Global money markets pass their stress test — for now
Global liquidity is easier to safeguard than it was during the global financial crisis
Russia's invasion of Ukraine and the subsequent imposition of a swathe of economic sanctions pose the biggest test of the plumbing that connects global financial markets since the demise of Lehman Brothers in 2008. So far, the network is taking the strain. But more challenges lie ahead.
As markets opened this week there was a distinct apprehension that the scale of sanctions imposed over the weekend — particularly those banning Russian institutions from the SWIFT banking payment messaging system — might lead to a liquidity crunch as central banks around the world struggled to meet a surge in demand for dollars as a haven.
It didn't happen — or, at least, it hasn't yet. On balance, Russia's exclusion from the monetary system has been ring-fenced, with the repercussions mostly limited to emerging markets.
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There are some savage localised losses for emerging market investors, and global demand for dollar cash is undeniably strong. But this is nothing like a Lehman moment, despite some well-publicised weekend commentary from Credit Suisse Group AG strategist Zoltan Pozsar.
Broad access to funding has not been impaired. It is still messy but confidence in the financial sector remains solid. That's partly because Russia has been deliberately reducing its dollar exposure in recent years, but is also down to reforms implemented in the wake of the global financial crisis that have made money markets more robust.
One key innovation is the Federal Reserve's Standing Repo Facility established last summer. It acts as a permanent swap facility where eligible banks and foreign central banks can pledge their holdings of US Treasuries to access dollar cash. (The Russian central bank, of course, does not have this privilege.)
As a consequence, the gauges of money-market stresses have not overreacted — as they did during both the global financial crisis and the pandemic — though there has been some inevitable tightening with the high demand for cash. It also helps that expectations for how much monetary tightening the major central banks will introduce have eased.
JPMorgan Chase and Co-Chief Executive Officer Jamie Dimon, in a wide-ranging Bloomberg TV interview on Monday, emphasised that "the banks are talking with the government so everyone understands the issues." That is the point. The scale of global coordination is incredibly impressive. While Dimon warned that the SWIFT exclusions may have "unintended consequences," these can be worked through provided everyone is liaising effectively.
The next stress test for markets is the $9 billion of payments due on Russian debt in the coming quarter. Russia has raised the prospect of a technical default on both domestic ruble-denominated bonds and bills, about a fifth of which are owned by overseas investors, and its $500 billion of foreign currency debt.
Perhaps in retaliation for a huge chunk of its $640 billion foreign reserves being frozen, Russia is playing a game of strategic ambiguity, sending mixed messages on whether it will service its obligations.
There's typically a 30-day grace period before a default is called, and Russian President Vladimir Putin will understand the consequences of failing to pay after living through the financial collapse of 1998.
Russia needs access to foreign finance as much as any modern economy; given that payments for oil and gas are still being made, if the will to make interest and principal payments is there, a way can surely be found.
We are in a rapidly changing environment, but crisis management skills have improved in recent years. The toolset available to monetary authorities is more than up to the task of keeping markets moving, with friction more likely than logjams.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
