Wednesday, August 17, 2011

BIS - The external support of the dollar

Distinguishing global dollar reserves from official holdings in the United States

"Official holdings of US dollar reserves are partly invested outside the United States.
These offshore investments do not strictly speaking finance the US current account, but
do support the US dollar. Offshore holdings grow fast when intervention is large.

"The extent to which global official dollar reserves exceed official holdings of assets in the United States has come under increasing scrutiny in recent years. To be sure, official holders of dollars have invested a portion outside the United States for generations. But, as official intervention in the foreign exchange markets has reached unprecedented levels, so too has the sum of dollars placed offshore. What accounts for these holdings, and in what sense do they either finance US external deficits or support the dollar’s exchange rate? Drawing on national and BIS data, this special feature begins by presenting estimates of official dollars held offshore. After reviewing the debate over their role in financing US current account deficits, it then outlines the political and economic reasons for such holdings. Once crucial, yield differences have lost importance, while country risk and investment lags after heavy intervention have not...."

Finally, the feature argues that, while offshore placements do not strictly speaking finance the US current account deficit, they do support the dollar. The importance of such official support can be gauged by the US net dollar external financing requirement, including the purchase of foreign currency assets.

[Mrt: The picture at the page 2 says it all "Global official dollar reserves and official holdings of US assets"]


"...Country risk: high politics, litigation risk and infrastructure risk
For an investor, country risk refers to factors that might prevent the use of funds placed in a given jurisdiction. The term can be used in a narrow sense of high politics or a broader sense including the actions of courts and breakdowns of market functioning (Borio and Packer (2004)). Here we opt for a broad usage. High politics. Histories of the eurodollar market, the market for short-term dollar placements outside the United States, refer to the Soviet Union as an early holder of dollars in London (Einzig (1970, p 30), Kindleberger (1973, p 289)). Such placements could have been intended to hide dollar payments from the US authorities and permit dollars to be mobilised in the event of cold war tensions. The validity of efforts to avoid the US authorities’ reach became evident in 1979, when they froze Iranian assets...."

"...Litigation risk.
Another type of country risk that can lead to holding dollars offshore is litigation risk. In the absence of collective action clauses in sovereign bond documentation, there is a hold-out problem when a sovereign restructures its debt. Some US investors seem to specialise in buying distressed sovereign debt and holding out from participating in offered settlements. They then seek to be bought out at better prices by threatening to initiate, or actually initiating, litigation. In some cases, this can include attempts to seize assets of the defaulting sovereign. In response, putting sovereign assets beyond the reach of US or other creditors’ courts may be a logical counter-strategy..."

"Infrastructure risk.
As central banks have lengthened their investment portfolios, their overall access to liquidity has become more dependent on the proper functioning of securities markets, including repurchase markets. Thus, the interruption of trading of US Treasury securities in September 2001 owing to terrorist attacks reminded officials of the potential benefits of having diverse trading and custodial locations. While normal operations with Treasury securities were interrupted, central banks with dollar securities held in European depositories were still able to carry out normal operations with them, since the US payment system continued to operate and thus banks could make dollar payments."


No comments:

Post a Comment