A new golf course in Asia financed with a USD bank loan. A Mexican property developer buying a hotel in USD. A European pension company wanting to hold USD assets & swapping borrowed EUR to do so. An African retailer importing Chinese-made toys, paying its invoice in USD

When a crisis hits, everyone in the Eurodollar system suddenly realizes they have no ability to create fiat USD and must rely on national USD FX reserves and/or Fed swap lines to swap local currency for USD for a period. This obviously grants the US enormous power and privilege.

The Fed has also introduced a new FIMA repo facility. Essentially this allows any central bank, including emerging markets, to swap their US Treasury holdings for USD. To put it bluntly, this repo facility is like a swap line but with a country whose currency you don't trust.

Allowing a country to swap its Treasuries for USD can alleviate some of the immediate stress on Eurodollars, but when the swap needs to be reversed the drain on reserves will still be there.

Third, most developing countries still do not hold enough USD for periods of Eurodollar liquidity stress, despite the painful lessons learned in 1997-98 and 2008-09.

So how large is the Eurodollar market today? Like the Matrix - vast.

The results are as shown below as of end-2018: USD57 trillion, nearly three times the size of the US economy before it was hit by the COVID-19 virus.

As such, the Fed is likely to find it needs to cover trillions more in Eurodollar liabilities (of what underlying quality?) coming due in the real global, not financial economy – which is exactly what the BIS are warning about.

If the Fed is to step up to this challenge and expand its balance sheet even further/faster, then the US economy will massively expand its external deficit to mirror it.

However, such fiscal action will prompt questions on how much the USD can be ‘debased’ before, like Agent Smith, it over-reaches and then implodes or explodes

Is the Neo Coronavirus ‘The One’ that breaks it?