The Global Dollar Funding Shortage Is Back With A Vengeance And "This Time It's Different"

Tyler Durden's picture

The last time the world was sliding into a US dollar shortage as rapidly as it is right now, was following the collapse of Lehman Brothers in 2008. The response by the Fed: the issuance of an unprecedented amount of FX liquidity lines in the form of swaps to foreign Central Banks. The "swapped" amount went from practically zero to a peak of $582 billion on December 10, 2008.

The USD shortage back, and the Fed's subsequent response, was the topic of one of our most read articles of mid-2009, "How The Federal Reserve Bailed Out The World."

As we discussed back then, this systemic dollar shortage was primarily the result of imbalanced FX funding at the global commercial banks, arising from first Japanese, and then European banks' abuse of a USD-denominated asset-liability mismatch, in which the dollar being the funding currency of choice, resulted in a massive matched synthetic "Dollar short" on the books of commercial bank desks around the globe: a shortage which in the aftermath of the Lehman failure manifested itself in what was the largest global USD margin call in history. This is how the BIS described first the mechanics of the shortage:

The accumulation of US dollar assets saddled banks with significant funding requirements, which they scrambled to meet during the crisis, particularly in the weeks following the Lehman bankruptcy. To better understand these financing needs, we break down banks’ assets and liabilities by currency to examine cross-currency funding, or the extent to which banks fund in one currency and invest in another. We find that, since 2000, the Japanese and the major European banking systems took on increasingly large net (assets minus liabilities) on-balance sheet positions in foreign currencies, particularly in US dollars. While the associated currency exposures were presumably hedged off-balance sheet, the build-up of net foreign currency positions exposed these banks to foreign currency funding risk, or the risk that their funding positions (FX swaps) could not be rolled over.

... And then the subsequent global public response:

The severity of the US dollar shortage among banks outside the United States called for an international policy response. While European central banks adopted measures to alleviate banks’ funding pressures in their domestic currencies, they could not provide sufficient US dollar liquidity. Thus they entered into temporary reciprocal currency arrangements (swap lines) with the Federal Reserve in order to channel US dollars to banks in their respective jurisdictions (Figure 7). Swap lines with the ECB and the Swiss National Bank were announced as early as December 2007. Following the failure of Lehman Brothers in September 2008, however, the existing swap lines were doubled in size, and new lines were arranged with the Bank of Canada, the Bank of England and the Bank of Japan, bringing the swap lines total to $247 billion. As the funding disruptions spread to banks around the world, swap arrangements were extended across continents to central banks in Australia and New Zealand, Scandinavia, and several countries in Asia and Latin America, forming a global network (Figure 7). Various central banks also entered regional swap arrangements to distribute their respective currencies across borders.

The amount of the implied dollar short was also calculated by the BIS.

The major European banks’ US dollar funding gap had reached $1.0–1.2 trillion by mid-2007. Until the onset of the crisis, European banks had met this need by tapping the interbank market ($432 billion) and by borrowing from central banks ($386 billion), and used FX swaps ($315 billion) to convert (primarily) domestic currency funding into dollars. If we assume that these banks’ liabilities to money market funds (roughly $1 trillion, Baba et al (2009)) are also short-term liabilities, then the estimate of their US dollar funding gap in mid-2007 would be $2.0–2.2 trillion. Were all liabilities to non-banks treated as short-term funding, the upper-bound estimate would be $6.5 trillion (Figure 5, bottom right panel).


One thing to keep in mind as reading the above (and the linked article as a refresher), is that the massive USD synthetic short, and resulting margin call, was entirely due to the actions of commercial banks, with central banks having to step in subsequently and bail them out using any and every (such as FX swaps) mechanism possible.

* * *

Why do we bring all of this up now, nearly 6 years later? Because, as JPM observed over the weekend while looking at the dollar fx basis, the shortage in dollar funding is back and is accelerating at pace not seen since the Lehman collapse.

The good news: said shortage is not quite as acute yet as it was in either 2008/2009 or on November 30 2011 (recall "Here Comes The Global, US-Funded Liquidity Bail Out") when just as Europe was again on the verge of collapse, the Fed re-upped the ante on its global swap lines when it pushed the swap rate from OIS+100 bps to OIS+50 bps.

