Reuters | 02 Jun 2010 | 03:59 AM ET
Some of the world’s richest central banks will not stop investing in the euro, supporting its reserve status, despite the sovereign debt crisis hammering the euro zone’s currency, government sources said.
Official sources in Brazil, India, Russia, Japan and South Korea told Reuters in separate interviews that their reserve currency portfolios were too big to change without affecting markets, and there were no alternatives in the near term to the liquidity of the euro and the U.S. dollar.
The four countries control nearly a quarter of the world’s $8.09 trillion in foreign exchange reserves.
Global market sensitivity to reserve management was highlighted last week after the Financial Times reported that China was reviewing its euro zone bond holdings because of growing concerns about gaping deficits in countries such as Greece and Portugal.
A Chinese government official told Reuters last week after the report that China’s goal of diversifying its reserves will not change.
The euro fell and stocks skidded, but later recouped some of their losses after China said on Thursday the report was groundless, adding that Europe will remain a major target of its enormous portfolio.
Like China, sources in other countries told Reuters they were not going to walk away from the euro.
“Even if the dollar or the euro is in trouble, is there anywhere else to invest? Not really. There needs to be a certain degree of liquidity,” said a senior Japanese government official, who asked not to be identified because of the political sensitivity of the issue.
“Currencies of countries with capital controls won’t work too. That leaves us with very few options,” the official said.
Japan’s $1.05 trillion in reserves is second only to China’s $2.45 trillion.
The comments suggest G20 finance ministers and central bankers meeting in South Korea on June 4-5 will try to bring a message of reassurance and stability to financial markets, after the euro fell 10 percent since April to four-year lows against the dollar.
Sources in Japan and India, though, were cautious about whether some European countries could do enough to prevent their deficits from becoming structural and if the crisis would spread to other countries.
“If Europe fails to make real efforts to alleviate market concerns, it’s no use begging reserve managers not to sell the euro,” another senior Japanese government official said.
Few of the large reserve managers reveal the composition of their portfolios, though many economists believe central banks have been slowly shifting some of their dollar holdings to euros to diversify risks.
Brazil’s central bank has 6-6.5 percent of its $249.5 billion official reserves in euros, a Brazilian government source said.
The euro zone sovereign debt crisis will not affect the make up of Brazil’s foreign reserves because the composition is based on the country’s private and public debt, said the source, who did not want to be identified in order to speak more freely.
“If we end that policy, we will become a speculator. We will be betting that a certain currency will strengthen or weaken. We don’t do that,” the source added. “We, therefore, will not touch the euro, yen, dollar mix.”
Some investors and economists have postulated that the dire outlook for Europe may push large central banks to look at other currencies, such as the Canadian dollar or Australian dollar.
However, all of the sources interviewed stressed their foreign reserves were kept to maintain macroeconomic and exchange rate stability and the euro still achieved that goal for now.
A source in Russia’s financial circles said reserve managers will not be able to move into Australian dollar-assets en masse because there just was not enough assets.
“That is not just true for the Australian dollar, it is true for other currencies, apart from euro and dollar — you cannot compare any other currency to them,” the source said.
Lee Eung-baek, director general of the Bank of Korea’s reserve investment office, said there was very limited room for using any other currency than the dollar and euro as a widely held store of value.
“There are few alternatives, even when looking on a long-term basis,” Lee said. “There can hardly be more than two or three reserve currencies.”
Yuan a Very Distant Prospect
The Bank of Korea has said 63 percent of its reserves were dollar dominated at the end of 2009.
China’s yuan, which is still not convertible for purely financial purposes, is seen as a very distant prospect and will unlikely be an established reserve currency within the next several decades, Lee added.
The Reserve Bank of India does not have significant euro exposure, though there have been some “adjustments” of the holdings to protect the portfolio, said an official with direct knowledge of India’s reserve management.
A senior Indian finance ministry source said it was too early to consider a change in the portfolio’s structure, though, since the euro itself was not fundamentally threatened.
“It’s not easy to shift out of currencies like the U.S. dollar, sterling and the euro overnight and unless this crisis spreads, I don’t think there is any need for that,” the source said.