LONDON (Reuters) - International debt issuance has soared in recent years as financing conditions improve, with dollar-denominated bonds beating bank debt as the most popular funding tool a decade after the global financial crisis, according to a study released on Sunday.
International credit, defined as bank loans and debt securities like bonds, has soared to 38 percent of the global economy in the first quarter of 2018, compared with 33 percent three years ago, according to a quarterly report by the Bank of International Settlements.
That debt has become an important gauge of global liquidity, especially since the 2008 crisis paralyzed cross-border lending activity, bringing the global economy to its knees.
Dollar lending to non-bank emerging markets have more than doubled to around $3.7 trillion since the 2008 crisis. A similar amount has been borrowed through currency swaps, according to the BIS.
Using quarterly bank lending statistics in countries and international debt issuance figures to create these measures of liquidity, the BIS says that it wants to build an early-warning signal of potential vulnerabilities in the financial system.
In recent years, borrowers have increasingly preferred favored debt issuance over bank loans, according to the BIS. As a result, the share of debt securities in international credit rose to 57 percent in the first quarter of 2018 compared with 48 percent a decade ago.
With a rise in bond issuance, the share of the dollar has accelerated as the prime foreign currency for international borrowing. Dollar credit to the non-bank sector outside the United States rose to a seventh of global GDP in March 2018 from around 10 percent at the end of 2007.
The greater use of the dollar poses problems for borrowers, particularly emerging markets — international bond investors tend to retreat quickly when U.S. interest rates rise, said Inaki Aldasoro and Torsten Ehlers, the authors of the report.
The Fed has raised interest rates seven times since late 2015 and is expected to raise them another three or four times by the end of 2019, raising costs for international borrowers.
A turbulent summer for emerging markets from Turkey to India has exposed the dangers of relying on dollar-denominated foreign capital flows to fund structural deficits.
The shift in issuance toward debt securities in the last few years contrasts with the period in the run-up to the global financial crisis in 2008, when bank loan growth had accelerated. After falling sharply during the crisis, bank loan growth has remained essentially flat while debt issuance has rocketed.
The shift toward foreign bonds has been most evident in advanced economies as the euro zone sovereign debt crisis forced European banks to shrink their international loan books.
Emerging markets paint a mixed picture with bank loan growth and debt securities issuance rising in tandem, reflecting a general ease in global financing conditions.
The rising volumes of debt issuance contrasts with the diminishing role that global banks play in international credit as non-bank players have scaled up their presence.
For example, global banks’ holdings of international debt in emerging markets have remained flat since the crisis while overall issuance has nearly doubled to 6 percent of regional GDP, the BIS said.
Reporting by Saikat Chatterjee, editing by Larry King