I'm attempting to parse through the loaded market commentary from Zoltan Pozsar as featured here. At one point, he makes the interesting assertion:

Pozsar cautions that "if things escalate, it’s hard not to see a direct impact on FX swaps and U.S. dollar Libor fixings given Russia’s vast financial surpluses and where those surpluses are deployed."

I interpret this to mean since Russia maintains a lofty current account surplus, it has enough eurodollars to move the market. To avoid settlement risk (from being ex-communicated from SWIFT), it may uproot all its USD holdings and leave major gaps in the balance sheet of its former counterparties in western Europe. However, Zoltan never mentioned it had anything to do with size; just that Russia was a "surplus agent." Either way, I'm not sure how exactly this leads to 'direct impact on USD Libor fixings.'


Can someone provide a clearer explanation of the cause and effect relationship between where Russia parks its short-term capital and the reportedly outsized effect on Libor? (Blue collar explanation is acceptable too)


1 Answer 1


One mechanism would be that if Russia owns money market funds containing bank Commercial paper, any attempted sale of those holdings would decrease the market price (and increase the yield ) of bank CP. since bank CP rates are a direct input into Libor settings.

Other mechanisms could be: banks that have exposure to Russian borrowers might face scrutiny , resulting in other banks requiring a higher interest rate to lend to them. Again this would result in a higher cost of funds for banks.

Another more general mechanism is that people fear that the sanctions will cause a payments gridlock. This fear can lead to dollar hoarding , which again drives up the cost of borrowing dollars, either through the Libor rate or through the cross currency basis or both.


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