Occasional publications on recent international economic developments with a focus on the IMF, emerging markets, emerging markets exchange and capital markets, financial safety nets, sovereign debt restructuring, sovereign wealth funds and long term international investments and coverage of participations in key international economic policy fora.

Central bank issued digital currencies and financial inclusion

Tenth Annual Conference—Central Reserve Bank of Peru and Reinventing Bretton Woods Committee

Sacred Valley, Peru, 24 July 2018

[...] In my remarks I will focus on the session title to respond to the question: Should central banks issue digital currencies or CBDCs? My answer is an unambiguous yes. Physical cash is simply no longer the best technology to make available means of payment widely. The gains from greater monetary control, transparency in payments and scope for financial inclusion should in my view by far outweigh possible disadvantages of CBDCs. However, those gains remain highly contested. I shall focus on the seldom evoked but important special role CBDCs can play to advance financial inclusion. [...]

Trade war, fintech and the new exorbitant privilege

20 July 2018

The U.S.-China merchandise trade war exposes China’s persistent fundamental disadvantage in international exchange. It uses the dollar to conduct most of its trade. While China may retaliate, it remains highly dependent on the U.S. for using the dollar. In a world where the U.S. is a willing leader to support international exchange it may not matter. In a “U.S. first” world it matters a great deal. China’s aim for renminbi internationalisation has thus become far more urgent. New financial technologies may be the new “exorbitant privilege.” [...]

Is the dollar still international enough?

Conference—World Finance Forum

Beijing, 30 June 2018

[...] I would like to explore the nexus between uncertainty and the direction of the international monetary system to address the question: Is the dollar still international enough to serve the international economy? As you know, the dollar remains by far the dominant international currency and a great number of countries, including China, maintain monetary policy frameworks that rely on the dollar as anchor currency. New financial technologies may now allow to overcome the entrenched advantages of the dollar. Decentralisation may be the new approach to integration. [...]

Swiss sovereign money referendum and the architecture of money

11 June 2018

The referendum on the Swiss sovereign money initiative (Vollgeldinitiative) of 10 June served as an important reminder that the modalities of the production of money are not set in stone. Its failure should not be seen as confirmation that central banking and money do not require some fundamental rethink. The initiative’s objective to suspend fractional reserve banking and provide central bank money to everyone was not its most radical proposition. It was the legalisation of cryptocurrencies and envisaged money competition. The referendum offered a true change in the architecture of money with likely important broader impulses for the international monetary system. [...]

ECB looks very 19th century

4 June 2018

The European Central Bank (ECB) may long have decided to switch its main instrument from interest rate setting to direct lending. Its persistent low and unchanged interest rates and maintenance of net asset purchases brings the ECB close to the origins of central banking. While the ECB was seen as a successor to the Bundesbank, it may now look increasingly closer to its ancestor the German Imperial Bank (Reichsbank). [...]

Beggar-thy-neighbour and inter-RFA coordination

Second joint RFA research seminar

Cartagena, 17 May 2018

The importance of coordination among regional financing arrangements (RFAs) to strengthen the global financial safety net (GFSN) has been well established. The number of institutions offering adjustment lending requires some coordination to mitigate duplication and strengthen effectiveness. However, too little attention is given to the outcome of adjustment such that adjustment of one country does not unduly impair prospects of other countries or regions. This fundamental principle of avoiding a beggar-thy-neighbour approach represents one of the most important rationales for seeking close coordination of RFAs. Yet, it remains elusive. [...]

Emerging markets vulnerability to exchange rate shocks—A curative approach

3 May 2018

The U.S. Federal Reserve announced on 2 May that it will keep its policy rate at its current level. The Fed reiterated that it sees economic conditions warranting "further gradual increases in the federal funds rate." Emerging markets currencies have notoriously been vulnerable to U.S. interest rate rises and in particular a stronger dollar. The prospect of a sustained rate increase therefore causes some disquiet or worse. Yet, it is important to be reminded that emerging markets exchange rate vulnerability seems largely "self-inflicted." A curative approach is needed. [...]

The geography of money

OMFIF May Bulletin, 1 May 2018

The quest for international currencies is not new. The 18th-century Maria Theresa thaler was one of the first international currencies and may be considered something of a model for bitcoin. The denationalised properties of the cryptocurrency have highlighted the advantages of such currencies. [...]

Maria-Theresa thaler, bitcoin and capital flows

London School of Economics—Reinventing Bretton Woods Committee Conference: Innovations in global financial governance and the role of emerging economies

Buenos Aires, 20 March 2018

[...] I hope to leave you with some confidence that cryptocurrencies have a natural role to play in the international economy, that there is a case to change the geography of money, that there is a continuum of types of money and that adoption of cryptocurrencies should be highest where monetary experiences have been bleakest. [...]

Cryptocurrencies challenge the status quo

VOX, with Piroska Nagy-Mohacsi, 15 March 2018

Cryptocurrencies have been the subject of recent attacks by official sector representatives, and the G20 finance ministers will consider regulatory proposals at their next meeting in Buenos Aires. This column argues that while cryptocurrencies present certain risks, they also represent an important innovation that promises to enhance choice and efficiency in monetary transactions. A proportionate, risk-based regulatory approach is required to accommodate differential attitudes and experiences and to avoid stifling innovation and competition. This implies having an open debate before sweeping regulatory action. [...]

OMFIF News and Commentary, 15 March 2018

The new German government may propose as one of its first European policy initiatives the establishment of a European Monetary Fund, a critical missing piece in the euro area monetary architecture. The coalition treaty between Chancellor Angela Merkel's Christian Democrat/Christian Social Union group and the Social Democratic Party states prominently that the 'existing European Stability Mechanism is to be developed into a European Monetary Fund'. The idea of an EMF is not new and failed a few times in the past to get off the ground, notably when the European Monetary System was set up in 1978 as the forerunner to economic and monetary union. Yet, in the light of continuous nervousness regarding prospects for the euro area, exacerbated by an unfavourable Italian election outcome, an EMF would signal that the bloc is willing to do what it takes to strengthen confidence. [...]

Venezuela’s petro digital currency

22 February 2018

Venezuela launched the pre-sale of its digital currency petro on 19 February. It is the first government to issue a digital currency and hopes to establish a new ecosystem around the token. Because the government of Venezuela is behind it, it raises naturally fundamental doubts about its credential as a currency. Its valuation makes it more an oil price-linked voucher. It does not reflect the underlying ideas and ideals of cryptocurrencies. [...]

