Reserve Bank of Australia Governor Glenn Stevens said foreign-reserve-rich emerging nations are concerned about their U.S. and European debt and probably want to aid indebted developed countries through the International Monetary Fund.
“Large reserve holding countries are already getting uncomfortable with their degree of exposures to major Western governments,” Stevens said in the text of a speech today in Sydney. “Hence, any offers of assistance are likely to be made with a careful eye to risk minimization. This is likely to mean they will prefer to operate through international institutions, such as the IMF.”
Stevens spoke a day after Canada said there hasn’t been discussion among the Group of 20 economies on a specific plan to boost IMF lending and ease Europe’s debt crisis. IMF spokesman William Murray also denied a Nikkei report that the G-20 is considering a $600 billion lending program.
Stevens didn’t comment on Australian monetary policy and the outlook for the local economy in his prepared remarks for the inaugural Warren Hogan Memorial Lecture at the University of Sydney today.
The governor noted that reserves in the world amount to about 15 percent of global gross domestic product, up from 10 percent five years ago. China’s reserves are near 50 percent of its GDP and many other Asian countries have equivalent ratios around 30 percent or more, he said.
Stevens said that “large centers of high saving with portfolios that are overweight in foreign assets whose return is low and whose value is highly likely to go down, measured in the currencies of the holders, amounts to something of a problem.”
“To paraphrase the old line, if I owe you a few billion, I may have a problem,” he said. “If I owe you a trillion or two, you may have a problem every bit as big as mine.”
The RBA governor also said global regulators need to understand how and where investors are pursuing “easy money” to spot excesses and prevent the next financial crisis.
“The key thing in avoiding disastrous crises in the future is less the specifics of regulation or resolution -- as important as these are -- than having a clear understanding of the nature and extent of risk-taking behavior,” he said. “In what area of risk-taking are the profits large or expected to be large?”
Stevens said that, should policy makers be able to avoid a major crisis over the next year and implement planned regulations -- both of which he called “big ifs” -- the next financial crisis may not occur in the same financial institutions as last time.
“It is conceivable that the current trend towards more assertive and intrusive financial regulation -- which is occurring for very understandable reasons -- will end up going much further than contemplated at present,” Stevens said. “The potential for an outcome that eventually involves significant inflation is also obvious.”
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