BRIC nations buy IMF debt to join big leagues

Bloomberg

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Brazil, Russia, India and China’s plan to shift some foreign reserves into International Monetary Fund, or IMF, bonds may be more a signal of their growing financial clout than a lack of demand for U.S. assets.

"They’re saying they are part of the big leagues," Alberto Ramos, an economist at Goldman Sachs Group, said in a telephone interview from New York. "They’re not buying IMF bonds to diversify reserves. They want to be seen as having a large voice" in global markets, he said.

Russia and Brazil announced plans Wednesday 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.

U.S. Treasuries declined Wednesday, 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.

"If this was the beginning of something much bigger, then the market would front-run that," said Dominic Konstam, head of interest-rate strategy at Credit Suisse Securities USA, in an interview. "It wouldn’t be in the interests of Russia or China to watch the value of their assets go down."

Climb in Treasury yields

The 10-year yield climbed to as high as 3.99 percent Wednesday from 3.86 percent, according to BGCantor Market Data. The yield has surged from 2.21 percent on Dec. 31 as the U.S. steps up debt sales to finance a record budget deficit and pull the economy out of the deepest recession since the 1930s. Treasuries slid Wednesday in part because the statement by Russia and Brazil was a "shock," said David Spegel, head of emerging-market strategy at ING Groep in New York.

China has 3.66 percent of votes in the IMF, Russia 2.69 percent, India 1.89 percent and Brazil 1.38 percent. The U.S. has a 16.77 percent.

"We are asking to increase the voice and representation of emerging economies," China’s He said at a June 9 briefing ahead of a BRIC summit next week in Russia.

Alexei Ulyukayev, first deputy chairman of Bank Rossii, said Russia would sell some of its $140 billion of Treasuries to make room for the purchase of the IMF bonds. Mantega said Brazil’s central bank would decide which assets to sell from its reserves portfolio for the transaction.

China’s State Administration of Foreign Exchange said last week that it’s "actively" considering buying as much as $50 billion of the IMF bonds.

India would be "perfectly capable of contributing" to the IMF’s bond program, Montek Singh Ahluwalia, deputy chairman of the nation’s Planning Commission, said in April. The nation may buy IMF bonds worth as much as $10 billion using part of its reserves, India’s Financial Express newspaper reported in April.

BRIC nations can’t pull out of the Treasury market because there "aren’t a lot of alternatives out there that are AAA rated," Spegel said. "With their reserve levels so high - $2 trillion from China - where are they going to put their money?"



IMFto decide

The IMF may consider late this month or in July the proposal to sell the notes, which would be the Fund’s first issue, IMF spokeswoman Conny Lotze said Thursday. The plan will likely determine other aspects regarding use of securities, such as whether they can be traded among countries much like U.S. Treasury bonds.

The debt will pay a yield similar to U.S. Treasuries and will be denominated in the fund’s basket of currencies, known as Special Drawing Rights, Mantega said. The IMF calculates the value of SDRs daily, with 44 percent weighted toward the dollar, 34 percent to the euro and the remainder split between the yen and the pound.