The bad news: at the current pace of dollar funding needs, it is almost certain that the tumble in the dollar fx basis will accelerate until it hits its practical minimum of - 50 bps, which is the floor as per the Fed-ECB swap line.

But the real news is that unlike the last time, when the global USD funding shortage was entirely the doing of commercial banks, this time it is the central banks' own actions that have led to this global currency funding mismatch - a mismatch that unlike 2008, and 2011, can not be simply resolved by further central bank intervention which happen to be precisely the reason for the mismatch in the first place.

In other words, central banks have managed to corner themselves in yet another policy cul-de-sac, six years after they did everything in their power to undo the last one.

Here is how JPM's Nikolaos Panigirtzoglou frames the problem:

The decline in the cross currency swap basis across most USD pairs in recent months is raising questions regarding a shortage in dollar funding. The fx basis reflects the relative supply and demand for dollar vs. foreign currency funds and a very negative basis currently points to relative shortage of USD funding or relative abundance of funding in other currencies. Such supply and demand imbalances can create big shifts in the fx basis away from its actuarial value of zero. Figure 1 shows that the dollar fx basis weighted across eight DM and EM currencies, declined significantly over the past year to its lowest level since mid 2013, although it remains well above the lows seen during the depths of the Lehman or the Euro debt crisis.


It does indeed, for now, however read on for why the current basis reading just shy of -20 bps will almost certainly accelerate until and unless there is a dramatic convergence in the policies of the Fed and the other "developed world" central banks.

First, what are currency and fx swaps, and why does anyone care? "Cross currency swaps and FX swaps encompass similar structures which allow investors to raise funds in a particular currency, e.g. the dollar from other funding currencies such as the euro. For example an institution which has dollar funding needs can raise euros in euro funding markets and convert the proceeds into dollar funding obligations via an FX swap. The only difference between cross currency swaps and FX swaps is that the former involves the exchange of floating rates during the contract term. Since a cross currency swap involves the exchange of two floating currencies, the two legs of the swap should be valued at par and thus the basis should be theoretically zero. But in periods when perceptions about credit risk or supply and demand imbalances in funding markets make the demand for one currency (e.g. the dollar) high vs. another currency (e.g. the euro), then the basis can be negative as a substantial premium is needed to convince an investor to exchange dollars against a foreign currency, i.e. to enter a swap where he receives USD Libor flat, an investor will want to pay Euribor minus a spread (because the basis is negative)."

One read of a substantial divergence from par in the fx basis is that there may be substantial counterparty concerns within the banking system - this was main reinforcing mechanism for the first basis blow out of the basis back in 2008.

Both cross currency and FX swaps are subjected to counterparty and credit risk by a lot more than interest rate swaps due to the exchange of notional amounts. As such the pricing of these contracts is affected by perceptions about the creditworthiness of the banking system. The Japanese banking crisis of the 1990s caused a structurally negative basis in USD/JPY cross currency swaps. Similarly the European debt crisis of 2010/2012 was associated with a sustained period of very negative basis in USD/EUR cross currency swaps.

As noted above, the fundamental reasons for the USD shortage then vs now are vastly different. Back then, financial globalization meant
that "Japanese banks had accumulated a large amount of dollar assets during the 1980s and 1990s. Similarly European banks accumulating a large amount of dollar assets during 2000s created structural US dollar funding needs. The Japanese banking crisis of 1990s made Japanese banks less creditworthy in dollar funding markets and they had to pay a premium to convert yen funding into dollar funding. Similarly the Euro debt crisis created a banking crisis making Euro area banks less worthy from a counterparty/credit risk point of view in dollar funding markets. As dollar funding markets including fx swap markets dried up, these funding needs took the form of an acute dollar shortage."

And as further noted above, while there is no banking crisis (at this moment) unlike virtually every other year in the post-Lehman collapse as commercial banks are flooded in global central bank liquidity (now that central banks are set to inject more liquidity in 2015 than in any prior year, 2008 and 20099 included) the catalyst for the current shortage are central banks themselves:

Given the absence of a banking crisis currently, what is causing negative basis? The answer is monetary policy divergence. The ECB’s and BoJ’s QE coupled with a chorus of rate cuts across DM and EM central banks has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections and rate cuts raising the supply of euro and other currency funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis.

