The BRICS group of emerging economies will contribute $100 billion to a fighting fund to steady currency markets destabilized by an expected pullback of U.S. monetary stimulus, Russian President Vladimir Putin said on Thursday.
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 $240 billion 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 U.S. 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 $100 billion.”
At the meeting of BRICS leaders, China committed $41 billion; Brazil, India and Russia $18 billion each; and South Africa $5 billion.
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 told Reuters. “Politically, the countries are ready, but technically they are not.”
A joint BRICS development bank, with capital of up to $50 billion, is also still months away from realization 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 U.S. dollar accounts for 62 per cent 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 per cent. Only three said the likelihood was greater than 50 per cent.
Solidarity only goes so far
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.
“The policy options in response to such … difficulties include increasing interest rates or devaluing currencies.”
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.
Asked about the Indian statement, South African Finance Minister Pravin Gordhan told Reuters this week: “We don’t know what the proposal is … This is India’s initiative to resolve India’s issues.”
Nonetheless, Indian officials said they were counting on the strong support of the G20 to provide reassurance over the winding down of the Fed’s quantitative easing program as the U.S. economy picks up.
Arvind Mayaram, economic affairs secretary at India’s ministry of finance said: “I think there should be a very strong statement on the G20 having a consensus on the concern about the spillover effects.
“I think if a strong statement is made on these two points, it will have a major calming impact on the markets in the emerging economies,” he told reporters.
Storchak said the G20 communique’s wording on spillover effects would be the same as agreed by G20 ministers in July, when they said future changes to monetary policy should be “carefully calibrated and clearly communicated”.
A separate communique from the BRICS leaders on Thursday echoed those words verbatim.