Public trust and cryptocurrencies

21 February 2018

Bitcoin and other cryptocurrencies have recently been subject to severe attacks from the official sector denouncing them as a “bubble” and “Ponzi” scheme. Mark Carney, governor of the Bank of England, said on 19 February that bitcoin has failed as a currency amid its extreme volatility. 1 The G20 is now called upon to offer some comprehensive regulation. Volatility though may be a poor guide to assess currencies. [...]

Cryptocurrencies, monetary stability and regulation: Germany’s nineteenth century private banks of issue

Institute of Global Affairs, London School of Economics and Political Science, 14 February 2018

The present paper classifies bitcoins and other cryptocurrencies as money, reviews their possible economic impact and proposes a regulatory approach based on Germany’s nineteenth century private banks of issue. Cryptocurrencies represent important monetary innovations and have reinvigorated interest in and debate about notion and meaning of money. They aim to disrupt and challenge existing monetary and financial arrangements. Their market valuations though highly volatile may become substantial quickly. Their impact on the financial system therefore causes disquiet. It has already led to various regulatory measures and calls for more. However, few discussions on regulation have focused in earnest on the possibility of a sustained significant expansion of cryptocurrencies as money. [...]

European Monetary Fund—A misnomer

23 January 2018

The prospects for a European Monetary Fund (EMF) are good. The agreement of last Sunday to initiate formal talks between the SPD and CDU to form a government in Germany made an EMF significantly more likely. An EMF has been promoted by the CDU and pushed by the SPD and may be one of the first European measures of the new government. However, an EMF is unlikely to address monetary issues or become a fund. The misnomer obfuscates what an EMF should and likely will be doing. European Fiscal and Financial Support Bank would be more fitting. [...]

Cryptocurrencies and tulipmania

28 December 2017

The spectacular price rises of many cryptocurrencies during the past 12 months have for some time been compared to the seventeenth century Dutch tulip mania. The comparison seems appropriate. Not because price rises are comparable. They are not as cryptocurrencies have seen price increases far greater than those seen for tulip bulbs. Tulips and cryptocurrencies share the same fundamental feature: They can be reproduced at will. As with tulip bulbs, with totally elastic supply, the substantial price increases for cryptocurrencies appear impossible to justify.[...]

International reserve diversification

6 December 2017

The composition of central banks’ international reserves has not changed much over the decades. Or has it? The latest IMF Coordinated Portfolio Investment Survey (CPIS) shows a significant increase in the number of countries in which assets are invested that are held as foreign exchange reserves. This seems indicative of some momentum towards greater diversification in international reserve holdings.[...]

International portfolio investments (update)

6 December 2017

International portfolio investments picked up in 2016 amid a push towards the United States and a modest recovery towards emerging markets. The latest IMF Coordinated Portfolio Investment Survey (CPIS) shows the total stock of cross-border portfolio investments in equity and debt securities, excluding securities held as international reserves, in December 2016 at 42.9 trillion (57 percent of world GDP) up from US$39.9 trillion in 2015 (54 percent of world GDP). The shifts in cross-border portfolio holding reveal a further decline of Euro Area securities and somewhat more concentrated portfolio holdings. Overall, total international portfolio investments have still not recovered from their 2007 peak relative to world GDP. [...]

Federal Reserve—Unwinding of securities holdings

1 December 2017

The Federal Reserve initiated in October2017 the unwinding of its securities holdings acquired as a result of its quantitative easing policy. It means channelling large amounts of credit and duration risk back into the market. At the same time, the collapse of money velocity highlights persistent strong liquidity preference by the market and likely wariness to absorb interest rate risk in an environment of targeted interest rate increases. The combination of low money velocity and long duration of the Fed's balance sheet means that unwinding of quantitative easing will be a complicated affair. At the end of targeted normalisation, the Fed will still retain unprecedented large amounts of rate and credit risks. The Fed could therefore become itself an important source of instability for monetary policy, the international monetary system and the dollar. [...]

Central banks and digital currencies

3 November 2017

Bitcoin closed at a record above US$7,000 on 2 November, up from US$702 12 months ago, serving as a stern reminder that digital currencies are on the rise. The advances of private cryptocurrencies have made central banks increasingly contemplate adopting official cryptocurrencies themselves in part also not to lose out against the digital currency rivals. While lately the Bundesbank argued that digital currencies are a long way off and the Bank of Estonia had to retreat from earlier hints it may support a digital currency, the Riksbank interim report on its e-krona project seems to conclude that adoption is possible in the near future and the People’s Bank of China announced that it completed key tests of its own digital currency. Yet, although the advantages of digital currencies in national transactions remain somewhat controversial hindering and possibly blocking prompt adoption, the benefits are clear in international payments. The adoption of any digital currency therefore will likely be driven in large part by perceived opportunities to make it big as a global digital currency on the nexus between technology and payments. [...]

IMF Annual Meetings——Exchange rates matter at last

17 October 2017

The IMF Annual Meetings on 14-15 October in Washington, D.C. offered plenty of optimism with the usual dose of caution. The world economy experiences the broadest upswing since the 2000s. Downside risks remain important including political risks, market frothiness, rising debt levels. Yet, one of the more intriguing aspects was the communiqué of the International Monetary and Financial Committee (IMFC), that was remarkable in its emphasis on exchange rates. Since 2000, the IMFC has only very rarely if ever mentioned exchange rates. This time, exchange rates and the international monetary system featured prominently. It is likely a sign that IMF member countries want a more assertive approach on international economic policy matters. [...]

ECB government financing and the IMF

1 October 2017

The Bundesbank on 25 September 2017 reiterated what many fear could lead to a sudden stop of the European Central Bank's (ECB) large scale asset purchases: "The problem of the public sector securities purchases is that the central banks have become the largest creditors of the [Euro Area] member countries. The boundary between monetary and fiscal policy increasingly blurs." The pending verdict by the German Federal Constitutional Court (GFCC) regarding the incompatibility of the asset purchases with German law has gotten new momentum with the referral for several questions, as announced on 15 August, to the European Court of Justice (ECJ) for a preliminary ruling. A verdict by the GFCC attesting the unconstitutionality of the PSPP is likely, the consequences of which would be severe but not only for the ECB. The Bundesbank has for years financed governments through the International Monetary Fund (IMF). The GFCC therefore risks upsetting the very foundations of the international financial architecture. [...]

