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U.S., “Europe” brush off calls for new reserve currency

Posted by smeddum on March 25, 2009

 

 

UN panel expected to side with China, Russia in call to dump greenback

With files from AP

WASHINGTON and OTTAWA — Creating a new global currency may be a long shot, but that isn’t stopping some heavy hitters talking up the idea as world leaders prepare to meet in London next week.

China has added its voice to Russia, an upcoming United Nations panel and others who want to end the U.S. dollar’s long reign as the world’s reserve currency by shifting to a new coinage run by the International Monetary Fund.

The idea has some logic and appeal, particularly to countries who feel they’ve been on the outside of the global financial system looking in for too long.

But experts warned that such a fundamental change to the global financial architecture would be virtually impossible in the near-term because anything short of 100 per cent buy-in would doom the project to failure.

Chinese central bank governor Zhou Xiaochuan released an essay in Beijing on Monday in which he called for a new global currency, based on the IMF system of Special Drawing Rights or SDRs, which are used to manage ownership of the fund.

A panel of independent experts put together by the UN is likewise poised to recommend this week a successor to the U.S. as the world’s reserve currency, blaming the greenback’s dominance for massive global trade and financial imbalances.

The dollar has been the world de facto reserve currency since the end of the Second World War. Major commodities, including oil and gold are priced in dollars, prompting central banks to keep large dollar reserves.

China, the largest foreign holder of U.S. Treasuries, has been griping in recent months about the losses it’s suffered on those holdings.

Highlighting the difficulty of compromise, U.S. Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner were quick to dismiss the idea at a congressional hearing yesterday.

And European Union Commissioner Joaquin Almunia also rejected the idea, saying the dollar, “will continue to be there for a long period of time.”

The chance of moving to a global currency in the next few years is remote, agreed Andrew Busch, global foreign exchange strategist at BMO Nesbitt Burns Inc. in Chicago. But a decade from now, he rates the likelihood at 50-50.

“The fact that China and Russia are talking about this is significant,” he said.

The idea of a global reserve currency administered by the IMF has merit, but it’s not the time to try to implement it, said Paul Masson, an economics professor at the Rotman School of Management at the University of Toronto and former IMF official.

The many issues that would need sorting include how to convert the trillions of dollars countries hold in reserve to the new currency and creating a market for SDRs by issuing securities in the IMF unit of exchange, Mr. Masson said.

But the biggest stumbling block would be the U.S. government, which benefits greatly from having the dollar as the world’s de facto currency.

“I’m sure there would be reluctance in the U.S. to support this,” Mr. Masson said from Toronto. “This might be viewed as a destabilizing force. The suggestion that the dollar might be on the way out wouldn’t be helpful.”

China has plenty of reasons to argue for a means of exchange other than the dollars.

Despite the country’s rise as a trading power, investors remain wary of assets priced in the Chinese currency, which hurts the government’s ability to sell yuan-denominated debt on world markets. If the yuan was included in the basket of currencies that sets the value of SDRs, then investors might take the yuan more seriously, said Glen Hodgson, chief economist at the Conference Board of Canada and a former IMF official.

China also is likely worried about the future value of the dollar being eroded by the massive debt the U.S. government is running up to fight the financial crisis, said David Laidler, economics professor emeritus at the University of Western Ontario in London and a former adviser at the Bank of Canada.

“If I was a Chinese central bank, I would be worried about all the dollars I was holding and I’d be happy to have an international institution convert them for me,” Prof. Laidler said.

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