Who would have ever thought that a stingy Fed could be sowing the seeds of the next financial crisis (don't answer that rhetorical question).

For those who are curious about where this mismatch is manifesting itself in practical terms, look no further than the amount of USD (expensive) vs non-USD (i.e., EUR, i.e., very cheap thanks to NIRP) denominated cross-border debt issuance:

Do we see these funding imbalances in debt issuance? The answer is yes if one looks at cross border corporate issuance. Figure 2 shows how EUR denominated corporate bond issuance by non-European issuers (Reverse Yankee issuance) spiked this year as percentage of total EUR denominated corporate issuance. Similarly Figure 3 shows how Yankee issuance, the share of USD denominated corporate issuance by non-US companies, declined sharply this year. In other words, cross border issuance trends are consistent with higher supply of EUR funding vs. USD funding. We get a similar picture in value terms. Reverse Yankee issuance totaled €47bn YTD which annualized is twice as big as last year’s pace. Yankee issuance totaled $41bn YTD which represents a decline of more than 30% from last year’s annualized pace.


Which makes sense: why would US multinationals, already hurting by the surge in the USD on their income statement, also suffer this move on the balance sheet abnd pay about 50 bps more for the same piece of paper issued in Europe? They won't, of course, however in the process they will hedge fx, and push the basis even further into negative territory. JPM explains:

Does this cross border issuance have a currency impact? It depends. For example, if a US company issues in EUR and swaps back into USD to effectively achieve cheaper synthetic USD funding rather than issuing directly in US dollar funding markets, the transaction has no currency impact. This synthetic USD funding especially attractive right now as credit spreads over swaps are much tighter in Europe than in the US by around 40bp-50bp for A-rated corporate currently in intermediate maturities, which more than offsets the negative fx basis. This means there is a significant yield advantage for US companies using synthetic USD funding (i.e. issuing in EUR and swapping back into USD rather than issuing in USD directly). In theory, the USD-EUR credit spread difference of Figure 4 suggests that the fx basis has room to widen by another 20bp, i.e. to decline to -50bp before the yield advantage of synthetic USD funding disappears. For the EURUSD, the basis cannot go below -50bp as this is the floor implied by the ECB’s FX swap line with the Fed.


And there you have it: all else equal, there is at least enough downside to push the fx basis as far negative at -50 bps: this would make the USD shortage the most acute it has ever been, at least as calculated by this key metric!  And since this is essentially a risk-free arb for credit issuers, and since there are many more stock buybacks that demand credit funding, one can be certain that the current fx basis print around - 20 bps will most certainly accelerate to a level never before seen, a level which would also hint that something is very broken with the financial system and/or that transatlantic counterparty risk has never been greater.

Unlike us, JPM hedges modestly in its forecast where the basis will end up:

Whether the above YTD trends continue forward is a difficult call to make. The widening of USD vs. EUR credit spreads shown in Figure 4 has the propensity to sustain the strength of Reverse Yankee issuance putting more downward pressure on the basis. On the other hand, this potential downward pressure on the basis should be offset to some extent by Yankee issuance the attractiveness of which increases the more negative the basis becomes.

JPM's punchline:

In all, different to previous episodes of dollar funding shortage such as the ones experienced during the Lehman crisis or during the euro debt crisis, the current one is not driven by banks. It is rather driven by the monetary policy divergence between the US and the rest of the world. This divergence appears to have created an imbalance in funding markets and a shortage in dollar funding. It is important to monitor how this dollar funding shortage and issuance patterns evolve over time even if the currency implications are uncertain.

And to think the Fed's cheerleaders couldn't hold their praise for the ECB's NIRP (as first defined on these pages) policy. Because little did they know that behind the scenes the divergence in Fed and "rest of the world" policy action is leading to two things: i) the fastest emergence of a dollar shortage since Lehman and ii) a shortage which will be arbed to a level not seen since Lehman, and one which assures that over the coming next few months, many will be scratching their heads as to whether there is something far more broken with the financial system than merely an arbed way by US corporations to issue cheaper (hedged) debt in Europe thanks to Europe's NIRP policies.

