Less than a month ago a handful of the world’s policy makers gathered in Washington at the International Monetary Fund (IMF), no surprising headlines were run – but an obscure meeting and a discreet report launched exclusive signals for the next global economic crisis.
The panel, which included five of the most elite global bankers, was held during the IMF’s spring meetings to discuss the special drawing rights (SDR) 50th anniversary. On the surface the panel was a snoozefest, but reading beyond the jargon offers critical takeaways.
The discussion revealed what global central banks are planning for a future crisis and how the IMF is orchestrating policy for financial bubbles, currency shocks and institutional failures.
Why the urgency from the financial elites?
In his opening remarks Obstfeld identified, “There has been increasing debate over the role of the SDR since the global financial crisis. We in the Fund have been looking more intensively at the issue over whether an enhanced role for the SDR could improve the functioning of the international monetary system.”
“The official SDR is something we are familiar with but is there a role for the SDR in the market or a market SDR? What is the SDR’s role for the unit of account?”
Here’s the five most important signals from the world money panel, what they could mean for the international monetary system and the future of the dollar.
India’s foreign exchange reserves declined by $935.2 million to $359.671 billion in the week to December 23 on account of fall in foreign currency assets, the Reserve Bank said on Friday.
In the previous week, the reserves had fallen by $2.380 billion to $360.606 billion.
They had touched a life-time high of $371.99 billion in the week to September 30, 2016.
Foreign currency assets (FCAs), a major component of the overall reserves, dipped by $933.2 million to $335.970 billion in the reporting week.
FCAs, expressed in US dollar terms, include the effects of appreciation/depreciation of non-US currencies such as the euro, pound and the yen held in the reserves.
Gold reserves remained steady at $19.982 billion in the reporting week, the RBI said.
The special drawing rights with the International Monetary Fund decreased by $0.9 million to $1.427 billion, while India’s reserve position with the Fund too declined by $1.1 million to $2.290 billion, the data showed.
India’s foreign exchange reserves declined by USD 1.506 billion to USD 366.139 billion in the week to October 14, due to fall in foreign currency assets, the Reserve Bank said today.
In the previous week, the reserves had decreased by USD 4.343 billion to USD 367.646 billion.
It had touched a life-time high of USD 371.99 billion in the week to September 30, 2016.
Foreign currency assets (FCAs), a major component of the overall reserves, dipped by USD 1.486 ..
FCAs, expressed in US dollar terms, include the effect of appreciation/depreciation of non-US currencies such as the euro, pound and the yen held in the reserves.
Gold reserves remained steady at USD 21.406 billion, the apex bank said.
The special drawing rights with the International Monetary Fund declined by USD 8 million to USD 1.468 billion, while India’s reserve position with the Fund dipped by USD 12.8 million to USD 2.356 billion, RBI said.
Maintaining an uptrend for the fourth consecutive week, India’s foreign exchange reserves soared by $ 1.347 billion to $ 367.169 billion in the week ended August 19, the Reserve Bank of India (RBI) said here today.
The country’s forex reserves had increased by $ 73.2 million to $ 365.822 billion in the previous week.
In its weekly statistical supplement, the central bank said that foreign currency assets, which constitute a major chunk of the forex reserves, had, risen by $ 1.316 billion to $ 341.675 billion during the week.
Foreign currency assets expressed in US dollar terms include the effect of appreciation or depreciation of non-US currencies such as the euro, pound and yen held in the reserves.
According to the bulletin, the country’s gold reserves remained changed at $ 21.584 billion while its special drawing rights went up by $ 11.8 million to $ 1.497 bilion.
India’s reserve position in the International Monetary Fund (IMF) rose by $ 19.2 million to $ 2.411 billion, the bulletin added.
In the year since China’s surprise devaluation of its currency, the yuan’s troubles going global have become all too apparent.
With the yuan continuing to lose strength as the Chinese economy slows, Chinese authorities have become reluctant to further expose the currency to market forces — a step necessary to achieve true reserve currency status.
Last month, the People’s Bank of China gathered local bank executives here for a meeting to inform them of de facto regulations on transactions that could facilitate capital flight. Officials from the central bank reiterated administrative guidance on a prior reporting requirement for large foreign-currency purchases or outbound fund transfers by corporations.
This guidance would not be put in writing, but banks were expected to comply, the officials said, according to people familiar with what transpired at the meeting. Banks were also instructed not to sell foreign currency to companies not registered in Shanghai.
In its 2016 report on internationalizing the yuan, released Wednesday, the PBOC hails rising cross-border transactions and the currency’s progress toward global status. The Chinese leadership, under President Xi Jinping, has set a goal of having “a convertible, freely usable currency” by 2020.
But in a seeming contradiction to this aim, the central bank early this year introduced nationwide restrictions meant to block capital outflows, and has since tightened them. The yuan has been hit with bursts of activity that appear the work of short-sellers. Clearly afraid of letting the currency weaken or allowing capital outflows, the PBOC has put a halt to the liberalization on which the drive for a global yuan depends.
IMF Managing Director Christine Lagarde speaks at the 40th anniversary of the IMFC meeting at the IMF Headquarters in Washington, April 20, 2013.
When Bloomberg reported late last year that China founded a working group to explore the use of the supranational Special Drawing Rights (SDR) currency, nobody took heed.
Now in August of 2016, we are very close to the first SDR issuance of the private sector since the 1980s.
Opinion pieces in the media and speculation by informed sources prepared us for the launch of an instrument most people don’t know about earlier in 2016. Then the International Monetary Fund (IMF) itself published a paper discussing the use of private sector SDRs in July and a Chinese central bank official confirmed an international development organization would soon issue SDR bonds in China, according to Chinese media Caixin.
Caixin now confirmed which organization exactly will issue the bonds and when: The World Bank and the China Development Bankwill issue private sector or “M” SDR in August.
Things were already bad enough for emerging markets going into August. Persistently low commodity prices, slumping demand from China, depressed global trade, and a “diminutive” septuagenarian waving around a loaded rate hike pistol in the Eccles Building had served to put an enormous amount of pressure on the world’s emerging economies. And then, the unthinkable happened. No longer able to watch from the sidelines as the export-driven economy continued to buckle from the pain of the dollar peg, China devalued the yuan. What happened next was nothing short of a bloodbath. In short, the devaluation drove a stake through the heart of the EM world by simultaneously i) validating concerns about weak Chinese growth, thus guaranteeing further pressure on commodities, ii) delivering a staggering blow to the export competitiveness of multiple emerging economies, iii) depressing demand from the mainland by making imports more expensive.
While virtually no emerging economy has escaped the pain, some countries have suffered more than others due to their particular sensitivity to trade with China and idiosyncratic political circumstances. One of the hardest hit EMs has been Brazil, and to be sure, we haven’t been shy when it comes to documenting the country’s troubles, which can be summarized as follows: 1) twin deficits on the current and fiscal accounts, 2) political deadlock which makes closing the budget gap with austerity next to impossible, 3) a plunging currency, 4) the worst stagflation in over a decade, 5) a recession that’s projected to last for many quarters to come, 6) street protests, 7) a President with an 8% approval rating, 8) an embattled finance minister, 9) allegations of government corruption. And we could go on.
Given the above, we weren’t surprised to see Brazil at the top of RBS’ EM heat map which is presented below and should serve as a helpful guide to who’s hurting the most in the wake of China’s “surprise” entry into the global currency wars.