After the Group of Eight Finance Ministers wrapped up this weekend, we'll now get to the Group of Four or BRIC meeting this week on June 16th. This will be the the first summit meeting solely of Brazil, Russia, India, and China and they're gathering in Yekaterinburg, Russia. The topics will range from development of a new reserve currency to reforming the IMF to climate change. Clearly, these countries are becoming more assertive towards having a voice commensurate with their economic importance.
The BRIC countries own 42% of global currency reserves and 15% of the world economy. Since the beginning of the year, there have been numerous comments and discussions over the issue of the US dollar as the world's major reserve currency. The Chinese and the Russians appear to be the point people for driving the conversation as they are concerned over their massive holdings of not only US dollars, but also US debt. Specifically, they are concerned over the massive new issuance of US government debt and the quantitative easing program by the US Federal Reserve.
However, they face a paucity of choices when it comes to currencies and debt. One solution that has been put forward is the use of IMF SDR's and IMF SDR debt. The IMF has yet to make an official announcement of when they will issue bonds, but already Russia ($20 billion), Brazil ($20 billion), and China ($50 billion) have all stated they will buy the bonds. Russia said last week that they would shift out of US dollars/bonds to make the purchases. At the BRIC Summit, we may have India announce they will join the thrust to buy IMF debt as well.
All of this contributed to a negative bias to the US dollar and US government securities last week during the auctions. However, we also know that foreign direct purchases at these auctions remained strong and surprised to the upside given all this rhetoric. Today, we wake up to find that the Russian Finance Minister Alexei Kudrin said the dollar's role as the world's main reserve currency is unlikely to change in the near future. Perhaps, the largest holders of US debt/dollars woke up as well to the fact that they should tread lightly when it comes to making negative comments which depreciate what they own.
According to the US Treasury, the two largest holders of U.S. debt are China with $768 billion and Japan with $687 billion. Brazil owns $126.6 billion and Russia owns $138.4 billion. Without question, markets were nervous over the actions by these players during the last auction period by the US government. While it may seem that they are going to continue to buy US dollars and buy US debt, they are telling the world they are actively seeking alternatives.
There may not be many alternatives now, but over long enough time frames there will be. More importantly, the BRICs are telling the world they want to find ways out of investing in a country that is fiscally irresponsible and unlikely (healthcare) to change their spending habits any time soon. Eventually, they will find a way.