Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Gold Bullhorns Quieted for a Day, at Least - 22nd Feb 19
US Auto Loans - Americans Missing Car Payments Is a Symptom of a Much Bigger Problem - 22nd Feb 19
Stock Traders Must Be Cautious Part III - 22nd Feb 19
Stock Traders Must Stay Optimistically Cautious II - 22nd Feb 19
Sheffield FlyPast Footage - "Mi Amigo" US Bomber Crash Memorial Endcliffe Park - 22nd Feb 19
Sheffield "Mi Amigo" Memorial Fly Past , BBC Crew Setting Up Stage for Breakfast TV Endcliffe Park - 21st Feb 19
Stocks Closer to Medium-Term Resistance Level - 21st Feb 19
The Stock Market’s Momentum is Extremely Strong. What’s Next for Stocks - 21st Feb 19
QE Forever: The Fed's Dramatic About-face - 21st Feb 19
Gold Technical Perspective – Why So Bullish? - 21st Feb 19
Sheffield "Mi Amigo" Memorial Fly Past at 8.45am on 22nd Feb 2019 - 20th Feb 19
Here’s The Real Reason You Stress About Money - 20th Feb 19
Five Online Marketing Predictions that will Matter in 2019 - 20th Feb 19
Has Gold Price Reached Upside Resistance Near $1340-1360? - 20th Feb 19
So Many Things are Not Confirming Stock Market Rally - 20th Feb 19
Forex Trading Management: The Importance of Being Prepared - 19th Feb 19
Gold Stocks are Following This Historical Template - 19th Feb 19
Here’s Why The Left’s New Economic Policies Are Just Stupid - 19th Feb 19
Should We Declare Emergency for Gold? - 19th Feb 19
Why Stock Traders Must Stay Optimistically Cautious Going Forward - 19th Feb 19
The Corporate Debt Bubble Is Strikingly Similar to the Subprime Mortgage Bubble - 18th Feb 19
Stacking The Next QE On Top Of A $4 Trillion Fed Floor - 18th Feb 19
Get ready for the Stock Market Breakout Pattern Setup II - 18th Feb 19
It's Blue Skies For The Stock Market As Far As The Eye Can See - 18th Feb 19
Stock Market Correction is Due - 18th Feb 19
Iran's Death Spiral -- 40 Years And Counting - 17 Feb 19
Venezuela's Opposition Is Playing With Fire - 17 Feb 19
Fed Chairman Deceives; Precious Metals Mine Supply Threatened - 17 Feb 19
After 8 Terrific Weeks for Stocks, What’s Next? - 16th Feb 19
My Favorite Real Estate Strategies: Rent to Live, Buy to Rent - 16th Feb 19
Schumer & Sanders Want One Thing: Your Money - 16th Feb 19
What Could Happen When the Stock Markets Correct Next - 16th Feb 19
Bitcoin Your Best Opportunity Outside of Stocks - 16th Feb 19
Olympus TG-5 Tough Camera Under SEA Water Test - 16th Feb 19
"Mi Amigo" Sheffield Bomber Crash Memorial Site Fly-past on 22nd February 2019 VR360 - 16th Feb 19
Plunging Inventories have Zinc Bulls Ready to Run - 15th Feb 19
Gold Stocks Mega Mergers Are Bad for Shareholders - 15th Feb 19
Retail Sales Crash! It’s 2008 All Over Again for Stock Market and Economy! - 15th Feb 19
Is Gold Market 2019 Like 2016? - 15th Feb 19
Virgin Media's Increasingly Unreliable Broadband Service - 15th Feb 19
2019 Starting to Shine But is it a Long Con for Stock Investors? - 15th Feb 19
Gold is on the Verge of a Bull-run and Here's Why - 15th Feb 19

Market Oracle FREE Newsletter

The Real Secret for Successful Trading

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

© 2005-2019 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