The world can breathe a little easier. The US Federal Reserve has come to the rescue of a global economy slowing to stall speed. It has extended a lifeline to a China sinking ever deeper into a debt-deflation trap.
The Fed has relieved pressure on the $US13 trillion ($19.1 trillion) nexus of dollar-denominated debt traded offshore. The Bank for International Settlements says emerging markets have racked up $US5.2 trillion of dollar debt – from companies in Brazil, or Kazakhstan or Korea.
Wall Street have surged higher on the back of the Fed’s rate cut. Whether the rally can be sustained is another matter entirely. Credit: AP
This understates the true scale of borrowing embedded in the derivatives market – FX swaps, forwards, etc – which pushes the dollar liabilities of non-US banks to over $US35 trillion. This has to be rolled over continuously. “Much of this debt is very short-term,” said the BIS.
The start of a Fed rate-cutting cycle is a huge moment for the international financial system. Central banks in emerging markets can loosen a little without fearing a run on their currencies. Indonesia’s central bank has stopped defending the rupiah and dared to cut rates. India’s Sensex stock index hit an all-time high on Thursday as markets anticipate a new world of abundant liquidity and surging inflows of foreign funds.
The Fed’s jumbo half-point cut is transmitted instantly to the 40-odd countries and currency boards linked to the US dollar in one way or another. These regions were forced to import the most aggressive tightening cycle in 40 years through their exchange rates, whether or not their local economies were synchronised with the US cycle.
Hong Kong’s banks have finally been able to cut their suffocating prime rate. Over 90 per........