New challenges for global economic integration

Conference——9th Annual Conference organised by the Central Reserve Bank of Peru and Reinventing Bretton Woods Committee, Cusco, 24-25 July

29 July 2017

The benefits of global economic integration are seen increasingly sceptically or so it appears. The conference with the participation of leading policy makers from Latin America and other countries, representatives from international organisations, academia and the private sector debated the future of globalisation. While there was recognition that globalisation may produce some adverse distributive outcomes, in Latin America support for openness seemed overwhelming. Herein is a summing-up of the discussions at the conference. [...]

Cryptocurrencies——Forward to the past

27 July 2017

Record valuations of Bitcoin suggest that cryptocurrencies are coming of age. The proliferation of cryptocurrencies or digital currencies seems to advertise a new era of money. In fact, their underlying ideas are rather old. Cryptocurrencies, herein referred to only as not having legal tender status, aim for a world—abstracting from their profound technological impact on recording, anonymising and administering monetary transactions—of rigid monetary rules and private monies and without central banks. There were many good reasons of why monetary systems moved forward. While this may not diminish the appeal of cryptocurrencies, to represent a monetary innovation they must look far beyond the traditional functions of money. [...]

Globalisation under threat

8 July 2017

The G20 summit in Hamburg on 7-8 July is to celebrate globalisation. Yet there is mounting concern that globalisation has peaked. Reinventing Bretton Woods Committee and Hamburg Institute of International Economics organised a conference ahead of the G20 with academics, private sector participants and G20 and other officials to reflect on the threat from de-globalisation. Herein is a summary of the views expressed during the conference [...]

European Monetary Fund (update): Beware of Germany

5 June 2017

The E.U. Commission announced on 31 May rather ambitious ideas about possible ways for deepening Europe's Economic and Monetary Union. Those reaffirm discussions about a European Monetary Fund (EMF) to help fighting Euro Area crises. Germany in particular seems eager most likely by transforming the existing European Stability Mechanism (ESM). The recent impasse on Greece's economic programme illustrates the dysfunctionality of the Euro Area's economic crisis management and urgency for institutional reforms. It would critically complement the financial architecture of the Euro Area and strengthen the euro. However, key lessons need to be learnt for the design of an EMF; above all from the International Monetary Fund (IMF). To be effective, an EMF will have to be insulated from undue German influences. [...]

International portfolio investment holdings update

26 April 2017

International portfolio investments continue to show signs of globalisation fatigue. The latest IMF Coordinated International Portfolio Survey (CPIS) of non-official cross-border portfolio investment holdings with data through June 2016 reveal that total international portfolio investments have continued to decline in percent of world GDP. Investments in the Euro Area have suffered the most. Emerging markets have been zigzagging and remain below their peak. [...]

Central bank reserves update

3 April 2017

Central bank foreign exchange reserves have continued to shrink but become more diversified. The latest IMF report on the composition of central bank foreign exchange reserves (COFER) through December 2016 shows that reserve holdings have maintained their downward trend. The composition by currency indicates broadly stable allocations but with a new high in the allocation to non-traditional reserve currencies. The allocation to renminbis is identified for the first time and shows a share of 1.1 percent in central banks’ foreign exchange reserves. [...]

A European Monetary Fund

7 March 2017

There have been repeated calls for a European Monetary Fund (EMF) for the Euro Area. The European Commission affirms the proposal of establishing an EMF on the basis of the European Stability Mechanism (ESM). It now also seems to become a core proposition as part of the 60th anniversary celebration of the Treaty of Rome this month. However, for an EMF to be effective it would have to be constituted quite differently from the ESM. It would only make sense if an EMF was based on borrowing directly from the European Central Bank (ECB). An EMF would also at last incorporate into the statutes of the European Union the notion that adjustment forms an integral part of monetary unions. [...]

Case for free trade

18 February 2017

The charge against international trade by President Donald Trump but also persistent opposition in the European Union to the free trade agreement between the EU and Canada (CETA) call for reiterating vigorously the case for free trade. Free trade remains the best option to foster economic growth and development all things considered. The alternative is often associated with more government intervention and market failures. The stock market rally on the basis of Trump's promises of increasing protectionism is inconsistent with past economic developments and likely to be only short-lived. [...]

Greece's shrinking

17 February 2017

The International Monetary Fund (IMF) and European Union (EU) quarrel once again about the sustainability of Greece’s government debt. Debt should not be the focus. The latest IMF Article IV consultation on Greece published on 7 February illustrates the considerable shrinking of the Greek economy. Naturally, an economy that represents less than 70 percent in size in 2016 than it was originally projected to be must attract a comprehensive rethink of how to tackle its problems. Greece needs a completely new approach. This will most certainly require more debt relief from private and official creditors. [...]

U.S. manufacturing employment and international integration

12 February 2017

President Donald Trump wants to put “America first” by changing the nature of U.S. international engagements. He proclaims that the U.S. has not benefitted equally from the international economic order. In 1945, President Franklin Roosevelt called "citizens of the United States, to use our influence in favour of a more united and cooperating world." 1 This has laid the foundation for international integration and cooperation following economic decline during the inter-war period amid mounting economic protectionism and political radicalisation. Trump now seems willing to move the U.S. further away than ever from Roosevelt's economic policy ideals. Moreover, the President uses erroneous pretenses to do so. [...]

Fear gauge

12 January 2017

Forget the VIX. The often quoted indicator for capital market sentiment has been only a timid reflection of market turbulence in 2016. In the eventful 2016, the VIX was half down from its 2008-09 highs. In contrast, exchange rate volatility had the highest reading since 2008-09 representing more than three quarters of the 2008-09 levels. Exchange rate volatility seems by far the better fear gauge. [...]

International monetary dimension of sterling's decline

5 December 2016

The start of the hearing of the Supreme Court in the U.K. on 5 December on whether the U.K. Parliament’s consent is required to commence official Brexit negotiations, has been accompanied by a recent appreciation of sterling. Sterling’s upward move should not mask the fact that Brexit, assuming the Court will not alter the modalities of Brexit, is set to constitute a permanent significant realignment of sterling. The market expects Britain to be a poorer and less interesting place outside the E.U. Sterling’s decline has a domestic dimension. More importantly is its international impact. Sterling’s decline marks the international monetary dimension of Britain’s decision to leave the E.U. The decline of sterling serves as a reminder that the international monetary system is in urgent need of reform. [...]

