Update BRICS and Global Finance

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We shouldn’t be surprised after all but today came the news that BRICS – Brazil, India, China, Russia and S-Africa – are a bit fed up with the international world of finance. Last year we already commented on the fact that they were willing to come to the rescue wrt the sovereign debt crisis in the developed world, provided their voice would be heard more frequently and translated into a new power key positions within the IMF and Worldbank. Apparently that’s no longer at stake because BRICS nations are planning to bypass the IMF/Worldbank. How ? Simple, by creating their own giant supra-bank

Well, it shouldn’t come as a surprise because the US itself was the main obstacle in introducing new distribution keys within the IMF way back in 2010 (never ratified it). Today however, we have a different world than a decade ago

1) BRICS jointly hold $ 4,400 bio worth in fx reserves of which the major part is held by China.

2) BRICS account for 43% of global population

3) Intra- BRICS trade in 2002 was about $27 bio and reached $282 bio last year. Prognosis is $500 bio by 2015, that is if the global business cycle doesn’t show further signs of fatigue (hitting emerging in particular).

So with these power shifts occurring, the creation of an emerging Bretton Wood institution benign towards developing nations seems more than logical. Of course there is more than just having a new Supra Institution funding infrastructure investments in BRICS. It will also serve in traditional IMF style like handing out emergency loans should that become necessary. And last but not least – but further upon the road – it will pool the joint FX reserves. The objective here is most likely to control “currency wars” and to monitor crises emerging from out of FX crises. And of course to monitor Uncle Sam’s currency escapade which still forms the bulk of BRICS’ fx reserves.

However, how logical this move might be, there is something more and maybe a logical necessity which originates out of various trends over the past 5 years : Some of the individual nations’ development banks have become mighty, mighty big, even TBTF. And hence probably suitable candidates to seek shelter under a joint umbrella. Last week, Moody’s came with the following report :

http://www.ft.com/intl/cms/s/0/0a07be4c-924f-11e2-851f-00144feabdc0.html#axzz2OdkL0fqX

Briefly : things have gone a little too hard in Brazil and China when it comes to state support and increasing the state development banks’ balance sheets without the proper buffer installed. Not to mention even the concentration risk arising from certain loans.

How big will this new BRICS bank be ? Well, for starters it seems that a $10 bio contribution from each members will provide the kick-off, put forward by Vladimir Putin some weeks ago. On the issue of fx pooling, Brazilian Finance Minister Mantega last year proposed to copy the Chiang Mai initiative. This initiative was launched in 2010 by ASEAN economies, China, Japan and South Korea and its fx pool has now expanded to $ 240 bio, accessible for the members as emergency liquidity to shield the region from shocks.



Econopolis

This article was written by Econopolis

on 26 March, 2013 in IMF