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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.


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