The precarious stability and certainties that the world had until 2019 are rapidly disappearing due to the coronavirus pandemic and the economic crisis , which is also questioning the preeminence of the United States Dollar as the global reserve currency .
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This is not the first time, of course, that the Dollar is challenged in the midst of a major disaster; however, it is expected that the trends that emerged after the 2008 financial crisis , such as the strengthening of the Yuan , the Euro and the digital currencies , will now accelerate given the dimension of the economic meltdown we are facing.
Just as an example, the United Nations Conference on Trade and Development ( UNCTAD ) is calling for a USD $2.5 trillion rescue package for developing countries, warning in a new analysis that the deteriorating global conditions, as well as the fiscal and foreign exchange constraints will result in a USD $2 trillion to USD $3 trillion financing gap over the next two years.
The report stresses that after the COVID-19 virus began spreading beyond China , developing countries as Mexico took an enormous hit in terms of capital outflows, growing bond spreads, currency depreciations , lost export earnings, falling commodity prices, and declining tourist revenues.
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In the face of the “looming financial tsunami ,” UNCTAD proposes a strategy that includes a USD $1 trillion liquidity injection for those being left behind through reallocating existing drawing rights at the International Monetary Fund ( IMF ); the cancellation of USD $1 trillion in debts owed by developing countries, and a USD $500 billion Marshall Plan for recovery funded from some of the missing official development assistance long promised yet not delivered by leading economies.
Is the current financial system able to meet this challenge?
It is worth recalling that a 2010 survey released by the UN Department of Economic and Social Affairs following the U.S. recession stated that “ the Dollar has proved not to be a stable store of value , which is a requisite for a stable reserve currency .” The report supported a proposal long advocated by the IMF to create a standardized international system for liquidity transfer.
Under this system, countries would no longer have to buy up foreign currencies , as China has long done with the Dollar . Rather, they would accumulate the right to claim foreign currencies , or special drawing rights ( SDRs ), rather than the currencies themselves.
The SDRs would be backed by a basket of currencies , which would make them less susceptible to volatility in any one currency. And because the value of a SDR is defined by the IMF , changes in the value of any one currency could be adjusted for.
This scenario also opens up a great opportunity for digital or cryptocurrencies , highlighted by the decision of the U.S. Federal Reserve in November to analyze the costs and benefits of developing a digital currency that would be directly available to business and households, despite its initial negative reaction to Facebook’s Libra and other projects from JPMorgan and Wells Fargo .
Long-term jeopardy
Just before this announcement, U.S. lawmakers wrote to Fed Chairman Jerome Powell , expressing their concern “that the primacy of the Dollar could be in long-term jeopardy from wide adoption of digital fiat currencies ,” adding that “it may become increasingly imperative that the Fed take up the project of developing a Dollar digital currency ,” considered by other members of Congress as a potential risk to monetary policy and financial regulations .
“I think we agree that Libra raises a lot of serious concerns, and those would include privacy , money laundering , consumer protection , and financial stability ," declared Powell.
However, other countries, regional blocs and corporations, from China to Great Britain , the European Union , and Sony , are also studying the benefits that cryptocurrencies would offer, aware that the world increasingly becomes digitised and that the own U.S. isolationist policies—not to mention its huge debt and the sanctions imposed on other nations—are undermining the greenback.
In an analysis of digital currencies planned by central banks obtained by EL UNIVERSAL English , Jonny Fry , CEO of TeamBlockchain Ltd in London , explained that the United States’ economic importance has to a great extent been based on the use and power of the Dollar , recalling that Great Britain’s Sterling held such status as the global reserve currency from 1815 to 1920. Before this, it was the French Franc in the Napoleonic period, preceded by the Dutch currency from 1640 to 1720.
“All these currencies ultimately gave way to a new currency and typically after 100 years. The Dollar has been the global reserve currency since 1920, i.e. 100 years—nothing lasts forever!,” Fry remarked.
He noted that Mark Carney , then-Governor of The Bank of England , pointed out at a Fed meeting last year that the days of the Dollar “are numbered.” Nevertheless, rather than being replaced by another fiat currency , such as the Chinese Renminbi ( Yuan ), a digital currency as Libra could be an alternative.
“The combination of heightened economic policy uncertainty, outright protectionism, and concerns that further, negative shocks could not be adequately offset because of limited policy space are exacerbating the disinflationary bias in the global economy ,” said Carney.
In the same vein, Larry Fink, CEO of Blackrock , the largest fund management company in the world, underscored “the U.S. risked undermining the Dollar reserve status and being the dominant currency would not last forever.”
As for China , Fry detailed that its digital currency under development will be able to be used by people who do not have a bank account, allowing them to have access to it via a digital wallet that can be used on citizens’ mobile phones. The cryptocurrency will not pay interest and it is thought that it is likely to be used as a form of payment in those countries where Beijing is building its Belt and Road Initiative ( BRI ).
In just the first half of 2019, trade along the 60 BRI countries was over USD $617 billion , an increase of 9.7% compared to 2018. “These figures give a feel for the size of the BRI and its potential impact for China , together with the nations the BRI runs through,” stressed Fry, noting that the infrastructure to power the use of this new digital currency is alleged to be being provided by Huawei and, using its vast telecom network, it is well placed to handle what could be huge amounts of data.
Using a central bank digital currency in the countries where China has invested USD $1 trillion into new infrastructure ought to mean that this currency will be widely used across Asia , Africa , the Middle East and Europe . Thus, he observed, Beijing “will have beaten not only the likes of Libra , yet other countries in creating and encouraging the mass adoption of digital currencies , thus further undermining the use of Dollar.”
Fry added that the two largest foreign holders of U.S. bonds, China and Japan , have been reducing the amount of U.S. debt they own. Though this is no surprise as interest rates rise, and the value of the bonds fall to reflect the increase in interest rates, it is concerning. Rising interest rates usually put pressure on equity markets as it becomes harder for organizations to service their debt payments.
Russia
has also been selling the U.S. Treasury bonds and accumulating gold reserves. In November, Russian President Vladimir Putin said that “the world will look for alternative payment systems, because the volatility of Dollar transactions makes many economies around the world want to find alternative reserve currencies , and create payment systems that are not dependent on the Dollar.”
To date, the eight members of the Shanghai Cooperation Organization ( SCO ), including China and Russia , decided last month during its summit in Moscow to conduct bilateral trade and investment and issue bonds in local and national currencies instead of dollars.
Russia
, as current head of the SCO , called for suggestions from all member states for trade and investment in local currencies. After a detailed review of these proposals, a system of mutual settlement of national currencies will be introduced for the member countries of the bloc, which includes Kazakhstan , Kyrgyzstan , Tajikistan , and Uzbekistan , covering three-fifths of the Eurasian continent and nearly half of the world population.
Editing by Sofía Danis
More by Gabriel Moyssen