The U.S. elections and the dollar

9 November 2016

The U.S. presidential election should serve as a reminder that it is very risky for the international economy to rely on a national currency. Donald Trump’s win surprised markets and it is unclear what it means for the continuity in U.S. economic policies and therefore the dollar. In Trump’s surprisingly conciliatory victory speech he indicated that he will work with all nations in partnership. That is positive. However, the potential downside or considerable uncertainty a Trump presidency may cause remains disconcerting. The dollar may just have become much more a national currency and this should greatly concern the international economy. [...]

The U.S. elections and emerging markets

9 November 2016

The U.S. presidential election outcome seems mildly negative to very negative for emerging markets economies. Presidential candidate Donald Trump indicated that he will break with the trend in traditional international economic affairs set by previous U.S. administrations. He announced a more adverse stance on free-trade, climate change and immigration pointing to a more inward-looking economic agenda that reduces greatly scope for international economic dialogue. President Trump’s effect on emerging markets may therefore depend on how important international trade, climate change and immigration will be in shaping international economic affairs. [...]

The Chinese money wall (update)

6 October 2016

The inclusion of the renminbi in the IMF’s SDR basket on 1 October signifies that China will have to maintain progress towards financial liberalisation to sustain the new reserve currency status of the renminbi. China’s massive stock of money may represent its biggest obstacle to pursue orderly liberalisation both domestic and international. The persistent significant expansion of China’s money supply serves as a reminder that the monetary dimension of China’s rise may be one of the most important factors in determining prospects of China’s international integration. [...]

The renminbi and the SDR

5 October 2016

The IMF included the renminbi in the Special Drawing Right (SDR) basket effective 1 October. This is only a small step towards needed reform of the international monetary system but potentially a giant leap to signal that change is on its way. While the international economy has changed dramatically with the increasing importance of China and emerging markets, the international monetary system has remained broadly the same. If the system changes it will likely cause considerable upset. [...]

G20 Hangzhou Summit

5 September 2016

The Hangzhou Summit of 4-5 September produced a rather long action plan but few concrete measures. It missed addressing in earnest important issues like the refugee crisis and international security. The Communiqué is remarkable for the number of initiatives, actions and working groups it endorses and commits to. There are 15 action themes and 73 measures. It may convey a lack of focus. Less likely, it may simply be a reflection of the complexity of managing the global economy. [...]

G20 and the SDR

26 July 2016

The G20 seems to find it increasingly difficult to reach common ground. The G20 communiqué of Chengdu of 24 July illustrates the blandness of commitments that have become commonplace. However, there is one interesting tangible measure. China is pushing the IMF's Special Drawing Right (SDR) and the G20 is seemingly obliging: "We support examination of the broader use of the SDR, such as […] the potential issuance of SDR-denominated bonds, as a way to enhance resilience." There has not been for decades probably more momentum around promoting the SDR. However, concrete options to aid SDR proliferation will remain highly contingent on actual IMF and private sector interests. [...]

International monetary dimension of Brexit

Conference—Reform of Global Financial Architecture: Short Term Measures and Long Term Goals

Chengdu, 22 July 2016

Brexit is a calamity. I believe it will diminish the U.K. This will lead to reducing further the role of sterling as an international currency. It will have adverse consequences for national policies but also for the international monetary system. Brexit therefore makes reforming the global financial architecture more urgent. [...]

Brexit, political risk and emerging markets

26 June 2016

Emerging markets have long suffered from a fundamental flaw. They do not offer sufficient political, institutional and constitutional continuity. That has made investing there to be perceived as more risky. Regime shifts, ad hoc changes to the rules of the game, coups all have contributed to the perception that emerging markets are unreliable and unpredictable. The U.K. now offers a similar treatment. Political risk is now greatest in Europe. [...]

Brexit and the dollar

26 June 2016

During the E.U. referendum election night when the voting area of Sunderland in the North East of England announced its voting results at 00:16 hours on 24 June, the pound started a mindboggling fall against the dollar. Sunderland was seen as a bellwether voting district and only the 4th out of 382 to declare. The predicted Leave district produced a 23 point lead over Remain. A 7-point lead was considered to predict a Leave win. The pound depreciated against the dollar between 00:10h and 05:30h by about 10 percent from USD1.4985 per pound prior to the announcement to USD1.3297 before stabilising and recovering somewhat. This was one of the biggest intra-day moves in the pound’s modern history. The precipitous decline of the pound serves as a reminder that the international monetary system does not work as intended. [...]

SDR Substitution Fund

, April 2016,Vol.3, No.2

30 April 2016

The inclusion of the renminbi into the IMF Special Drawing Right (SDR) basket was an important but mostly symbolic step. The relevance of the renminbi inclusion will come with the proliferation of the SDR. This will rest largely on the amount of SDRs outstanding. While the IMF is unlikely to offer greater SDR allocations amid resistance from key IMF member countries, China could embark on promoting the SDR through an SDR substitution fund. It would likely define the actual future of the SDR, may address incipient concerns about reserve shortages and could help propel the renminbi.

Historic perspectives on the purposes of the SDR

27 February 2016

The inclusion of the renminbi into the IMF Special Drawing Right (SDR) basket may signal the revival of the SDR. There have been considerable fluctuations in interest in the SDR. The IMF has at times embraced but most of the times largely ignored it. The SDR is not the outcome of a singular vision but rather the campaign of competing views among IMF member countries. It offers a glimpse about countries’ perspectives on the purposes of the SDR. With renewed interest in the SDR and shifting country influences at the IMF, those may offer valuable insights into the possible future direction of the SDR.

IMF Managing Director selection

14 February 2016

The International Monetary Fund (IMF) closed the nomination period of the next IMF Managing Director on 10 February. Incumbent Christine Lagarde is the only candidate. Given the recent history of the selection of the IMF Managing Director, a single candidate seems odd. The lack of competition or interest in one of the most important international official positions risks undermining credibility and legitimacy of the selection process. [...]


