The liquidity conundrum
Daily Thoughts 11 Mar 2025 (Free)
I am currently in the process of updating our liquidity forecasts for this week’s Weekly Forecasts and came across with my old analysis. It detailed the “fracture lines” that have appeared into the global financial system. It’s time for a quick update.
The figure shows the flow of cross-border and local foreign currency (FCY) bank lending and debt security issuance in all countries reporting to the Bank of International Settlements, or BIS. As we notice, cross-border and local FCY bank lending stalled post-Corona. The reason why global liquidity did not collapse was the massive debt issuance combined with artificial liquidity flows from the central banks. This led to a massive surge in M2 money in circulation.
We can see the collapse in the international lending more clearly, when we compare it to historical periods of crises. In 2023 and 2024 there was a recovery, albeit not a very strong one.
Similarly, we can see the changes in the cross-border and local FCY debt issuance to fluctuate heavily during crises. Also it has seen a (mild) recovery in late 2023 and in 2024.
The recovery of cross-border and local foreign currency bank lending and debt issuance has not been especially strong, but it’s still a recovery. This explains, in part, why financial markets rallied in 2023 and in 2024, even when the artificial central bank liquidity started to withdraw. Now, we may have entered another period of withdrawing cross-border (global) liquidity, but we know this for sure only after the fact.
There’s also no escaping the feeling that global recession is just around the corner. Investors are feeling this, and it shows.
Have a great day,
Tuomas
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