The IMFs plan to deter key emerging economies from building up excess foreign exchange reserves, by creating a global currency pool, was dealt a blow yesterday by Brazil.
Brazilian central bank Governor Henrique Meirelles said that the Funds proposal would have no impact on the countrys reserves management.
Ahead of the June meeting of the G20 grouping when the proposal will be discussed, Meirelles said: It is better to self-insure even if there is a cost associated with that.
Meirelless intervention comes as Nicolás Eyzaguirre, head of the IMF Western Hemisphere Department, told Emerging Markets the Fund needs new capital to act as a global financial safety net.
But IMF fears that the crisis has hardened the resolve of countries to accumulate large-scale reserves were confirmed by Meirelles yesterday. It is because we had $200 billion of reserves that eventually everything [the dollar liquidity crunch] came back to normal [in Brazil], he said.
We are prepared to replace capital providers in the international financial system as we have the reserves [for] up to two years to self-insure Brazil if the currency or access to dollar liquidity comes under fire, he said.
Brazil has increased its accumulation of foreign exchange reserves since the September 2008 crisis broke, and holdings now stand at more than $200 billion.
Even Mexico, the IMFs key Latin American client, which on March 10 asked the IMF to renew a $48 billion line flexible credit line (FCL) an instrument dubbed as a possible precursor to an IMF central bank was cool on the proposal.
The countrys central bank governor Agustín Carstens said yesterday that beefing up the quota and representation of key emerging market economies should precede discussion on IMF capitalization.
But Eyzaguirre said: You cannot preach the need to rebalance the global economy and avoid the threat of global imbalances without boosting the IMFs status as a liquidity provider of last resort that offers countries insurance in the event of capital flight. This would disincentivize rapid foreign exchange accumulation that is financially costly and creates global imbalances, he said.
Accumulation of large-scale dollars allows the likes of Brazil and China act as self insurance against abrupt reversals of private capital from emerging markets during a crisis. The Funds hope is that a well-capitalized IMF could be a suitable alternative.
Negotiations on a capital increase of up to $80 billion for the IDB stalled in Cancun last night as Emerging Markets went to press. There is neither white nor black smoke to report, IDB president Alberto Moreno said on his way to a delegates banquet. We will be back working into the night.