Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
Precious Metals Sector: It’s 2013 All Over Again - 19th Sep 18
US Dollar Head & Shoulders Triggered. What's Next? - 19th Sep 18
Prepare for the Stock Market’s Volatility to Increase - 19th Sep 18
The Beginning of the End of the Dollar - 19th Sep 18
Land Rover Discovery Sport 'Approved Used' Bad Paint Job - Inchcape Chester - 19th Sep 18
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB
Silver's Relationship with Gold Reaching Historical Extremes - 16th Sep 18
Emerging Markets to Follow and Those to Avoid - 16th Sep 18
Investing - Look at the Facts to Find the Truth - 16th Sep 18
Gold Stocks Forced Capitulation - 15th Sep 18
Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - 15th Sep 18
Trading The Global Future - Bad Consequences - 15th Sep 18
Central Banks Have Gone Rogue, Putting Us All at Risk - 15th Sep 18
Gold Price Seasonal Trend Analysis - 14th Sep 18
Growing Number of Small Businesses Opening – and Closing – In the UK - 14th Sep 18
Gold Price Trend Analysis - Video - 14th Sep 18
Esports Is Exploding—Here’s 3 Best Stocks to Profit From - 13th Sep 18
The Four Steel Men Behind Trump’s Trade War - 13th Sep 18
How Trump Tariffs Could Double America’s Trade Losses - 13th Sep 18
Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - 13th Sep 18
Trading Cryptocurrencies: To Win, You Must Know Where You're Wrong - 13th Sep 18
Gold, Silver, and USD Index - Three Important “Nothings” - 13th Sep 18
Precious Metals Sector On a Long-term SELL Signal - 13th Sep 18
Does Gambling Regulation Work - A Case Study - 13th Sep 18
The Ritual Burial of the US Constitution - 12th Sep 18
Stock Market Final Probe Higher ... Then the PANIC! - 12th Sep 18
Gold Nuggets And Silver Bullets - 12th Sep 18
Bitcoin Trading - SEC Strikes Again - 12th Sep 18

Market Oracle FREE Newsletter

Trading Any Market

The Emerging Market Game Changer Is Here

Economics / Emerging Markets May 05, 2014 - 03:30 PM GMT

By: Money_Morning

Economics

Peter Krauth writes: The group of five nations - Brazil, Russia, India, China, and South Africa, otherwise known as the BRICS - is making some intriguing financial, economic, and political moves.

They're committing tens of billions of dollars each to organize their own versions of an IMF and World Bank.

Many observers thought the BRICS nations would encounter too many obstacles to collaborate effectively.


But after announcing such plans just over a year ago, the next BRICS summit in July is likely to see the official launch of these institutions.

The implications are huge for investors...

Here's What Created the Original IMF and World Bank

In the aftermath of World War II, the IMF and World Bank were offspring of Bretton Woods in 1944.

According to the IMF's own website, they are "twin intergovernmental pillars supporting the structure of the world's economic and financial order."

But what purpose do they serve, exactly?

The IMF was established as a "voluntary and cooperative institution" to help counteract what were seen as lingering financial problems that led to the 1930s Great Depression, including abrupt and unpredictable currency exchange valuations and general protectionism.

More recently since the financial crisis, the IMF has made subsidized loans to troubled members, both developed and developing.

The World Bank, formally known as the International Bank for Reconstruction and Development, was initially set up to lend to Western European economies ravaged by WWII. Later, the Bank focused increasingly on developing nations. Its main aim is "to promote economic and social progress in developing countries by helping to raise productivity so that their people may live a better and fuller life."

So why would the BRICS be interested in setting up its own institutions?

If you consider that these five nations represent 41% of the world population and 20% of global trade, their reasons become a whole lot clearer.

The Drivers Behind the "BRICS Bank"

Proponents of the new currency reserve pool (as an alternative to the IMF) make no bones about why they are forging ahead with their plans.

Russian Ambassador-at-Large Vadim Lukov has commented that "given that governance of the IMF is in the hands of western powers, there is little hope for assistance from the IMF in case of an emergency. That is why the currency reserve pool would come in very handy."

Lukov speaks from recent, sobering experience.

The financial crisis led to multiple bailouts in Western European nations in particular, including Portugal, Ireland, Italy, Spain, Greece, and Cyprus.

But more recently, when the U.S. Fed finally said it would cut its $85 billion monthly stimulus, the taper tantrum hit emerging markets especially hard.

Hot money fled the BRICS, slamming their capital markets and weighing heavily on their currencies.

The proposed currency reserve pool would act as an insurance policy against such routs. Members could call on the fund if they face a budget deficit or other financial difficulty. An injection of foreign currency would help a member deal with a shortfall.

Although plans were already in the works, the emerging markets sell-off provided extra impetus to reach these goals sooner. Lukov has recently indicated that both institutions would be operational by 2015.

In fact, the members have even determined how much each will contribute: China will commit $41 billion; Brazil, Russia, and India each $18 billion; and South Africa $5 billion. Respectively they are proportionate to the size of each nation's economy.

But the BRICS are not only interested in helping themselves exclusively.

Their new Development Bank would actually look to finance mainly external projects, as the five members are confident in their abilities to finance internal ventures.

As Ilya Prilepsky, member of the Economic Expert Group explained, "For example, it would be in BRICS' interest to give a loan to an African country for a hydropower development program, where BRICS countries could supply their equipment or act as the main contractor."

The Trend Is Picking Up Speed

Things are moving quickly. Russia is drafting the intergovernmental agreements to establish the bank, and Brazil has prepared a preliminary BRICS Development Bank charter.

BRICS members have agreed that the new institutions will be capitalized at $100 billion each. Each one of the countries wishes to host the bank's headquarters, whose final location has yet to be decided.

Not surprisingly, one point of contention is the currencies to be used in the reserve pool.

China has made noise about wanting to see the yuan being "floated globally" and perhaps eventually supplanting the U.S. dollar. So, the Chinese would certainly like to see the yuan play a leading role in these new BRICS institutions.

But a more diplomatic solution, one in which a BRICS currency consists of a basket of the members' currencies, may still win out.

Initially, at least, funding will be in U.S. dollars. But don't expect that to last.

As I've pointed out numerous times before, a number of nations, including the BRICS members, have been quietly establishing swap agreements allowing them to trade completely outside of the U.S. dollar.

Increased cooperation between the BRICS nations thanks to these new institutions will only serve to accelerate this trend.

We're Poised to Pounce

I'll be keeping a keen eye on the progress of a new BRICS currency reserve pool and BRICS Development Bank.

These institutions could well bring additional stability to emerging markets, quickly making their stock and even bond markets attractive investments as average investors start to benefit.

Their P/E multiples might rise faster than they otherwise would, compressing gains into fewer years.

I'm re-gauging my own radar on BRICS and will be delivering the best investment ideas as I see them arise.

It's time to look at the BRICS, and the global economic balance, with a totally new set of glasses.

Source : http://moneymorning.com/2014/05/05/the-emerging-market-game-changer-is-here/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules