|
|
The stock of US dollar-denominated debt of non-banks outside the United States is an important gauge of global liquidity. That stock stood at $9.8 trillion at the end of September 2015, unchanged from the end of June. US dollar-denominated debt of non-banks in EMEs also held steady in the third quarter of 2015, at $3.3 trillion. Q3 marked the first time since 2009 that the measure, which is linked to the strength or weakness of the dollar, stopped increasing.
In the lecture, entitled "Credit, commodities and currencies", Mr Caruana pointed to Bank for International Settlements (BIS) research showing a close link between debt - especially in foreign currencies - and risk-taking. "The feedback loop between deleveraging and EME currency depreciation presents challenges that should not be underestimated. That feedback loop has started to impact the broader economy in EMEs now that the dollar has started to appreciate," he said, noting that the strong dollar resulted in pressure to reduce debt in dollars.
Mr Caruana said that these shifting global financial conditions, along with maturing financial cycles in a number of emerging economies, were helping to drive the current combination of disappointing economic growth, large shifts in exchange rates and sharp falls in commodity prices. He said these should not be seen as one-off shocks or headwinds but as reflecting a number of phenomena that have accumulated over time, including policy choices. While these developments present policymakers with significant challenges, they can also be seen as an opportunity to move the global economy onto a more sustainable growth path.
"These transitions and realignments inevitably bring short-term discomfort in the financial markets. They also raise significant risks. But depending on the policy responses, they could eventually allow renewed and, above all, more sustainable and resilient growth, both in advanced economies and in key emerging economies," Mr Caruana stated.