UBS European Conference 2015, London, 10 November 2015

Politicians are eager to stress the need for disruptive policies to bring desired change. One area where disruption is overdue is the global financial architecture. It has remained largely unreformed despite the fact it does not function as intended amid persistent large external imbalances and high exchange rate volatility resulting in considerable welfare losses. It is the IMF Special Drawing Right (SDR) that could offer needed disruption. [...]

SDRs and international currency diversification

LSE IDEAS and Konrad Adenauer Stiftung Workshop—The Emergence of a Multipolar Currency Regime, London, 28 October 2015

Earlier this month, at the IMF Annual Meetings in Lima, it was almost bewildering to witness how universal concerns were about the effect on the international economy of an increase in the policy rate of the Federal Reserve. Those concerns serve as a critical reminder of the old and well known dilemma of using national currencies to manage international liquidity. In my brief remarks I will focus on the IMF Special Drawing Rights (SDRs) arguing that SDRs could usefully serve as a framework to promote greater international currency diversification.

Renminbi internationalisation: Need for a new gentlemen's agreement?

Brookings, Finance 40 Forum, Euro50 Group Conference—China's Financial Stability and Monetary Policy Outlook, Beijing, 29 August 2015

The impact of renminbi internationalisation on the global financial system will likely depend in large part on whether the renminbi will add or subtract stability to central banks' reserve allocation patterns. This will naturally be contingent on renminbi conversion pressure, that is, whether adoption of the renminbi as a reserve currency will be sustained. The threat of large-scale reserve currency conversions has been a concern for a long time and a cornerstone for managing international liquidity has remained tied to some understanding about limited reserve currency convertibility. Milton Friedman called it "the gentlemen's agreement among central banks not to press for conversion […]." [...]

IMF SDR valuation review: A test nobody can pass

9 August 2015

The IMF Executive Board deliberated on 29 July in informal session about next steps to conduct the 2015 quinquennial SDR valuation review. The IMF staff document guiding the review concentrates on determining whether the renminbi is a freely usable currency as necessary inclusion criterion. The review is conducted seemingly on technical considerations only on the basis of the existing inclusion criteria and does not propose revisiting those. This signals a bias against innovation. It seems to represent an extraordinary missed opportunity in light of actual and expected changes in the international monetary system. This may not be the IMF staff’s mistake.

The Troika was a mistake (in German)

Süddeutsche Zeitung, 29 July 2015

Germany's self-proclaimed role as chief negotiator for the Greece arrangement has severely upset the multilateral framework.[…]

Central bank asymmetric reserve allocation and capital markets volatility

Global Financial Stability Conference, Seoul, 22-23 June 2015

Central bank capital markets interventions through foreign exchange reserve allocations have become critical determinants of national and international capital markets developments. However, many economies, including in particular most emerging markets economies largely lack central bank capital markets participation. The asymmetry in central banks' reserve allocations may induce undue biases in the distribution of international capital markets volatility.[...]

Time to transform the world's currency system

Financial Times, 22 June 2015

The pending IMF review of the SDR is much more than a rejigging of a currency basket. It is about serious steps towards the transformation of the international monetary system. […]

BBC News, 15 June 2015

Ousmene Mandeng conference images

Why does Germany take the lead on Greece?

BBC Business Daily interview, radio podcast, 15 June 2015

The negotiations for the continuation of Greece's IMF arrangement are a muddle. It is no longer clear who is negotiating with whom and who sets the terms for the negotiations significantly undermining the multilateral framework on which basis the arrangement was established. [...]

Why IMF must reform the SDR

OMFIF May Bulletin, 13 May 2015

The Special Drawing Righ has failed as a reserve asset, and never gained ground as a financial instrument. However, it may succeed as a framework for international currency diversification. […]

BNE Intellinews, 27 April 2015

The alienation felt between the EU and Russia has seemingly deepened to a post-Soviet Union low. This may in large part be due to the fact that Europe has never fully engaged with Russia economically in the first place. [...]

BNE Intellinews, 20 April 2015

The International Monetary Fund/World Bank Spring Meetings in Washington DC over an April weekend felt mostly like a routine affair. Persistent concerns about a "mediocre" global economic outlook were voiced and duly corresponding policy recommendations made. Somewhat ambitious was a call for "a new multilateralism for a sustainable future." At least two issues though were more unusual: the quinquennial special drawing rights (SDR) valuation review and a possible default of Greece to the IMF. Both have caused considerable background tussles. [...]

Why Wimp label sticks to emerging nations

Financial Times, 16 March 2015

[Emerging markets] suffer from the fact that they are without international monetary power: they are Wimps.
International monetary power is the ability to conduct economic policy without immediate regard to external constraints. […]

A proposal for an enlarged SDR basket

B20 Istanbul, 13 February 2015

The present note offers a proposal for consideration by the G20 to support a significant enlargement of the IMF SDR basket. The proposal is seen to constitute an important addition to the B20 Australia recommendation of achieving greater recognition of emerging markets economies. The SDR also represents an integral part for strengthening the international financial architecture. The measure is in addition considered an important element towards meeting the objectives of the delayed IMF governance reform. The IMF is due to undertake a review of the SDR basket during 2015 to be concluded towards end-2015. [...]

Boao Review, 14 January 2015

The international financial architecture and its governance model are under pressure to change. One of the most contested issues is the influence of countries at the International Monetary Fund (IMF) and other international financial institutions. The recent establishment of the BRICS Development Bank (DB) and Contingent Reserve Arrangement (CRA) have been seen, at least in part, as a response to the perceived slow progress in reforming the international financial architecture. However, while governance is mostly portrayed as a conflict between advanced economies and emerging markets, the main challenge may well be one between the BRICS and the other emerging markets. The BRICS may need to focus as much on how to share influence with other emerging markets than on how to have their say with advanced economies.[...]

Fed has built a thorny central bank divide

Financial Times, 6 November 2014

Top Federal Reserve officials […] underlined the divide between central banks that have access to the Fed’s dollar swap facility and those that do not [have] a Fed backstop . [...]

International illiquidity and a BRICS payments union

BRICS Economic Think Tank Forum, Beijing 6 November 2014

Ladies and Gentlemen

It is a great pleasure to participate in this timely initiative to reflect on the international financial architecture through the prism of the BRICS countries. The considerable advances BRICS countries have made in the world economy remain in stark contrast to their role in the international financial system. There are few areas where this is more pronounced that in the international monetary sphere. The world economy has remained highly dependent on a narrow set of national currencies to conduct cross border financial transactions. This constitutes a critical vulnerability and disadvantage for BRICS countries. Commemorating the 70-year anniversary of the Bretton Woods Conference this year, it is an opportune moment to think about needed reforms of the international financial architecture. I will try to make the case for a BRICS payments union.[...]

