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
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
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.