June 12, 2009 11:35
Brazil, Russia, India and China, sometimes lumped together as BRIC to represent fast-growing developing economies, are selling off their U.S. Treasury Bond holdings. Russia announced earlier this month it will sell U.S. Treasury Bonds, while China and Brazil have announced plans to cut the amount of U.S. Treasury Bonds in their foreign currency reserves and buy bonds issued by the International Monetary Fund instead.
The BRICs are also soliciting public support for a "super currency" capable of replacing what they see as the ailing U.S. dollar. The four countries account for 22 percent of the global economy, and their defection could deal a severe blow to the greenback.
If the BRICs sell their U.S. Treasury Bond holdings, the price will drop and yields rise, and that could prompt the central banks of other countries to start selling their holdings to avoid losses too. A sell-off on a grand scale could trigger a collapse in the value of the dollar, ending the appeal of both dollars and bonds as safe-haven assets.
The moves are a challenge to the power of the dollar in international financial markets. Goldman Sachs economist Alberto Ramos in an interview with Bloomberg News on Thursday said the decision by the BRICs to buy IMF bonds should not be seen simply as a desire to diversify their foreign currency portfolios but as a show of muscle.
The BRICs countries plan their first summit in the Russian town of Yekaterinburg on Tuesday, where their leaders will discuss the status of the global financial crisis and measures to reform international finance and trade. The so-called "super currency," which Russian President Dmitry Medvedev proposed during the G20 summit in London in April, is expected to be a major topic of discussion. Russia claims that a supranational super currency is needed to prevent another global economic crisis. China has proposed turning the IMF's special drawing rights (SDRs) into a globally-recognized super currency, and Brazil also supports the use of SDRs.
The BRICs have a total of US$1.711 trillion worth of Treasury Bonds, accounting for 33 percent of the total $3.27 trillion worth of American overseas debt. In the worst-case scenario, their sell-off could launch central banks around the world into a selling frenzy. This could lead to the collapse of the dollar following hyper-inflation as the depreciation of the U.S. currency causes raw materials prices to soar.
But Park Jong-kyu, chief economist at the Korea Institute of Finance, said the BRICs will not begin selling off their Treasury Bonds any time soon, since the collapse of the dollar would mean a steep decline in the value of their foreign currency reserves as well. Park predicted a prolonged tug of war between the BRICs and the U.S., which will try to prevent a sell-off.
According to the Bank of Korea, the foreign currency reserves of the BRICs countries amounts to $2.78 trillion.
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