The Chinese money wall

Milken Institute London Summit, 28 October 2014

The adoption of unconventional monetary policies by several leading central banks has raised widespread concerns about undue monetary expansion, possible asset price distortions and exchange rate manipulations and related adverse external spillovers. However, the biggest monetary threat may be quite a different one. China dominates monetary issuance today by far. The world broad money supply has nearly doubled since the beginning of the global economic and financial crisis mostly due to China. Unless money is entirely neutral, the significant shift in relative inter-country monetary balances is likely to have some real and relative price implications. It is similarly likely to be a key determinant for the further integration of China into the international financial system.[...]

Why does the international monetary system matter?

Johns Hopkins School of Advanced International Studies (SAIS), Washington, D.C. 9 October 2014

Ladies and Gentlemen

It is a great pleasure to be here at U.S. Korea Institute at SAIS. I’m most grateful to the organisers for the opportunity to moderate this outstanding panel. Before we start the discussion, I would like to offer some short introductory remarks focusing on what the Bretton Woods Conference was about, why it should matter to the public and why it offers critical insights for international investors. [...]

International portfolio investment holdings—2013 update

2 October 2014

International portfolio investment holdings increased significantly in 2013. The increase was driven largely by investments in debt securities and a significant allocation to the U.S. The share of investments in the Euro area has also increased while investments in emerging markets declined. Portfolio country and securities allocation patterns continue to differ between all countries and emerging markets. International portfolio investments have continued to progress with the level of total holdings in 2013 being more than four times as high as in the early 2000s.[...]

Banking Union, asset managers and financial integration

Banco de Portugal, Lisbon, 14 September 2014

The establishment of the European Banking Union is seen as essential to foster a reintegration of the European banking system. This is viewed also to support restoring the effectiveness of the ECB’s monetary policy amid the adverse relationship between financial fragmentation and the workings of the monetary transmission channels. However, the financial disintermediation of the European banking system may diminish considerably the importance of the banking sector relative to other financial sector participants. By simple conjecture, the increasing heterogeneity of financial sector participants in euro area financial markets suggests that the actual impact for a single monetary policy of a successful Banking Union may be more limited than generally assumed. [...]

BRICS development bank and contingency reserve arrangement

24 July 2014

The establishments of a BRICS development bank (DB) and a contingency reserve arrangement (CRA) seem to indicate new momentum for change in intergovernmental finance and cooperation. It may mark a rebuttal of the existing framework dominated by the main multilateral institutions but also increasing confidence that China and leading emerging markets can do it on their own. It is only a modest start though. [...]

Argentina and sovereign debt restructuring

21 July 2014

The decision of 16 June by the U.S. Supreme Court to deny a petition filed by Argentina in relation to holdout claims serves as an important reminder of persistent major uncertainties in the principles guiding sovereign debt workouts. The petition was to review a decision of the U.S. Courts of Appeals affirming district court orders of 7 December 2011 for full payout to holdouts of Argentina’s 2005 and 2010 debt restructurings. The decision affirms ambiguity of at least five key aspects of sovereign debt restructuring: What equitable distribution or pari passu means, what rateable payments are, the relevance of collective action clauses (CACs), the seniority in distribution of the International Monetary Fund (IMF) and the role of payment agents in dispute cases. Noting that the relevant U.S. court maintains that there are very limited broader implications of its ruling amid the extraordinary circumstances of Argentina, the decision is deemed here to have major adverse repercussions on the incentives for participating in sovereign debt restructurings. This risks unduly inflating the costs of sovereign default.[...]

Internationalisation of currencies, capital account opening and the SDR basket

China Society for Finance and Banking, Hangzhou, 17 May 2014

Ladies and Gentlemen,

My remarks will focus on the SDR basket to reflect on the role it plays today and more importantly could play. The internationalisation of currencies, capital account opening and the SDR basket are naturally linked to one another. Capital account opening constitutes to some extent a necessary condition for currency internationalisation and major international currencies should normally be eligible as constituents of the SDR basket. Yet, one of the most salient features of the international economy is the fact that very few currencies have become truly international despite important and widespread capital account openings.[...]

What next for the IMF?

G20 Australia, Washington, D.C., 9 April 2014

The IMF was widely applauded for being the only entity capable of putting together at short notice a sizeable financial support package for Ukraine. It is indeed the very strength of the IMF. Yet, the IMF merely lends by borrowing money. The IMF moves international liquidity around but for all practical reasons cannot create international liquidity. Ukraine thus serves as a good reminder that the IMF remains highly constrained in supporting countries in distress. To remedy this sustainably the IMF should not principally look at its own resources to be able to offer more countries more financial support actual and contingent, as has been normally the case in the past, but rather based on one of its main purposes prioritise broadening the usability and convertibility of currencies in international financial transactions. This would address one of the key causes of emerging markets distress rather than the remedy.[...]

Middle income trap and international portfolio allocation

Austrian National Bank, Vienna, Workshop 18, 27-28 February 2014

The present note links the middle income trap to the EU convergence methodology and aims to offer by simple conjecture several discussion points on immediate and intermediate consequences of the middle income trap for portfolio investments in emerging markets. The note affirms prima facie evidence of the existence of the middle income trap between 1992 and 2012 highlighting differences between EU and emerging markets economies. Nominal and real convergence patterns are reviewed showing significant differences in the duration of nominal and real convergence cycles. Fixed income appears to offer attractive investment opportunities amid short convergence cycles. The long duration of real convergence cycles seems to indicate that emerging markets stock market outperformance may remain elusive over normal investment horizons. The relationship between portfolio flows and economic growth may establish self-fulfilling expectations for generating conditions for the middle income trap.[...]

Countries’ economic vulnerabilities (update)

22 October 2013

The recent IMF World Economic Outlook (WEO) seems to affirm the notion that the international economy has become more fragile. The vulnerability indicator on the basis of the revised October 2013 data compared with the April 2013 data shows that the composition of the 20 most vulnerable countries remains broadly unchanged while economic fundamentals on average have slightly deteriorated with some exceptions. India has replaced the UK as the most vulnerable country and Argentina is now among the 20 most vulnerable countries while Poland dropped out (Chart 1). Italy, Ireland, Canada and Brazil show some notable increases in vulnerability.[...]

