RPT-Reserve shift murmurs prompt call for new standard
Friday, June 02, 2006 12:25:24 PM (GMT-06:00)
Provided by: Reuters News
By Mike Dolan, Economics Correspondent
WASHINGTON, June 2 (Reuters) - A shockwave of financial volatility in recent weeks has refocused the attention of many experts and policy-makers on how to ease risks to global economic stability from jittery, unpredictable markets.
As economists pore over the roots of the steep jump and then slide in commodity, equity and currency prices since mid-March, some are urging governments to seek ways to minimize hiccups in increasingly powerful and interdependent markets.
Or at least, they argue, policy-makers should look at what they can do to starve speculators of unnecessary uncertainty while they seek a gradual and orderly reduction of imbalances in world trade, investment and foreign currency reserves.
A principal source of such instability, according to Washington think-tank the Institute for International Economics, is speculation over how national central banks manage huge and growing stockpiles of hard currency reserves.
Talk of even small shifts in the denomination of more than $4 trillion worth of reserves worldwide, more than twice the totals of four years ago and held mostly in Asia, has aggravated currency markets for several years.
Rumblings about reserve managers from South Korea to Russia to oil-exporting Arab states shifting away from dollars, still estimated to be make up more than two-thirds of total world reserves, are expected to persist as currency hoards mount.
"Policy-makers acting in their own interests can do something constructive to reduce the volatility introduced into foreign exchange and financial markets by rumors of large-scale international foreign exchange diversification," authors Edwin Truman and Anna Wong wrote.
While arguing that actual reserve diversification has been modest to date, the IIE paper proposed the voluntary adoption by major foreign exchange reserve holders, in particular, of an "International Reserve Diversification Standard."
CURRENCIES HIT BY RESERVES SHIFTS
The proposed standard would consist of two elements -- routine public disclosure of the composition of national reserves, not just the dollar value of total reserves, and agreement to adjust gradually when adopting new benchmarks.
Truman, a former senior U.S. Treasury and Federal Reserve official, said the standard could then be incorporated into the International Monetary Fund's existing standards on economic data dissemination and encouraged by the fund as part of its new role as international currency policy policeman.
About 114 IMF members, with the notable exception of the world's top reserve holder China, provide the fund with voluntary. though confidential, detailed reserve breakdowns.
The IMF now reports the aggregate numbers quarterly. Of the $4.17 trillion reserve total recorded in the final quarter of 2005, it published the overall currency makeup of some $2.8 trillion worth with divulging national compositions.
Truman estimates only 23 countries make public disclosures at least annually. Even though 11 are industrial countries, Hong Kong is the only one if the top 10 reserve holders -- who represent a whopping $3 trillion of world totals -- to do so.
The biggest reserve holders, China and Japan, do not and they account collectively for more than $1.5 trillion.
But Truman argues that with more than three quarters of the top 25 reserve holders now subscribing to detailed IMF reserve reporting, it would not be a big leap to go one step further on a wider agreement on publicizing national breakdowns.
"The vast majority of the large holders of foreign exchange reserves are on weak ground if they argue that releasing detailed information on their international reserves would reveal to the market too much information," Truman said.
The response from currency market analysts was mixed.
Many economists said they welcomed any proposal that provided more data transparency but others said the more important part would be agreement on gradual adjustment.
"On aggregate reserves, we know quite a lot -- some two thirds of the total -- and it's the aggregate that matters," said Binky Chadha, head of global currency research at Deutsche Bank in New York. "The more important bit of any such accord would be that any benchmark shifts are done gradually."
"As the IMF makes progress in its role to help resolve global imbalances, an accord on how central banks diversify their reserves should be an integral part of that."
Likening any shift out of dollars to the subsequent gold sell-off after nations abandoned the gold standard for currency values in the 1970s, Merrill Lynch analysts wrote: "Reassurance that there will not be a wholesale exodus is crucial."
"The best policy for central banks is to coordinate the selldown. This took many years in the case of gold but provides a good blueprint for any potential agreement on dollar sales."
But others disagree with the premise that greater national transparency would reduce market volatility.
Stephen Jen, chief currency economist at Morgan Stanley, said the paper makes too much of market disturbance already caused by such uncertainty. And he said more transparent, more frequent reporting may lead markets to overinterpret sometimes unrelated valuation shifts and portfolio adjustments."
"I'm skeptical. It's quite easy to spook the market with what is just some technical position adjustment. Perfect transparency of what is sometimes pretty sophisticated reserve management could cause even bigger disruptions," Jen said.
|
