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Another “BRIC” in the Wall

Posted by Larry Doyle on June 11, 2009 11:20 AM |

We have heard loud and clear from Chinese governmental officials about their concern over our growing fiscal deficit. Yesterday, Russia spoke out and announced their intention to diminish their holdings of U.S. Treasurys. Today, we see another BRIC (Brazil, Russia, India, China) nation announce intentions to increase holdings of IMF-issued debt at the expense of U.S. Treasurys. Bloomberg reports, BRICs Buy IMF Debt to Join Big Leagues:

Russia and Brazil announced plans yesterday to buy $20 billion of bonds from the IMF and diversify foreign-currency reserves. China will purchase $50 billion and India may announce similar funding, Brazil’s Finance Minister Guido Mantega said. The countries are seeking a stronger voice in international financial institutions such as the IMF, according to He Yafei, a vice foreign minister at China’s Ministry of Foreign Affairs.

Treasuries declined yesterday, pushing benchmark 10-year yields to the highest since October, after the government sold $19 billion of the securities and Russia said it may move out of U.S. debt to buy the IMF bonds. The so-called BRICs, an acronym coined by Goldman Chief Economist Jim O’Neill in 2001 for the biggest emerging markets, have combined reserves of $2.8 trillion and are among the largest holders of Treasuries.

While those in the administration and select economists will discount these maneuvers by these nations, I beg to differ. The U.S. is very dependent on foreign investors continuing to purchase our debt. If these lead nations move away even marginally, I believe that provides incentive for other smaller nations to do the same. Why?

Nations around the globe are in dire need of financing. A surefire way for smaller antions to curry favor with these BRIC nations is to follow their lead in purchasing IMF-debt versus U.S. Treasurys.

The mere perception that these BRIC nations are purchasing fewer U.S. Treasurys is powerful. Perception very often becomes a widespread reality.

LD

  • whaler

    How does the credit quality of the IMF issued debt compare to U S Treasurys?

  • Whaler,

    Perhaps this is more info than you may want/need on the IMF, but just in case you or other care, here is a wealth of info on the IMF,

    The Reader’s digest version,
    http://www.investopedia.com/articles/03/030703.asp

    The multi-volume
    http://www.imf.org/external/

    The IMF consists of 185 member countries. As such, I am fairly certain their debt is not formally rated but their funding is provided by their members on a pro rata basis. The U.S. is the largest contributor by far. That said, going into and coming out of the G-20, there is a definite shift in power with the BRIC countries gaining influence.

    Obama traded influence within the IMF for these countries for a commitment from them for fiscal stimulus within their countries.

  • TeakWoodKite

    LD , back when Wolfiwitz was sent packing there was great consternation among the other members as to who would be in the chairmanship.
    If I understand it correctly, the US has been the majority share holder and got its way 99 percent of the time. As the dollars are divested from the portfolios of member states, how does this effect quality of IMF as funding source?

    I get a feeling that the dollar will go the way of the British pound of the 1960 and 70’s. Where the pound was 2 to 1 against the dollar.

    You posted an article last year on the IMF. What was your imppresion on the events surrounding the sacking of Wolfie? It seems like he pissed off many people.

    I never understood how he got that gig after his involvement in Iraq.

  • I will admit that I am not an IMF scholar. I know that many countries have no interest in their support. Why? Draconian measures including currency devaluations.

    In fact, many believe it was the currency devaluations in the Far East which set the table for the tremendous surplus in that region from extraordinary levels of exports. That capital streamed into our country. The rest is history.

    • TeakWoodKite

      Thanks …food for thought..

  • Pingback: The Investor Rebellion » Russia to sell some of their U.S. Treasuries - “This is potentially quite negative for the dollar”()






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