If and when the market finally does notice this gaping dollar shortage (as is usually the case with the mandatory 3-6 month delay), watch as the Fed will once again scramble to flood the world with USD FX swap lines in yet another desperate attempt to prevent the global dollar margin call from crushing a matched synthetic dollar short which according to some estimates has risen as high as $10 trillion.

Until then, just keep an eye on the Fed's weekly swap line usage, because if the above is correct, it is only a matter of time before they are put to full use once again.

Finally what assures they will be put to use, is that this time the divergence is the direct result of the Fed's actions, and its insistence that despite what is shaping up to be a 1% GDP quarter, that it has to hike rates. Well, as JPM just warned it in not so many words, be very careful what you wish for, and what you end up getting in your desire to telegraph just how "strong" the US economy is.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
gdogus erectus's picture

Thank got there wasn't a quiz after this article.

"As we discussed back then, this systemic dollar shortage was primarily the result of imbalanced FX funding at the global commercial banks, arising from first Japanese, and then European banks' abuse of a USD-denominated asset-liability mismatch, in which the dollar being the funding currency of choice, resulted in a massive matched synthetic "Dollar short" on the books of commercial bank desks around the globe: a shortage which in the aftermath of the Lehman failure manifested itself in what was the largest global USD margin call in history. "

I think of myself as a pretty smart guy but one there are more than three linkages and schematics are pea brain can't keep up.

I guess this is what "they" count on.

Self-enslavement's picture

A lot of propaganda gives me a headache.

cnmcdee's picture

This is a Shemitah Year - it will not disappoint.

(For those who might not know - 'The Shemitah Year : Long Title' by Johnathan Cahn.)


The thing I realize is the <entire economy> could be obliterated eventually like Greece, people living in the streets and in tents, macho nutsack cops running all over the place shooting the homeless and the reality is the Fed and the central banks will still fund themselves back into 'solvency.'  The Ron Paul audit showed that $16.7 TRILLION in the 2008 crisis was sent to offshore banks around the world.  That was the entire SIZE OF THE NATIONAL DEBT! 

But it is almost like a bunch of bankers playing a game of monopoly amongst themselves.. it is meaningless to the public. 

Tall Tom's picture

The thing I realize is the <entire economy> could be obliterated eventually like Greece, people living in the streets and in tents, macho nutsack cops running all over the place shooting the homeless...


The people of Greece have no weapons. Not only do many here posting have weapons (peashooting guns which will not penetrate armored vehicles) but even the homeless can get the materials, or already have the materials, to make bombs and poison gases which do penetrate armor. (I go out of my way to teach them.)


There are many more homeless hordes than there are macho nutsack cops.


Sooner or later a tipping point will be reached. And the homeless have the edge over the people who live in homes as they already know how to survive.


Yes it will be a firestorm bloodbath...especially in the urban battlespace.


Are you prepared?

Squid-puppets a-go-go's picture

as money is made more and more worthless and capital increasingly destroyed, the infighting within the oligarchy and their nutsacks will also increase. It looks like one big wall to the little people now, but soon it will look like a pile of bricks

Tall Tom's picture

Yeah. That is pretty damned sad.


It just did not have to turn out this way. But it did. Their own greed does them in. And all of the intellect which they supposedly have just cannot seem to stop those inate, instinctual, genetically hard wired urges.


I guess that it is no different between the little people and the oligarchs other than the scale of economies.


What a waste.

Squid-puppets a-go-go's picture

i think greed alone isnt the most pertinent motivating factor. i think just as much is this reckless, relentless competitivity. like james dean racing other hoons to the edge of the cliff. Certainly that seemed the major dynamic in the 2008/9 meltdown when the merchant banks were outrisking each other with derivatives.

america pursuing russia to within 300 yards of its border? Why on gods earth is that remotely necessary from any sane sense of self defence? It isnt of course, its relentless competitivity, a compunction to dominate. Its not so much about greed/gain, its about seeing your rivals downtrodden and humbled

VisionQuest's picture

New Age education in the U.S.A. teaches children to think of people in ways that don't comport with reality. A syndicated cartoonist, Jimmy Hatlo, made a career of lampooning foibles of the human condition

The old funny papers used to teach kids who could read a few things about what it meant to be a grown-up. Are today's young gamers getting the same kind of input?