IMF economic forecasts

14 October 2013

The International Monetary Fund’s (IMF) economic forecast is a serious matter. It is the most authoritative of economic projections. The IMF also gives policy advice on the basis of those projections. No institution employs more resources and a greater number of highly qualified economists—a gross budget of US$1.1 billion and 2061 professional and managerial staff—to follow countries’ economic developments in detail. It seems therefore safe to assume that the IMF should know best. Yet, the IMF has recently been exceedingly optimistic or pessimistic in its economic projections and more importantly appears to exhibit important projection biases.[...]

Dollar-based system is inherently unstable

Financial Times, 2 October 2013

The international monetary system does not work as intended. An international economy relying predominantly on one currency is inherently unstable. This is amply demonstrated by the recent turbulence in foreign [...].

Public financial corporations: Investment performance valuation and the exchange rate

20 September 2013

The recent exchange rate jitters serve as an important reminder that exchange rates matter for investment performance attribution and consequently exhibit important wealth implications. This is of particular significance to government entities that perform international investment functions given the importance for government finance sustainability. Public financial corporations (PFCs), of which stabilisation funds and sovereign wealth funds constitute important subsets, generally aim to provide support for government finances through international financial investments. Investment performance of PFCs therefore constitutes a critical component of governments’ fiscal policies. Different practices co-exist internationally of performance valuations of PFCs in particular with regard to the exchange rate.[...]

The IMF must quit the Troika to survive

Financial Times, 17 April 2013

There are many victims of the eurozone crisis but one loser is seldom mentioned: the IMF has suffered considerable collateral damage. It has been dragged along in an unprecedented set-up [...].

Conference: Adjusting the World to the new Realities of the International Financial System

Asian Development Bank Institute, Tokyo, 12 October 2012

The conference focused on the likely permanent effects of the Eurozone crisis discussing the consequences for international financial cooperation and pending institutional deepening in the Eurozone. The Eurozone made significant advances in establishing a financial safety net with the European Stability Mechanism (ESM) but at the same time raising concerns about the relationship between regional and multilateral financial cooperation possibly undermining international economic integration. Increasing reliance on regional financial safety nets contrasts with earlier considerable opposition to establish an Asian Monetary Fund (AMF) during the Asian crisis.[...]

Central bank reserves composition: Swiss effect

30 September 2012

The latest IMF survey on the currency composition of central bank foreign exchange reserves for Q2 2012 seems to affirm the effect of significant reserve accumulation by the Swiss National Bank (SNB). 1 SNB reserve accumulation represented significantly more than total reserve  accumulation  during  Q2  2012; during the last 12 months and 6 months, SNB reserve increases represented about one third of total accumulated foreign exchange reserves. [...]

40 years after the end of the dollar standard

27 September 2012

The upcoming 2012 IMF Annual Meetings are unlikely to produce much excitement. Even though persistent talks about currency wars and renewed fears of protectionism may cause severe disruptions to international trade and investments and are normally the sorts of issues that raise alarm bells with policy makers. Exactly 40 years ago at the 1972 IMF Annual Meetings, then U.S. treasury secretary George Shultz did shock the international community with a bold plan to reform the international monetary system and end the special role of the dollar as a reserve currency.[...]

Republican gold

3 September 2012

The recently aired proposal by the Republican Party to establish a Gold Commission to assess a return of the U.S. to the gold standard may seem weird—and it is—but does serve as a most useful reminder that current monetary and exchange rate policy arrangements are indeed increasingly perceived as deeply dissatisfactory. Unprecedented monetary expansion, the blurring divisions between monetary and fiscal policies, persistent large global imbalances suggest considerable scope for policy improvements. It also recalls that monetary policy autonomy is not a birthright and that we may enter a renewed period of decreasing central bank independence. However, at probably no point in recent economic history would a  return  to  the  gold standard appear more far-fetched and policies more unsupportive. Sadly rather than looking forward a debate about gold is strictly backward. [...]

Euro vision: Less than clear

Euro50 Group and Reinventing Bretton Woods Committee, Florence, 3-4 July 2012

I participated in the Reinventing Bretton Woods Committee/Euro50 Group meeting in Florence, Italy on 3-4 July “The Eurozone of yesterday, today and tomorrow.” The meeting brought together the strongest minds from academia and policy circles on Eurozone issues. My main takeaway of the proceedings is the utter disarray of what went wrong and should or could be done to stabilize the Eurozone. This appears all the more remarkable as we are in the fifth year of the global financial and economic crisis. The conclusion must be then that if a gathering of top technocrats cannot reach agreement on steps towards a resolution it seems inconceivable policy makers can. [...]

Next IMF Managing Director

19 May 2011

The IMF needs a new boss. Dominique Strauss-Kahn resigned as IMF Managing Director amid his pending indictment on criminal charges. Any new MD needs to be apolitical, provide credible leadership to ensure the IMF remains influential yet be seen as impartial, deal with governance and reputational concerns of the institution and be visionary and effective in enforcing its man- date especially also in a post-crisis environment. [...]

2010 SDR basket review

16 November 2010

The IMF is working on a new SDR basket to take effect on January 1, 2011 with a decision on the new basket probably around mid- November. There are rumours that a revised SDR basket may comprise emerging markets currencies for the first time again since 1980. This would provide a strong signal that emerging markets currencies are on the rise and need to be taken seriously. It would also be illustrative of what the IMF aims to achieve with the SDRs. Following the recent promotion of SDRs through the large allocation of August 2009 and more importantly interest in the role of SDRs voiced by key emerging markets notably China and Russia, SDRs seem back from the wilderness. [...]

"Currency wars"

29 September 2010

Brazilian finance minister Mantega’s warning on September 27 of a global currency war is only another indication that exchange rates are seriously out of whack. The foreign exchange market intervention by the ministry of finance of Japan on September 15 earlier hinted that exchange rates have moved to the top of policy makers’ concerns but could also be interpreted as an act of desperation or frustration that there is no common position on exchange rates.[...]

Trade redirection

20 September 2010

Emerging markets are set to continue to grow significantly faster than advanced economies. This rests in part on increasing reliance on domestic consumption. It reflects above all growing exports to other fast growing emerging markets. The increasing progression towards inter-emerging markets international trade is naturally a reflection of the increasing economic weight of emerging markets in the international economy. Yet, it could be the key driver of and basis for sustained higher overall economic growth. [...]

