FX swaps swap the principal amounts. So a default between the spot and forward legs can leave you with a chunky liability.
Unlike single currency interest rate swaps where the principal is notional in the sense that they aren't exchanged, they're just used to calculate the coupon exchange.
OK, but "chunky" is still much less than the notional value, right? (I mean, if one currency suffered runaway inflation, it could approach 100%, but that should be rare...)
It's not a notional principal for a fx swap, it's an actual principal that you swap. If your counterpart defaults, you're still liable for what you owe (usually multiple millions) but you won't receive the other side.
But in a sense, only the cost of capital is at risk, not the capital borrowed. The 80T number is capital borrowed. It’s definitely worthy of skepticism.
It’s definitely a liquidity risk given the short term and principal swaps requirements, hence mostly a central bank issue as a backstop. But potential losses in economic terms seem smaller.
Unlike single currency interest rate swaps where the principal is notional in the sense that they aren't exchanged, they're just used to calculate the coupon exchange.