MachoMan's picture

I don't believe it is greed so much as hubris.  Self interest is a part of every human decision.  Differentiating between mere garden variety self interest and its overpowering kissing cousin, greed, can be quite cumbersome.  Frankly, I'm not sure this is a distinction with a difference.

The issue that they're faced with is the same issue all central planners face, power entails the responsibility to make decisions, and humanity is too dynamic and complicated to always choose correctly.  In this regard, you might consider many of the laws, propaganda, entrenchment, consolidation, and other power moves as ways to simplify the decision making process...  narrow the possibilities, in other words.  The ultimate goal of all political acts is to force your opponents into binary decisions, either of which benefit you.

The neat part about power and hubris is that if you have enough power, then the consequences of your hubris might be mitigated...  this is the whole "changing the rules of the game while we're playing" issue that most of us grew out of during grade school.  Eventually though, bad decisions compound, much like the debt so often used to make those bad decisions.

PS, it does have to turn out this way...  but I believe that society is developing the tools to break the cycle.  Fortunately or unfortunately, shovels don't dig ditches themselves.   

Zero Point's picture

Only a banker could make TEOTWAWKI boring.

orez65's picture

"... my pea brain can't keep up"

It's not your brain it is the most clever scam ever: "fiat money and fractional reserve banking"

If "real money", gold and silver, was used and fractional reserve banking was outlawed it would be very simple and honest.

But then nations would not be able to deficit spend without limit and bankers would not be able to steal.

Bad Lieutenant's picture

Can someone clearify exactly what "same piece of paper" is being referred to in the part:

Which makes sense: why would US multinationals, already hurting by the surge in the USD on their income statement, also suffer this move on the balance sheet abnd pay about 50 bps more for the same piece of paper issued in Europe?

Kindly choose your words carefully.

TimmyM's picture

Piece of paper means issue corporate bonds in dollars rather than euros.

And one thing not mentioned in the article is that sovereign collateral used to cover margin calls in the swap market at negative yields has negative carry and contributes to the negative basis of the fx swap.

willwork4food's picture

Which, in English means massive deflation in the US..right?


Tall Tom's picture

A massive deflation which the US Government cannot allow as the income stream from taxation dries up. Then they will have to print to pay their bills which will take away real wealth (Goods and services) from the economy which, subsequently, will result in price inflation.


Or they will have to default upon the underfunded and unfunded liabilities which is political suicide.



willwork4food's picture

I still don't know for sure whether to bet against massive deflation or inflation. Logically it would be deflation first (elite vultures @ work scooping up the remaining economic carcass), then inflation (due to subsequent lack of goods). That is what I'm going with for now.


All Risk No Reward's picture

That is correct.  TBTF&Jail means just the right size to annihilate everyone else and take over the world.

They are looting trillions now.  When that operation is over, they will then crash the economy by restricting money from it.  Of course, they'll make money ont he way down, too.  They will then buy up the carcass of the West for pennies on the dollar.  This will take some time.  Part of this operation is to zero out bank and investment accounts over time - maybe not zero, but some harsh haircuts over time.  Once that that operation is over, their TBTF&Jail corporate fronts of the Debt Money Monopoly will be completely bankrupt.  They will then break the bond market (which already served its purpose to hand reality over to the Debt Money Monopoly) and hyperinflate.  This operation will "balance the books," as it were and then comes the long grind of the "New World Order" of Debt Money Monopolist Feudal Lords ruling over the serf classes.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert by secret agreements arrived at in frequent private meetings and conferences."
  -- Quote from Caroll Quigley's Tragedy and Hope

MachoMan's picture

To bet for one or the other boils down to a timing decision, which is a fool's errand unless you're the shot caller.  There are quite a few vehicles that hedge both ways, but most people would be best advised to reduce debt loads and purchase inflationary hedges without leverage.  Intangible financial instruments (that offer no natural utility) are the ones that stand to be hurt the most in the monetary whipsaw.  Don't put all your eggs in one basket unless you're on the inside (and if you have to ask...)

defender's picture

Think of it this way:

If you go to the bank and get a loan, the document that they give you is called a "promissory note".  If the bank wants to talk to you about the loan, they ask you to bring the "note", since it contains all of the information in the loan.

