New reserve currency possible, Lipsky says

Hurriyet Daily News with wires

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A top official of the International Monetary Fund, or IMF, said it’s possible to take the "revolutionary" step of creating a new global reserve currency to replace the U.S. dollar over time.

The IMF’s so-called special drawing rights could be used as the basis for a new currency, First Deputy Managing Director John Lipsky told a panel discussing reserve currencies at the St. Petersburg International Economic Forum Saturday.

"There are many, many attractions in the long run to such an outcome," Lipsky told a panel discussing reserve currencies at meeting. "But this is not a quick, short or easy decision," he said, adding that it would be "quite revolutionary."

The SDRs would have to be delinked from other currencies and issued by an international organization with equivalent authority to a central bank in order to become liquid enough to be used as a reserve, he said, according to Bloomberg.

As much as 70 percent of the world’s currency reserves are held in dollars, according to the IMF, leading to calls for nations to diversify their cashpiles to avoid excessive exposure to the U.S. economy as it quadruples its budget deficit in a bid to counter the worst recession since the Great Depression.

Dollar depreciates

The dollar fell on June 3 to its lowest level in 2009 against the euro on concern that the ballooning deficit would sap demand for Treasuries among foreign investors and central banks.

"The largest debtor is very unlikely to dominate any currency arrangement today," said Ousmene Mandeng, head of Ashmore Investment Management’s public sector investment advisory.

Russian President Dmitry Medvedev on Friday questioned the dollar’s future and said using a mix of regional currencies would make the world economy more stable. Russia has proposed regional reserve currencies, including the ruble, as part of a response to the global financial crisis. "It’s an oddity that on the one hand we have an increasingly multipolar international economy, an increasing commercial diversification, and on the other hand we have a unique concentration in terms of monetary transactions," Mandeng said. "That in itself creates a lot of instability."

Meanwhile, Russia’s finance minister pulled back on Russia's aspirations for the ruble to emerge as a regional reserve currency in the near future, saying Saturday it would likely first happen in China.

In a deviation from the bullish line of his government, Alexei Kudrin said the world could not simply create a new reserve currency by agreement, and there would need to be much greater integration of economic policies before this could happen.

"I don't think any new unions of currencies will appear any time soon," The Associated Press quoted him as saying. "The shortest way toward this would be for China to liberalize its economy and allow the convertibility of the yuan."

"This may take 10 years," he said. "But after this there will be a demand for this currency, and this will be the shortest way to create a new global reserve currency."

Economists have said Russia's ambitions appear unrealistic given the devastating effect the global crisis has had its economy and on the ruble, a currency that is closely linked to oil prices.

In another development, former Soviet leader Mikhail Gorbachev, writing in the Washington Post, called for a "global perestroika" in which the U.S. and the world replace a market-driven economic model with one that emphasizes "public needs and public goods" such as a clean environment, affordable housing and "sound" education and health systems.

The current system, driven by the pursuit of "super-profits" and "hyper-consumption," along with "unrestrained" use of resources, is "an illusion that benefited the very rich" and is "unsustainable," Gorbachev wrote in early edition of Saturday’s Post. "The current model ... needs replacing," he wrote. Countries should seek a better balance between the role of government and markets, Gorbachev wrote. He forecast that a new economic model will emerge that focuses on the public good by producing a cleaner environment, sounder infrastructure and public transportation, better education and health systems and affordable housing.

While serving as the general secretary of the Communist Party of the Soviet Union from 1985 to 1991, Gorbachev sought to modernize the economy under a movement labeled perestroika, the Russian term for "restructuring." The political and economic changes he sought to institute, including free elections and greater freedom of expression, eventually led to the breakup of the Soviet Union. Gorbachev, 78, won the Nobel Peace Prize in 1990. He now heads the Gorbachev Foundation in Moscow.