The Daily Update - Global debt warning / Italian debt

According to the Bank for International Settlements (BIS), due to international accounting practices used for hedging trade and foreign currency bonds, the amount of debt the global economy has may have been under-reported to the tune of over USD10tln, maybe potentially up to USD14tln. The researchers at the BIS believe the biggest worry for the ‘missing’ debt would be a liquidity crunch as seen in the financial crash. The risks were highlighted in the latest quarterly report from the BIS with Claudio Borio, head of the BIS’s monetary and economic department, stating that the FX exposure ‘remains obscured from view’ adding that ‘accounting conventions leave it mostly off-balance sheet, as a derivative, even though it is in effect a secured loan with principal to be repaid in full at maturity’. With this in mind he went on to explain why the BIS believes these FX trades could be problematic, ‘In particular, the short maturity of most FX swaps and forwards can create big maturity mismatches and hence generate large liquidity demands, especially during times of stress’.

Along with the debt warning, the BIS has also cautioned that the global economy has become so used to low interest rates that any move higher could have an adverse effect on the global recovery. Borio warns that if and when rates begin to rise, both markets and companies are at risk after years of easing, which has created inflated asset prices. He believes that there is an assumption by the markets that central banks and governments will not stand by should the global economy again become stressed. ‘We do not fully understand the factors at work’ he explained, adding, ‘Another factor could be market participants’ belief that central banks will not remain on the sidelines should unwarranted market tensions rise’. He went on to warn, ‘All this underlines how much asset prices appear to depend on the very low bond yields that have prevailed for so long’.

And talking of debt, last week the Bank of Italy announced that the southern Mediterranean country’s public debt now stands at over EUR2.3tln. At over 132% of GDP, Italy is second only to Greece in the Eurozone debt table. As if this was not bad enough, the Italian employers’ federation says the rising levels of youth emigration, no fewer than 51,000 under-40s emigrated in 2015 alone, is estimated to be costing €14bn, equivalent to almost 1% of GDP per year. According to Employment and Social Developments in Europe (ESDE) almost 20% of young Italians (15-24 year olds) are neither employed, job-seeking, nor in full-time study. Although this is a slight drop in last year’s figures, with the EU average of 11.5% youth unemployment, it seems the Italian government still has some way to go to persuade those looking for work aboard that their future may be brighter if they were to stay.