Re: [OPE] New reserve currency?

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In solidarity, Jerry

UN panel backs calls for end of dollar as global reserve currency

By Harvey Morris at the United Nations

Published: March 27 2009 02:00 | Last updated: March 27 2009 02:00

World leaders should give urgent attention to reaching consensus on creating a global reserve system that would replace the US dollar as the main international currency, the United Nations General Assembly was told yesterday.

The recommendation, by an advisory committee set up by the 192-member world body, followed China's proposal this week for an extension of the use of special drawing rights (SDRs) created by the International Monetary Fund and the eventual replacement of the dollar as the world's reserve currency.

Russia weighed into the growing debate by proposing a conference of government representatives and experts aimed at drafting international agreements on a new global monetary and financial architecture.

Andrei Denisov, Russia's deputy foreign minister, told a General Assembly meeting on the global financial crisis: "The current situation requires new collective solutions agreed at the international level."

Speaking to the RIA news agency, he added: "This proposal is aimed at a practical realisation of the idea about a new global accounting unit or a new global currency. It is a question which should be discussed to create a -consensus."

Joseph Stiglitz, the Nobel-prizewinning US economist who chairs the UN advisory committee, said reform of the global reserve system was long overdue. In the context of the present financial crisis, the dollar-based system meant that poor countries were lending to rich countries at virtually zero interest rates rather than using reserves to stimulate their own economies.

He told the General Assembly that financial instability had obliged developing countries to accumulate dollar reserves to protect against a rainy day. The consequence, however, was to tie up trillions of dollars that could be spent on helping them combat the worst effects of the financial crisis.

"The current system contributes to global instability, it contributes to the insufficiency of global aggregate demand," Mr Stiglitz said.

The dollar-based reserve system was bad for the world's economies and bad for the US. "The global reserve system has been fraying for a long time. It's hard to be a strong reserve currency when that currency is highly volatile," he said. There was great uncertainty because of the size of the Federal Reserve balance sheet and of US debt.

The UN report, representing its interim findings ahead of next week's G20 summit of leading and emerging nations in London and a heads of government meeting at the UN in June, says the new global system could be based on greatly expanded SDRs. The new system would "counteract the risk of a rapid fall in the value of the major reserve currency, gutting hard-earned reserve funds".

The report dismissed as equally unstable the alternative of a multi-currency reserve system towards which it said the world appeared to be moving.

Tim Geithner, US Treasury secretary, said on Wednesday he was open to expanding the use of the IMF's special drawing rights. Investors initially interpreted his remarks as an endorsement of China's proposal and the dollar fell before Mr Geithner clarified his remarks, saying he expected the dollar to remain the world's dominant reserve currency.

Barack Obama, the US president, this week called the dollar "extraordinarily strong" because investors were confident in the ability of the US to lead a worldwide recovery.

Rejecting calls for a new global currency, he said: "There is a great deal of -confidence that ultimately, although we are going through a rough patch, the prospects for the world -economy are very, very strong."

Copyright The Financial Times Limited 2009

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Received on Fri Mar 27 09:12:23 2009