The review by the Bank for International Settlements entitled Global Liquidity: selected indicators adds to and clarifies the picture of global debt presented in the report Debt and (not much) deleveraging published by the consulting firm McKinsey. The conclusions of both documents concur: global debt is growing, and according to many parameters the global debt situation today is comparable with how the situation was on the eve of the 2007-2009 financial crisis or even worse. This means that a second wave of the financial crisis could strike the global economy at any moment.
The authors of the BIS review have focussed their attention on those debts that have been generated by the cross-border transactions of banks in the provision of credits and loans. Interbank credit transactions have remained beyond the scope of the review owing to their high specificity and accounting complexities. The report’s authors refer to bank credits and loans issued to non-residents as «offshore transactions». According to the BIS, the total amount of outstanding dollar credits and loans issued by American banks to all types of non-banking organisations in the autumn of 2014 was close to $50 trillion (on 01.10.2014 it was around $49 trillion). Moreover, US residents accounted for nearly $40 trillion and non-residents (offshore credits and loans) for approximately $9 trillion. The total amount of credits and loans issued by banks in the eurozone is estimated to be $35 trillion, with offshore credits and loans accounting for nearly $2 trillion. Finally, the total amount of credits and loans issued by banks in Japan was estimated at $18 trillion, with a relatively insignificant proportion of offshore credits and loans. The volume of credits and loans issued by Chinese banks was also impressive at more than $16 trillion, while the proportion of offshore transactions was negligible.
On 1 October 2014, the total amount of credits and loans issued by banks in the US, the eurozone and Japan to non-banking organisations was $102 trillion, while offshore credits and loans accounted for a little more than $11 trillion. It turns out that the lion’s share of offshore credits and loans issued by banks in the ‘golden billion’ countries falls to US banks. This is not surprising. After all, since the beginning of this decade, EU countries have been in a debt crisis, and most of the resources of European banks have been directed towards resolving the problems associated with it. Japan traditionally pursues a policy of ‘credit nationalism’ where the government does not encourage the offshore lending activities of its banks, instead directing their resources towards domestic economic development.
Let us look more closely at the offshore activities of American banks in regard to credits and loans. On 1 October 2014, the credits and loans of US banks to non-banking organisations in other countries amounted to $9.2 trillion. Incidentally, this is 50 percent more than on the eve of the 2007-2009 financial crisis. The growth in the volume of cross-border credits and loans issued by American banks over one year (2013-2014) is rather impressive: nearly $2 trillion in absolute terms, and 26 per cent in relative terms.
Credits and loans issued by US banks to non-banking organisations outside of the US (in trillions of dollars)Total, bank credits and loansBank creditsBank loans (the purchase of debt securities by banks)TotalTo non-financial organisationsTo non-banking financial organisationsOn 01.10.20126.96.36.199.20.7On 01.10.20188.8.131.52.41.9Growth for the year184.108.40.206.21.2
The volume of bank loans grew at a higher rate in comparison to credits and this is understandable. Investment transactions (and the purchase of corporate bonds is classified as an investment), in view of the fact that regulatory authorities do not have as much control over them, provide greater profitability than credit transactions. Most of the growth is accounted for by loans to foreign non-banking financial organisations, i.e. investment funds, insurance companies, pension funds and so on.
The high growth rates of cross-border (offshore) transactions by American banks are also not surprising. At the height of the financial crisis, so-called quantitative easing (QE) programmes began to be implemented in the US, which dramatically increased the amount of dollars issued by the US Federal Reserve System. The third QE programme was launched in September 2012, which provided for the purchase of $45 billion of Treasury securities and $40 billion of mortgage-backed securities by the Federal Reserve. At the end of October 2014, the FRS announced that the objectives of the QE programme had been reached (there was a noticeable improvement in America’s economic situation) and the printing press would reduce its output. While the assets of the FRS equalled $0.9 trillion on the eve of the global crisis (2007), by October 2014 they had already reached $4.5 trillion, so in other words they had increased fivefold. Such active issuing activities by Federal Reserve banks created the conditions for an increase in money supply by American commercial banks that are members of the FRS (several thousand banks). As mentioned earlier, according to the BIS, the total amount of credits and loans issued by American banks reached $50 trillion in the autumn of 2014 (exclusive of transactions on the interbank market, i.e. without credits and loans to other banks). Almost a fifth of these credits and loans were distributed outside the US.