Eurodollar jitters and emerging markets

11 August 2010

The most important price of the international economy has become increasingly jittery. The dollar/euro exchange rate volatility has reached its highest level since the final collapse of Bretton Woods of fixed exchange rates. Previous episodes of heightened eurodollar volatility have coincided with or an- nounced a major turning point in the eurodollar exchange rate. The importance of eurodollar suggests that there is sub- stantial uncertainty at the core of the international economy including but not limited to growth, fiscal policy and monetary policies. Its significance for the exchange market also suggests that it may risk contaminating other currency crosses. [...]

The case for reserve currency competition

Central Banking Journal, May 2010

In January 2010, the French president, Nicolas Sarkozy, said: “We need a new Bretton Woods, we cannot put finance and the economy back in order if we let the disorder of currencies persist.” He is right. The international monetary system needs change. His call follows earlier proposals by the Chinese and Russian authorities to foster international currency diversification. Why is change needed? [...]

Is QE dollar supportive?

28 February 2010

Some emerging markets policy makers and others have been protesting repeatedly that the U.S. Federal Reserve’s policy of quantitative easing (QE)—or credit easing—causes a weaker dollar and channels unwanted hot money flows into emerging markets. Actually, the opposite may be true. [...]

South-south investments

8 February 2010

Emerging markets are increasingly seeking investments in other emerging markets. The latest IMF portfolio investment data (CPIS) show that emerging markets continue to allocate an increasing proportion of their cross-border portfolio investments to other emerging markets. This contrasts with persistent sluggish portfolio investments in emerging markets by advanced economies. The asymmetry in allocation behaviour seems to reveal significant differences in views about the international economy and where it is heading, namely emerging markets seem increasingly confident about themselves. [...]

"Putting money where the G20's mouth is?"

11 November 2009

The steady depreciation of the dollar has fuelled renewed doubts about the dollar’s status as the dominant reserve currency. Mean- while, central banks have continued to purchase U.S. treasury secu- rities in droves. While they may no longer have full confidence in the dollar as the dominant anchor of the international monetary system, their net purchases appear to signal otherwise. [...]

Case for multiple reserve currencies

9 September 2009

The debate about the future of the international monetary system is taking shape. It has been driven in large part by increasing concerns about the U.S. dollar as a credible anchor for the international economy. It also emerged amid mounting dissatisfaction that the current international monetary system is prone to instability and potential collapse. Consensus now seems to have formed on moving towards adopting a multi-reserve currency system. This would potentially have widespread implications for the international economy and be the clearest sign that the status quo centered around the U.S. dollar is bound for change. [...]

Rise and fall of reserve currencies

26 August 2009

Reserve currencies move around more than meets the eye. The fall of the British pound and coincident rise of the dollar during the interwar and immediate post-war period is often portrayed as the only historic precedent of a change in international currency hegemony. Yet, the rises of the German mark and Japanese yen during the1970s and 1980s suggest that central banks are willing to undertake significant adjustments to their reserve portfolios. [...]

What role can the SDR play today?

15 May 2009

The IMF’s Special Drawing Right (SDR) is seeing an unexpected revival. Only in 2006, the Managing Director of the IMF concluded that there was not the necessary support from IMF member countries to seek issuance of SDRs, reflective of what had been a steady decline in the relevance of the SDR since the 1980s. [...]

Need for a new international monetary system?

28 April 2009

The global financial crisis has caused significant interest and exchange rate volatility. Both can be deemed failures to manage global liquidity. This risks causing commercial and trade disruptions, lead to competitive devaluations and fuel protectionism thus undermining prospects of a sustained recovery. Many commentators have attributed those market dislocations to a failure of the international monetary system, the set of rules that govern cross-border monetary transactions. [...]

Central Banking Journal, February 2009

One of the most puzzling aspects of the present global crisis is the fact that despite the vast accumulation of central bank reserves, mostly denominated in dollars, the international economy had been subject to a severe and sudden shortage of dollar liquidity. The increasing share of the official sector in US Treasury securities has raised repeated concerns – in particular with regard to its effect on interest rates, the dollar and valuation of central banks’ balance sheets.


Near zero U.S. Treasury yields

14 January 2009

The current global financial crisis brought short-dated U.S. treasury securities yields down to close to zero. Current U.S. Federal Reserve policy suggests that yields are going to stay low. This poses a dilemma for most investors but in particular for central banks that have remained disproportionately exposed to U.S. Treasury securities. As the financial crisis has undoubtedly shifted priorities from real returns to nominal capital preservation, most investors will be excused for not making money for some time. [...]

Fear of intervening

16 November 2008

One of the most puzzling phenomena of the current financial crisis is the fact that despite the very large accumulation of international reserves mostly denominated in dollars, the international economy has suffered a severe shortage of dollar liquidity. The unexpected acute dollar shortage has led to significant downward pressure on many currencies. Such sudden dollar shortages can normally be accommodated by selling international reserves. Yet, central banks have seemingly not been able to fully mobilise their reserve assets. [...]

U.S. Federal Reserve swap lines

10 November 2008

The U.S. Federal Reserves has extended swap lines to several central banks including to Brazil, Singapore and Korea. The Fed swap network has been in place for decades but its revival has been the clearest indication yet that the Fed is concerned about global dollar liquidity and its potentially disruptive effect for the global financial system. [...]

Central banks and emerging markets liquidity

27 July 2008

Central banks have traditionally attached a high priority to market liquidity for the investment of their foreign exchange reserves. This is due in part to criteria governing the definition of central bank reserves. While many central banks have tiered their reserves to allow differential allocation criteria and investment horizons, liquidity considerations have remained important. Very large central banks contemplating building sizeable portfolios in emerging markets assets, generally in excess of US$10 billion, are concerned that they would have to overly compromise on liquidity and that significant allocations may cause unwanted price movements. [...]

Foreign reserves carry costs

5 March 2008

Holding international reserves can be quite costly. The financial implication of holding reserves of course only represents one aspect of reserve holding and many central banks would argue that the benefits far outweigh the costs. However, reserves affect central banks’ profit and loss account and as such do have an immediate incidence on the financial soundness of central banks and as such on the effectiveness of central banks. [...]