The same thing is done with corporate debt, only instead of calling it a "note", it is called "paper".  Thus, if MegaCorp "issues paper", then they are selling a loan (with specific terms).

TL:DR The corporation got the same amount of money from a specific loan, i.e. same paper, without paying the higher interest.

All Risk No Reward's picture

BTW, this is why "money" is called a "Federal Reserve Note."  We use Federal Reserve Debt receipts as "money."  This means society, including government, rents its money from a private, supranational international banking cartel.  Now you know who runs the rest - and it ain't cartoon caricature politicians!

Canadian Dirtlump's picture

that was alot of jive talk to let us know that when the shit hits the fan, in a bizzarro world, in a room full of central banks, the US fed will jump on the grenade, and everyone else will die..




p.s. great auto play ads on zerohedge featuring end of the world epic music and trendy mongoloids playing on monkey bars. Fuck sakes.

fxpmtrader's picture

All Putin's fault.

Or the Europeans ... Greeks ...

Or ... else!

Dead Canary's picture

Ooo.... I know! GLOBAL WARMING.

( racism? )

cnmcdee's picture

Putin has a star death - CIA (there fixed it for yah)

waterwitch's picture

Is it the star of David?

cossack55's picture

How is it that most on ZH have identified BANKS as the real global problem and yet they continue on as if nothing happened.

Makes one wonder who really is in charge of the world? Not!

Anusocracy's picture

Maybe because government is the problem?

Government runs the world: the idea that the few rule the many. Hasn't changed changed for thousands of years.

Usurious's picture



the government is the bank and the bank is the government.......its just monetary masturbation

cnmcdee's picture

Like the saying goes - Masturbation is like Procrastination, it might seem like a good idea at the time but in the end your just fking yourself.

Escrava Isaura's picture






You should know better by now.

It is the private money system, idiots.


It is always and forever an impossibility to pay down debts in a credit money system.  Our existing system is about 97% credit as money.

Therefore the credit as money that is created cannot return to destroy the debt instrument.  It is an impossibility because the instrument’s demands have now increased in ratio relative to money in supply. 

Hyperinflation is always an exchange rate problem. MEFOBILLS




Yen Cross's picture

 It's all starting to unravel... Using the $usd carry as a funding currency isn't being long $usd until you have to cover the trade. (convert the funded counter currency back into $usd)

 Now, with liquidity drying up, the last thing the Fed. wants to do is raise rates.

Seasmoke's picture

with all due respect YC, you were very wrong about the USD last week (as was I)

Yen Cross's picture

 No, I wasn't. The $usd strengened vs the euro and pound. The yen and other majors and crosses are still in the same ranges they've been in for months.

Captain Jack Sparrow's picture

YC can you explain what you think will happen to the value of the USD.  Economics 101 says that if they are printing USD then there will be more supply so the value will decrease.  But this article says there is a shortage so the value will increase.  Is the shortage in the swaps greater than the amount they are printing? 

Yen Cross's picture

 The supply will need to be expanded. The net result will be a softer $usd. The supply can be expanded through various mechanisms.

 Those mechanisms can include looser (longer term SWAP fixes) lending terms, and increasing supply from the money market, without printing initially. If things get ugly, they'll print. The problem is that the deficite has come back in. The Fed. doesn't want to be seen as monetizing debt.


SWRichmond's picture

best article I've read in a while.  the quandary simply illustrates what happens when men that think they're smart distort the s*** out of a system.  

a long long time ago myself and others here at zero hedge started saying you can't fool math.  the situation described in this article is an illustration of that.  

Deathrips's picture

Agreed SWR,


He fought the tide valiantly, till he drowned.

The end.

And then there's math too.


Mad Cow's picture

May I have a piece of Pi?

thinkmoretalkless's picture

The whole thing reminds me of the scientist who builds a nuclear weapon, he is in it for the scientific achievement...that is its own reward...kinda like profit...they really don't consider the consequences on dumb schmucks like me.