Thursday, June 13, 2013


Edited by Tsvetan Manchev, Doctor in Economics

Foreign reserves3 include gold and/or other central bank assets which come entirely within its control and are easy to trade on international financial markets. According to the Fifth Edition of the IMF’s Balance of Payments Manual “reserve assets consist of those external assets that are readily available to and controlled by monetary authorities for direct financing of payments imbalances, for indirectly regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes”.4
The IMF description is clear on the role and significance of reserves, and on the motives for owning and using them. Except in special and closely defined circumstances, the monetary authorities in the definition are national governments and central banks. Depending on organizational and legal arrangements, the government and central bank may either manage their portions of foreign reserves independently, or have them managed by one or the other on behalf of the nation. World practice tends to favor central banks as managers of these reserves and, as the law stands, Bulgaria is no exception. Hence our definition treats foreign reserves as a central bank province.
Another important element of the proposed BNB definition, in line with the IMF one, is the necessity to hold reserves in foreign exchange and foreign financial assets which are easy to trade on international financial markets. Ease of trading implies that assets and currencies are quoted at all times, enabling transaction immediacy with no significant departures from current market quotes.

Easily traded instruments (assets and currency) broadly fulfill these criteria:
• the country 5 which issues “international currency” has to have a stable financial and political system imparting confidence in the currency;
• the issuing country’s financial markets have to be well developed and integrated into world financial markets;
• the currency must be recognized as internationally stable and suitable for use as a means of storing value;
• the issuing country must have a large share of world trade, or the currency must be widely used as a means of exchange in international transactions.

3 We use ‘foreign reserves’ or ‘reserves’ for brevity instead of ‘international reserves’.
4 Balance of Payments Manual, Fifth Edition, the International Monetary Fund, 1993, p. 97.


"...Financial history offers as few grounds for simple assessments of foreign reserve management as it does examples of more successful central banks. Interventions in support of an exchange rate or of other monetary policies appear appropriate only in the short term. Pragmatic thinking puts them alongside other mon- etary policy levers, with success dependent on their combined use. Alan Greenspan*12 states the general principle that foreign reserves should be kept in currencies seen as stronger than the local one. The proof by default is that the Fed has used gold as a foreign reserve for a lengthy period. Whenever the dollar has weakened, the Fed has boosted the shares of yen and marks (euro)..."

*12 Greenspan, A. Currency Reserves and Debt: Remarks before The World Bank Conference on Recent Trends in Reserves Management, Washington, D.C., April 1999.


Chapter Five, from pg.80
BNB Policy in Managing Monetary Gold
[Mrt: with respect to gold and credit risk aspect]


"...The second instrument, deposits denominated in physical gold, is
deposited (as if it were cash) with highly-rated private commercial
banks abroad for fixed terms, yielding interest on maturity dates. The
deposits are usually negotiated on the London interbank bullion mar-
ket, with delivery and settlement in Bank of England vaults. At the end
of 2005, 609,000ozt were thus invested: 51 per cent of the Bank’s
monetary gold. During substantial market fluctuations such as that
since October 2007, operations with gold deposits are temporarily
suspended and the metal is stored at the Bank of England due to
tighter credit risk constraints....
...The third instrument, into which some 7 per cent of BNB gold was
invested between 2003 and 2007, are debt securities denominated in
gold. These are issued by international financial institutions and some
highly-rated private foreign banks. Essentially, they entail an uncon-
ditional obligation to pay the principal in physical gold at maturity*94,
plus fixed coupons payable semiannually. For the gold-denominated
bonds into which the BNB has invested, the coupon has been pay-
able in US dollars. Periodic coupon payments yield a modest interest
income (usually under 1 per cent) against the assumption of a mod-
est credit risk exposure. Interest on gold deposits is traditionally very
low and reflects expectations of market price evolution and gold fu-
tures prices. The BNB assumes a credit risk exposure to the securi-
ties’ issuers who are typically supranational financial institutions with
the highest investment grade rating..."

*94 According to London Good Delivery Standard.


File name: pub_np_internmonreserves_en-4.pdf

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