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AndA recent G20 report for the Robert Triffin forum warned that offshore dollar lending has exploded to $18 trillion and overwhelmed the diminished firepower of global rescue bodies. A black swan event like Covid-19 is exactly what it feared.
“The risk of an unexpected and unplanned reversal of abundant global liquidity hangs over the world economy. Strong contagion across markets could make the endogenous dynamics of global liquidity very dangerous,” it said.
The purely “private component of global liquidity” has mushroomed to $12 trillion and this is highly geared to spasms of greed and fear, setting off potentially unstoppable chain reactions. Forced deleveraging can expose the “liquidity illusion” in a heartbeat. “
Beneath the BBBs are junk bonds with a record share weighed down by a debt-to-earnings ratio of six times, as well as $2.4 trillion of leveraged loans packaged into securities on largely "cov-lite" terms with little or creditor protection - and even more prone to accidents than in 2008, according to the US Treasury.
Emerging markets may be the detonator for this nitroglycerin. The IIF said its daily tracking data from fund flows show that withdrawal from emerging markets are the worst ever seen by a “large margin”. This matters given that these economies are now 60pc of global GDP and most of global growth, with vastly greater linkages to the financial system than during past crises. The MSCI emerging markets fund for equities rebounded on Friday but has still fallen 26pc since mid-January.
Robin Brooks from the IIF said a decade of zero rates and QE has steered huge sums into risky “high-beta assets”, many in developing states. Lebanon has already defaulted this year. South Africa, Mexico and Chile are overstretched. The weaker oil exporters from Nigeria, to Algeria, Iraq, Angola, Colombia, Kazakhstan and Azerbaijan are all facing a brutal fiscal shock from coronavirus.
Mr Brooks said the economic heart attack in Argentina and Turkey after they were hit by investor flight in 2018 is a foretaste of what could now happen on a much bigger scale. “We worry that the unfolding 'sudden stop' now has a similar potential, just on a more global and systemic level,” he said.
Richard Kozul-Wright, UNCTAD’s economics chief, said the global damage could be $2 trillion and warned that developing countries no longer have the same “self insurance” that defended them in 2008. The average ratio of foreign reserves to short-term debt has halved since then, and liabilities have tripled.
He warned of a worldwide “deflationary panic” that turns into protracted slump. It is imperative that governments do “whatever it takes” this time to keep demand alive.South Africa, Mexico and Chile are overstretched. The weaker oil exporters from Nigeria, to Algeria, Iraq, Angola, Colombia, Kazakhstan and Azerbaijan are all facing a brutal fiscal shock from coronavirus.
Cause for concern?

The dramatic exodus of funds from emerging markets over recent days exceeds the worst capital flight of 2008 and is fast morphing into worldwide contagion, the top banking watchdog has warned.
“We worry a global that 'sudden stop' in financing is beginning to emerge,” said the Institute of International Finance (IIF) in Washington. It warned that a multitude of shocks are combining with a commodity crash and mounting stress in the US bond and funding markets.
The danger is a confluence of three crises erupting simultaneously and feeding on each other: a violent reversal of flows to emerging markets; a blow-up in the BBB and high-yield segments of the bond market; and a fresh "Club Med" funding crisis triggered by fears of a wrenching economic contraction in Italy.
Global asset markets are priced for a light recession. They are not priced for a deep downturn, let alone a series of seismic aftershocks that expose the fragility of an international system with record debt ratios near 322pc of GDP ($257 trillion).
The United Nations’ economics arm (UNCTAD) said a toxic mix of asset price deflation and debt distress could now set off a “vicious downward spiral” if world leaders fail to stem the contagion. “Widespread insolvency and possibly another ‘Minsky moment’ cannot be ruled out,” it said. The world came close to that this week.
Whether it moves into this second and much more dangerous phase of financial metastasis, and towards a deflationary bust, depends on the ability of world leaders to repair the shattered machinery of the G20 and launch joint action along the lines of the London Conference in April 2009.
That gathering led by Barack Obama and Gordon Brown - with China’s Ju Jintao fully on board - was a catalytic moment. It proved to be the definitive circuit breaker for the crisis. It is even more vital now because monetary stimulus cannot carry the load any longer, as made disturbingly clear over the last week by the failure of exhausted central banks to display their former magic.
But is a G20 moment possible under a dysfunctional ‘America First’ White House at war with the world? The Saudis chair the G20 at the moment and they are in an oil war with Russia.
Only Boris Johnson and Emmanuel Macron have both the clout and the diplomatic lines open to most capitals. They could join forces and pull off a diplomatic coup. "Somebody has got to do it or we will go into recession. People need to see world leaders acting together," said Lord Darling, the then Chancellor, at the 2009 summit.
The looming risk is that the US dollar will spike higher in a panic rush for safe havens - as happened in 2008 - causing global liquidity to evaporate and leading to seizure in the offshore dollar funding markets in Asia and Europe. The dollar index (DXY) has jumped to 98.13 over recent days but is not yet at the acute danger threshold. If it blasts higher in the current febrile circumstances, it will cause financial carnage through complex swap and de

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