BRICS Countries Prepare for Financial Crisis
Brazil, Russia, India, China, and South Africa, otherwise known as the BRICS countries discussed the possibility a few weeks ago of setting up a foreign-exchange reserve pool and a currency-swap arrangement in case a financial crisis breaks out in the West.
The BRICS countries decided to come together three years ago, because they were tired of being pushed around by the West, especially the U.S.
BRICS represent over 40% of the world’s population and 20% of the world’s gross domestic product (GDP). However, they are growing their portion of world GDP faster than the West, which means that, in just a few short years, the BRICS countries are going to represent a lot more than 20% of the world’s GDP.
Considering their growth rates and their prominence now in the world, the BRICS countries have grown up; they are not the little brothers the U.S. and the rest of the world can just push around: they are pushing back.
Earlier this year, the pushback came in the form of studying the proposal of the creation of a BRICS countries’ development bank that would offer an alternative to the U.S.-dominated World Bank.
Of course, should such a bank be created, it would need to be denominated in a reserve currency outside of the U.S. dollar and the euro, so that loans could be issued in that reserve currency to developing countries around the world and within the BRICS countries themselves.
Since the financial crisis in Europe continues to escalate, the BRICS countries decided they do not want to get caught—like they did during the Lehman crisis—without liquidity in their banking system, which will significantly hurt their economies.
They understand that as long as they are tied to the U.S. dollar and the euro, that illiquidity risk exists. The proposed foreign-exchange pool and currency swap agreements would be in the currencies of the BRICS countries themselves, outside of the use of the U.S. dollar and the euro. It would mean that, should a financial crisis occur, these countries would be capable of handling it themselves.
The fact that the BRICS countries are considering this before their next summit in six months from now shows how are worried they are about the potential of another financial crisis blowing up in the West relatively soon, with Europe lighting the match.
The other issue this raises is the fact that the U.S. dollar and the euro will hold less and less prominence going forward. The BRICS countries within this decade could reduce the use of these currencies to almost nothing, questioning the role of the U.S. dollar as the reserve currency.
China understands this development and is taking steps to make the renminbi a currency on par with the U.S. dollar and the euro. China clearly wants the renminbi to be the next reserve currency.
The BRICS countries are growing up and showing that they are not only capable of pushing back, but they are also ready to take over.