Monetary Policy and Foreign Denominated Debt by Non-Bank Borrowers

This paper analyzes cross border credit from a new perspective: We assess globally aggregated foreign-denominated credit to non-bank borrowers (provided by the BIS) and analyze which factors drive debt denominated in yen, euro and US dollar between 2003 and 2020. The determinants we analyze include global economic activity, global commodity prices and the evolution of assets in the FED balance sheet. We also consider assets in the ECB and the BOJ Balance in a second step. Our results show that global economic activity is the main driver of dollar debt only before the financial crisis while the Fed balance sheet drives dollar debt afterwards. We also identify a crowding-out effect of FED balance activities on debt denominated in yen and euro. On the other hand, effects of changes in the ECB and BOJ balance are qualitatively less important and more stable.

The Global Domain of the Dollar: Eight Questions

Since the late 1950s, the rest of the world has come to use the dollar to an extent that justifies speaking of the dollar’s global domain. The rest of the world denominates much debt in U.S. dollars, extending U.S. monetary policy’s sway. In addition, in outstanding foreign exchange deals, the rest of the world has undertaken to pay still more in U.S. dollars: off-balance-sheet dollar debts buried in footnotes. Consistent with the scale of dollar debt, most of the world economic activity takes place in countries with currencies tied to or relatively stable against the dollar, forming a dollar zone much larger than the euro zone. Even though the dollar assets of the world (minus the United States) exceed dollar liabilities, corporate sector dollar debts seem to make dollar appreciation akin to a global tightening of credit. Since the 1960s, claims that the dollar’s global role suffers from instability and confers great benefits on the U.S. economy have attracted much support. However, evidence that demand for dollars from official reserve managers forces unsustainable U.S. current account or fiscal deficits is not strong. The so-called exorbitant privilege is small or shared. In 2008 and again in 2020, the Federal Reserve demonstrated a willingness and capacity to backstop the global domain of the dollar. Politics could constrain the Fed’s ability to backstop the growing share of the domain of the dollar accounted for by countries that are not on such friendly terms with the U.S.

Chad elections will be too late to challenge president

Subject Prospects for authoritarianism in Chad. Significance President Idriss Deby Itno announced on April 7 that legislative elections would take place in November 2018, after a delay of three years. The move comes shortly after the end on March 28 of the Inclusive National Forum on Institutional Reforms, which culminated in an announcement that Chad would adopt a new constitution with a presidential system of government instead of the current semi-presidential one. Reinforced presidential authority -- with the post of prime minster abolished -- will be the central feature. Impacts February's restructuring of its 1.36-billion-dollar debt to Glencore will provide Chad with two years' breathing space. The surprise decision to abolish the post of prime minister reinforces the concentration of authority in the president's hands. The overhaul of the constitution shows Deby's self-confidence after securing crucial economic support from the international community.

Mozambique’s FRELIMO will ignore external pressures

Subject Mozambican fiscal and security threats Significance President Filipe Nyusi on February 8 announced a deal with Afonso Dhlakama, leader of opposition movement RENAMO, on provincial decentralisation. This came a week after the attorney-general confirmed that a legal complaint had been passed to the audit court for potential prosecutions relating to a long-running 2-billion-dollar debt scandal. While the ruling FRELIMO has trumpeted these developments as evidence of a commitment to peace and fiscal transparency, elite politicking risks undermining both, while increasing insecurity is threatening several pending gas deals. Impacts Given Mozambique's demographic projections, present economic growth trends are unlikely to substantially reduce widespread poverty. Controversy will persist over the management of local elections in Nampula amid allegations of fraud and malpractice. The FRELIMO-RENAMO provincial deal could undermine democracy by making it harder for third-party or independent candidates to become mayors.

Mitigating Systemic Spillovers from Currency Hedging

Korea has been a forerunner in incorporating macroprudential policies to mitigate the vulnerabilities from currency crises that can turn into a more generalised liquidity crisis. This paper examines longer-term design issues for a more resilient and stable financial system that could be expected to complement the existing macroprudential measures in achieving a more stable financial system. In particular, the paper examines the rationale and mechanics of a new public financial institution, provisionally called the Exchange Stabilisation and Guarantee Corporation (ESGC) whose main role is to buy dollar forward positions from Korean exporting companies who wish to hedge the currency exposure from long-term export orders. The ESGC is intended to mitigate the risks arising from the reliance on the role of the banking sector in providing currency hedging services to exporters. Rapid growth of short-term foreign currency denominated debt has been the result of banks receiving forward dollar sales by exporters, and then hedging the long dollar position by borrowing short in dollars. A public institution that can buy dollars forward, but which is designed so that there is no need to hedge by taking short dollar debt, can mitigate the rapid increase in short-term dollar debt in booms.