Offshore credits and loans are a very profitable business for American banks, since the interest rates on cross-border transactions are significantly higher than the rates on transactions in the US domestic market. The Federal Reserve’s base rate has remained at 0-0.25 per cent over the last few years. To compare, Russian companies and organisations took credits and loans from American banks at «low» (in quote marks) rates of 5-7 per cent. These rates were only low when compared with the usurious rates of Russian commercial banks that did not have access to cheap offshore money. But when compared to the nominal interest rates on the US market, the business of US banks in Russia was extremely profitable.
On the whole, there was a tendency during the QE programmes to move capital from the US to other countries around the world, including those on the periphery of the global economy, where the shortage of capital was palpable and the profit margins were higher. Last year, however, when there began to be signs that the third QE programme was being phased out, a U-turn in capital flows could be seen. In particular, a net capital outflow was recorded from all BRICS countries which, over the course of a few years, had managed to become hooked on cheap money from America. According to the Bank of Russia, the net capital outflow from Russia amounted to $151.5 billion (such a hefty outflow of capital was helped a great deal by the economic sanctions of the West, the rating agencies game regarding the ‘demotion’ of Russia etc.). All financial market participants are waiting for an increase in the interest rates of the FRS and in the rate of return on debt securities, primarily US Treasury bonds. The Federal Reserve has still not increased its base rate (0.25 per cent), but is planning to do so at the start of the summer. Market participants are preparing for this event in good time, but it is all fraught with serious consequences. This is also the conclusion that the authors of the BIS review arrive at.
Firstly, the US dollar exchange rate has risen against other currencies. Those non-American companies and organisations that have racked up large dollar loans and credits will experience (and are already experiencing) difficulties in servicing and repaying their obligations denominated in the US currency.
Secondly, many dollar loans and credits have a floating interest rate. Consequently, one can expect that the burden of borrowers to service such debts will become heavier.
Thirdly, the outflow of capital to the US will increase, and this will lead to the further deterioration of the economic situation in countries on the periphery of global capitalism, the further weakening of the exchange rates of these countries’ national currencies, and further complications in the servicing and repayment of enormous dollar debts.
The BRICS countries are among those that may suffer as a result of the phasing out of the QE programme. One of the largest holders of debt in terms of dollar credits and loans issued by US banks is China ($1.1 trillion according to the BIS). Other BRICS countries are also seriously burdened with such debts. Brazil, for example, owes US banks $300 billion.
The blow will not only be felt by countries on the periphery of global capitalism, however, but also countries across Europe. The quantitative easing announced by the European Central Bank coincides with the end of the QE programme in the US. This will cause a rapid decline in the exchange rate of the euro against the US dollar and increase the outflow of capital. The ECB’s QE programme could lead to a new escalation of the European debt crisis. Generally speaking, it would be difficult to think of a more unfortunate moment for the launch of the ECB’s QE programme, while some believe that it has been done not in the interests of Europe, but in the interests of the US.
At the same time, there is another factor that needs to be taken into account. The phasing out of the Federal Reserve’s quantitative easing programme and the appreciation of money could interrupt the not completely steady trend towards recovery of the real sector of the American economy. Even now, the current rise in the dollar exchange rate is undermining the already weak positions of US exporters. The former head of the FRS, Alan Greenspan, notes that the real sector of the US economy is recovering much more slowly than the financial market. There is an imbalance developing that could result in the emergence of an enormous financial bubble, and US banks and funds as well as investors around the world will take it upon themselves to inflate it. At present, there is much that is reminiscent of the situation on the eve of the 2007-2009 global financial crisis.