SEC Chair Gary Gensler has raised alarms about the $13 trillion sitting in offshore U.S. currency, saying it could destabilize the American financial system.
During the Bloomberg Global Regulatory Forum, Gensler pointed out that much of this money held by foreign banks isn’t insured.
This puts the U.S. economy at risk if something goes wrong in the Eurodollar markets, which have been linked to previous economic disasters, including the 2008 financial crisis.
“There may be more work for those of us in the global regulatory community to ensure resiliency in the offshore Eurodollar markets,” Gensler said.
He also mentioned that these offshore funds have made the Federal Reserve step in as a global savior more than once.
Offshore risks
During the 2008 crisis, the Fed pumped billions into foreign banks to stop the system from falling apart. In 2020, the Fed had to buy a ton of domestic corporate bonds to steady the global dollar-bond market.
The US central bank’s role as an international lender of last resort isn’t just an American issue. Global upheavals and crises are forcing the U.S. to bail out international banks and stabilize global markets.
According to a report by the Atlanta Fed, the bank’s 2020 buying spree was never about helping U.S. companies alone, it was about saving the global system.
The risk here is that the U.S. dollar’s dominance could hurt America itself when foreign financial systems start to crack.
At the same forum, Gensler flagged the Eurodollar market as particularly dangerous. He explained that when foreign banks use U.S. dollars but don’t fall under U.S. regulation, it leaves massive gaps that nobody is watching closely enough.
Gensler warns about private credit too
Beyond the offshore funds problem, Gensler also turned his attention to the growing private credit sector. He highlighted its potential risks, saying it has ballooned to $1.7 trillion. While private credit isn’t new, its sheer size now poses a new risk if things go south. He said:
“Though private credit has existed in some form for years, given its size has increased significantly, how will it weather times of stress at today’s or greater magnitude?”
Private credit players are also trying to tap into retail markets, which is raising eyebrows among regulators. Big names like State Street Corp., Apollo Global Management Inc., and BondBloxx are pushing to offer retail investors access to private credit through exchange-traded funds (ETFs).
While private credit offers higher returns, consumer advocates are worried that regular people don’t have the knowledge to understand these investments. The lack of transparency in the private credit market is a big issue here.
Critics are concerned that these private credit ETFs are blurring the lines between professional and retail investors. Gensler’s SEC is reviewing these applications to make sure that small-time investors don’t get burned in this space.
The worry is that private credit is full of risks that ordinary people can’t assess properly, especially with the lack of disclosures from the big players involved.
U.S. debt hits $35.6 trillion
Meanwhile, Gensler’s claim of financial stability for America is almost ironic considering its national debt keeps breaking records. Right now, it is over $35.6 trillion.
The federal deficit has shot up to $1.8 trillion for the fiscal year, driven by increased government spending amid economic pressures.
The rising deficit is making it harder for the U.S. to manage its finances, especially with interest rates on the rise. The average interest rate on the debt has climbed to 3.35%, making it more expensive for the government to service its loans.
This debt is divided into two main categories: debt held by the public and intragovernmental holdings. The former includes bonds held by individuals, corporations, and foreign governments. Intragovernmental holdings are the amounts the government owes to itself, like money owed to Social Security.
According to the International Monetary Fund (IMF), global public debt levels are nearing $100 trillion, with the U.S. and China being the biggest contributors.
The IMF has warned that high debt levels are unsustainable and could lead to a massive global economic fallout if not managed properly, and quickly.
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