Joe Barbieri
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Joe Barbieri in Joe the Investor,

Are the BRICS Countries Competing With the IMF For World Financing?

For many years, world finance has not really been thought of as a competitive business. If you wanted a loan and you were a government, you would go to the World Bank and the International Monetary Fund (IMF). Now, the BRICS countries (Brazil, Russia, India, China and South Africa) have announced that they want to start their own currency reserve. (1)(2) They are calling it a “currency reserve” but it will do some of the functions that a lender can do if it involves needing capital to defend a currency. If a currency gets under selling pressure, governments will buy back currency or bonds to create demand for their trading unit versus other trading units. Since they tend not to have cash on reserve, some sort of lending would come into play.

What does this really mean and what will be the effect on world finance? This is akin to creating a competitive environment where there was a monopoly before. If your government needs financing, it could choose between 2 sources of funding instead of only one. Assuming you have no predetermined allegiances to either institution, these choices will try to win your business over by making the terms better than the competition. This would also open the door for other alliances, making world finance a truly competitive marketplace. This would typically lower the cost of government lending, allow more flexibility in payment terms and allow alliances to be chosen rather than assumed or implied because “this is the only game in town”.

Any other decisions related to currency can now be negotiated with more than one party. Money has a lot of clout with institutions of any kind, so the idea of making access to currency competitive is a breakthrough of sorts. The effects will likely not be seen around the world for a while as the BRICS currency reserve gets started, but big changes start with ideas followed by small steps, gathering of volume and then the tipping point or critical mass at the higher levels. If this facility can bolster a nation currency reserves, it can be used in the future for other types of government loans.