Moves towards regional currency arrangements in Asia, Latin America and elsewhere could trigger a “chaotic” shift away from the dollar-based monetary system, Joseph Stiglitz, chair of a UN panel on global financial reform, has warned.
A shift away from the dollar system is inevitable after the financial crisis, Stiglitz told Emerging Markets in an interview.
But he said that the manner of that change could be complicated by competing currency initiatives, such as Asia’s so-called Chiang Mai Initiative of regional currency swaps and moves to internationalize China’s currency, the renminbi.
“The question is not whether we’re moving on from the dollar reserve system. We are – and we will get there either with or without the US”, Stiglitz said. “The question is are we going to move in a rather chaotic way to a set of regional swap arrangements, semi-currencies or multiple reserve currencies, or will we do it in a more organized way.”
Stiglitz’s warning came as Asian governments agreed yesterday to multilateralize the Chiang Mai Initiative.
The US dollar “won’t remain the reserve currency”, Stiglitz said. The former World Bank chief economist and Nobel prize winner noted that “confidence in the dollar is fraying” amid fears over the inflationary impact of a rapidly expanding Federal Reserve balance sheet. “[The dollar] is not a good store of value.”
In a report to the UN earlier this year, Stiglitz advocated using the IMF’s Special Drawing Rights (SDRs) as a new global reserve currency – an idea subsequently taken up by Russia and China. Stiglitz slammed last month’s G20 summit in London for failing to raise the issue. The UN will discuss Stiglitz’s broader findings at a global summit in June to assess the impact of the world economic crisis on development.
China’s central bank governor Zhou Xiaochuan sparked a debate in late March about the dollar’s status as the world’s main unit of exchange by suggesting the SDR be more widely used as part of a sweeping overhaul of the global monetary system.
But Asian policy-makers remain sharply divided on the proposal. India’s central bank governor Duvvuri Subbarao told Emerging Markets: “Unless the SDR increases in significant volume and has a market for it, I cannot see the SDR replacing the dollar.”
For a currency to take on reserve status, it must “first inspire confidence and trust, and second it has to be available in sufficient quantity to meet the payment needs” – criteria the SDR as yet fails to meet, he said.
Tarisa Watanagase, Thailand’s central bank chief, said that despite heightened fears of a massive dollar depreciation, the greenback would remain “a safe haven”.
“Confidence is still there because of the size of the market – its breadth and depth,” she said. “We have to admit that.” She added that although the RMB is “a potential candidate” for a reserve currency because of its “sheer size”, its inconvertibility remains the key constraint. “I don’t think it will happen,” she said.
Japan’s former point man on currency policy, Eisuke Sakakibara, said: “I don’t see any realistic possibility of SDRs or another currency to take over the role of the US dollar. Despite the crisis, the US is still a superpower.”
ADB president Haruhiko Kuroda noted that unless banks start accepting SDR-denominated deposits “the SDR could not be a widely used as an international currency or reserve instrument”. He said that Stiglitz’s proposal is “attractive” and “technically and economically possible”, but its implementation would depend on wide support from IMF member countries.