February 10, 2011
IMF urges overhaul of global monetary system
OTTAWA — The head of the International Monetary Fund called on key global economic players Thursday to accept an increased role for an alternative reserve currency as a way to curb trade imbalances that are at risk of widening further.
The alternative in mind is the IMF’s special drawing rights, or SDRs. And Dominique Strauss-Kahn, in prepared remarks delivered in Washington, said the IMF is open to changing the basket of currencies that determine the SDR’s value by giving more weight to emerging market currencies – including the yuan.
“Over time, there may be a role for the SDR to contribute to a more stable international monetary system,” Mr. Strauss-Kahn said. “Increasing the role of the SDR would clearly require a major leap in international policy co-ordination. For this reason, I expect the global reserve asset system to evolve only gradually, and along with changes in the global economy.”
Mr. Strauss-Kahn’s remarks emerge a week before Group of 20 finance ministers and central bankers gather in Paris. Reform of the global monetary system and changes to the dollar’s role as a reserve currency are expected to be on the agenda at this meeting.
French President Nicolas Sarkozy, G20 chairman, has mused of a greater role for SDRs in the global economy in an effort to move away from the U.S. dollar – which is under pressure due to Washington’s massive debt levels and rock-bottom interest rates.
In contrast, Mark Carney, the Bank of Canada governor, has argued moving to a new reserve currency wouldn’t provide enough of an incentive for emerging markets, led by China, to allow greater appreciation of their currencies.
In his speech, Mr. Strauss-Kahn warned that the global recovery isn’t unfolding as desired, with advanced economies still stuck with high unemployment levels. In addition, global imbalances – highlighted by excess saving by emerging markets and excess consumption in advanced economies – are widening again.
“Global imbalances are back, with issues that worried us before the crisis -- large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves -- on the front burner once again. Left unresolved, these problems could even sow the seeds of the next crisis,” Mr. Strauss-Kahn said.
“In my opinion, reforms to the international monetary system that help us get to the root of these imbalances could both bolster the recovery and strengthen the system’s ability to prevent future crises.”
In an accompanying paper, also released Thursday, the IMF considers ways SDRs could play a bigger role. For instance, SDRs could meet countries’ demands for “precautionary” reserves, as opposed to accumulating U.S. dollars; be used to price global trade and denominate financial assets, which would provide a buffer from exchange rate volatility; and be issued as bonds, creating a new asset class.
The IMF estimates total outstanding SDRs (204 billion) represent less than 4% of global foreign-exchange reserves. The IMF in November cut the U.S. dollar’s weighting in the SDR basket to 41.9% compared with 44%, while the Japanese yen fell to 9.4%, from 11%. The euro’s share rose to 37.4% from 34%.
http://www.financialpost.com/related/topics/urges+overhaul+global+monetary+system/4257888/story.html
IMF urges overhaul of global monetary system
OTTAWA — The head of the International Monetary Fund called on key global economic players Thursday to accept an increased role for an alternative reserve currency as a way to curb trade imbalances that are at risk of widening further.
The alternative in mind is the IMF’s special drawing rights, or SDRs. And Dominique Strauss-Kahn, in prepared remarks delivered in Washington, said the IMF is open to changing the basket of currencies that determine the SDR’s value by giving more weight to emerging market currencies – including the yuan.
“Over time, there may be a role for the SDR to contribute to a more stable international monetary system,” Mr. Strauss-Kahn said. “Increasing the role of the SDR would clearly require a major leap in international policy co-ordination. For this reason, I expect the global reserve asset system to evolve only gradually, and along with changes in the global economy.”
Mr. Strauss-Kahn’s remarks emerge a week before Group of 20 finance ministers and central bankers gather in Paris. Reform of the global monetary system and changes to the dollar’s role as a reserve currency are expected to be on the agenda at this meeting.
French President Nicolas Sarkozy, G20 chairman, has mused of a greater role for SDRs in the global economy in an effort to move away from the U.S. dollar – which is under pressure due to Washington’s massive debt levels and rock-bottom interest rates.
In contrast, Mark Carney, the Bank of Canada governor, has argued moving to a new reserve currency wouldn’t provide enough of an incentive for emerging markets, led by China, to allow greater appreciation of their currencies.
In his speech, Mr. Strauss-Kahn warned that the global recovery isn’t unfolding as desired, with advanced economies still stuck with high unemployment levels. In addition, global imbalances – highlighted by excess saving by emerging markets and excess consumption in advanced economies – are widening again.
“Global imbalances are back, with issues that worried us before the crisis -- large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves -- on the front burner once again. Left unresolved, these problems could even sow the seeds of the next crisis,” Mr. Strauss-Kahn said.
“In my opinion, reforms to the international monetary system that help us get to the root of these imbalances could both bolster the recovery and strengthen the system’s ability to prevent future crises.”
In an accompanying paper, also released Thursday, the IMF considers ways SDRs could play a bigger role. For instance, SDRs could meet countries’ demands for “precautionary” reserves, as opposed to accumulating U.S. dollars; be used to price global trade and denominate financial assets, which would provide a buffer from exchange rate volatility; and be issued as bonds, creating a new asset class.
The IMF estimates total outstanding SDRs (204 billion) represent less than 4% of global foreign-exchange reserves. The IMF in November cut the U.S. dollar’s weighting in the SDR basket to 41.9% compared with 44%, while the Japanese yen fell to 9.4%, from 11%. The euro’s share rose to 37.4% from 34%.
http://www.financialpost.com/related/topics/urges+overhaul+global+monetary+system/4257888/story.html
