkey is the single country that has built up the most credit (top-right chart). The €60 billion
of external claims against Turkey is almost one fifth of its negative international investment
position. Turkey remains one of the countries we see most at risk to a currency crisis
(bottom chart). A combination of a wide current account deficit and insufficient FX reserves
relative to imports and short-term debt put the TRY in a vulnerable situation.
(Click on image to enlarge.)
Source: Bloomberg, Macrobond and Variant Perception
