Wednesday, June 10, 2009
Russia, China, Brazil May Trade U.S. Treasuries for IMF Bonds
Bloomberg reports:
Russia’s central bank said it may cut investments in U.S. Treasuries, currently valued at as much as $140 billion, a week after China said it may reduce reliance on the dollar and American bonds.Russia is not alone:
Finance Minister Kudrin said on May 26 Russia will buy $10 billion of IMF bonds from the reserves and China may buy as much as $50 billion, IMF Managing Director said Dominique Strauss-Kahn yesterday...
China, Russia and Brazil are among a handful of nations that have expressed interest in purchasing the securities.
China is “actively” considering buying as much as $50 billion of the IMF bonds, the State Administration of Foreign Exchange said last week...
Why are these countries dumping treasuries for IMF bonds? As Bloomberg writes:
Some investors are wary of U.S. assets because the budget deficit is projected to reach $1.75 trillion in the year ending Sept. 30 from last year’s $455 billion, the Congressional Budget Office says. “The bigger picture is people are worried there are too many Treasuries, and that no one is even making a pretense of getting the fiscal deficit under control,” said Francis Beddington, co-founder of Insparo Asset Management, which oversees about $140 million in London...
IMF securities would give countries a different way to contribute to the fund and are unlike traditional bonds because they pay an interest rate pegged to the IMF’s basket of currencies, known as Special Drawing Rights.
Ulyukayev said Russia will cut the share of U.S. Treasuries “because a window of opportunity for working with other instruments is opening,” according to Interfax news wire. Russia may also place more of the reserves in deposits with foreign banks, he said. The remarks were confirmed by a Bank Rossii official who declined to be named, citing bank policy...
President Dmitry Medvedev questioned the U.S. dollar’s future as a global reserve currency last week and said that using a mix of regional currencies would make the world economy more stable. He renewed his call for consideration of a supranational currency to challenge the dollar.
The real issue, of course, is that the dollar is in the process of losing its status as world reserve currency. The interesting question is whether the IMF's special drawing rights (see this and this) - or something else - will take over as world reserve currency.
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