ST. PETERSBURG, Russia: The BRICS group of emerging economies will contribute $100bn to a fighting fund to steady currency markets destabilised by an expected pullback of US monetary stimulus, Russian President Vladimir Putin said yesterday.
China, holder of the world’s largest foreign exchange reserves, will contribute the bulk of the currency pool. But it will be much smaller than the $240bn originally envisaged and officials said it would not be functional for some time yet.
Cheap dollars that fueled a boom in Brazil, Russia, India, China and South Africa over the past decade have turned tail since Ben Bernanke, Chairman of the Federal Reserve, warned in May of a ‘taper’ in the US bond-buying scheme.
“The initiative to establish a BRICS currency reserve pool is at its final stage,” Putin said in opening remarks to a meeting of BRICS leaders during a Group of 20 summit in Russia’s second city, St. Petersburg. “Its capital volume has been agreed at $100bn.”
At the meeting of BRICS leaders, China committed $41bn; Brazil, India and Russia $18bn each; and South Africa $5bn.
Earlier both Chinese Vice Finance Minister Zhu Guangyao and Russian Deputy Finance Minister Sergei Storchak said details still needed to be worked out, suggesting that — beyond the announcement — much more work would need to be done on the reserve facility.
“We have asked not to create unnecessary expectations,” Storchak said. “Politically, the countries are ready, but technically they are not.”
A joint BRICS development bank, with capital of up to $50bn, is also still months away from realisation amid disagreements over burden sharing and where it should be based.
Last year’s original initiative foresaw creating a pool of central bank funds available to BRICS facing balance of payments difficulties. There was also a push to create an IMF-style credit line to insure against external shocks.
The Fed is widely expected this month to take its first steps to reduce extraordinary monetary stimulus, with potentially huge implications for a global financial system where the US dollar accounts for 62 percent of reserve assets.
A Reuters survey of over 50 foreign exchange strategists put the probability of joint intervention by emerging-nation central banks within the next few weeks at just 15 percent. Only three said the likelihood was greater than 50 percent.
The emerging nation facing the biggest financial shock, India, received scant sympathy from China and Russia as both called for policy action to tackle external deficits. “We see the temporary difficulties of some BRICS countries, mainly as difficulties in terms of international balance of payments,” said Zhu.
India said last Friday that it was liaising with other emerging countries on a plan to coordinate intervention in offshore currency markets. But it got little support and it is not clear if the currency reserve pool will be in place soon enough to help. Reuters