I think this is Exposure, not Debt right? If you borrow in USD and lend in non-USD, then the asset and the debt balance (roughly) and you are Exposed by $X to fluctuations in the value of USD. But you only actually lose $X if the other currency (Euro, Yen etc) becomes worthless.
Also, how reliable are these numbers? If I borrow 1tn USD and turn it into 1.1tn EUR, then borrow 1.1tn EUR and turn it into 1tn USD then my actual exposure net is zero in either currency. But journalists and sensationalists like to pretend that is 2tn USD and 2.2tn EUR...
Finally, and this is just my ignorance: why are swaps not on balance sheets? It's pretty simple with an FX swap like these to just list the (USD) liability and (non USD) asset and convert using today's rate to whatever actual currency you report in. I understand that swaps are a dumb way for pension funds to ratchet up their risk while pretending they are investing in low risk securities but that should not change how they are reported...
It's been too long since I've studied the details, but it's my recollection that the value at risk is on the balance sheet, it's just the notional amounts that aren't. The BIS hypothetical is that if markets freeze up and you can't buy one leg to cover your swap, you could be left with a huge liability.
Edit -- actually BIS has a little accounting example with two options noting that most people use the net basis as I remembered but they would prefer the gross basis: https://www.bis.org/publ/qtrpdf/r_qt1709x.htm
I agree that hte headline is deceiving, $80TN is not the right number
The correct number is closer to $26 tn , based on the BIS report and the REAL risk is the market risk exposure to equity from the assets that these loans fund.
In these contracts the borrowers lose money when the value of the asset they hold deviates from FX. if you borrow $500mm to buy AAPL stock and AAPL stock is down 10% you lose $50mm dollars. You needed to post 476MM EUR at the beginning with the expectation of receiving the same amount in 7 days and on that same day you would pay the USD 500mm you borrowed back.
You expect to do this 1000's of times, or until you sell AAPL stock.
If at the same time EURUSD moves from 1.05 to 1 when it comes time to "roll" your transaction, you need to find an extra 25mm EUR. Now the $500mm of debt requires 500mm EUR of collateral. If AAPL was up, you could sell some of it to cover the roll, if its down like in my example you have a $50mm and EUR 25mm are real equity losses.
I think these swaps are not on balance sheet because of accounting history. Generally the swap is described above woudl be held as a EUR 25mm derivatives payable. so on the balance sheet it goes from 0 to $25mm liability.
The REAL balance sheet, in addition show a EUR 475mm asset, a loan receivable & a 500mm borrowing a loan payable.
Unlike single currency derivatives , you MUST pay the full notional at maturity, you do not get to just net the $25mm owed, so generally your only options are to buy USD outright, using equity or local currency borrowing, in the entire size then send it to the counterparty, or to sell the USD asset to cover.
Also you are getting margined every day so it eats into equity...
Also, how reliable are these numbers? If I borrow 1tn USD and turn it into 1.1tn EUR, then borrow 1.1tn EUR and turn it into 1tn USD then my actual exposure net is zero in either currency. But journalists and sensationalists like to pretend that is 2tn USD and 2.2tn EUR...
Finally, and this is just my ignorance: why are swaps not on balance sheets? It's pretty simple with an FX swap like these to just list the (USD) liability and (non USD) asset and convert using today's rate to whatever actual currency you report in. I understand that swaps are a dumb way for pension funds to ratchet up their risk while pretending they are investing in low risk securities but that should not change how they are reported...