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The currency swap deal

The fifth Brics summit in Durban has brought to fore inherent contradictions in the politic-economic alliance.

The five emerging markets consisting of more than one-third of the world population, however, made a generous attempt to seem business-wise as each of them inked deals worth billions of dollars among themselves. These deals ranged from helicopters and fighter jets to oil and gas deals, and even an understanding to work for environment-friendly industrial policies. The most outstanding achievement was the $30 billion currency swap deal signed between Brazil and China that would enable both the countries to trade in their local currencies regardless of global financial conditions.

The monetary arrangement is designed to safeguard against future global financial crises and is a masterstroke of politics against the monopoly of dollar in the international trading circles. China and the like, including the European Union and Japan, for long had hinted at expanding the basket of international currencies and allowing states to trade in their local fiat. To what extent can this yuan-reais amalgamation matter on the international scene is not so difficult to guess given its limitations to the tune of 30 billion dollars. But it could set a precedent wherein major emerging economies can sign similar deals, which could inevitably result in weakening the dollar’s indispensability. The greenback is already in a fix as recession worldwide has unnerved its clout to the core. How the US will react to such extra-regional pacts, especially at a time when Washington wants a trouble-free relationship with its southern neighbours and the world’s second largest economy remains a question mark for times to come.

Beijing, however, in its endeavour to push for a more international role for its currency has been trying to promote the yuan as an alternative to the US dollar, since China’s currency is not fully convertible to other currencies. It has been quite successful and that is evident from bilateral swap deals it has struck with Australia, worth up to $31 billion, and is in talks with the Bank of England to finance a three-year bilateral trade and investment programme. The fact that China made use of the Brics forum is meaningful, and it is hoped that similar deals are in the offing with India, Russia and South Africa, which could come to cement more than half of its international trade in its own denominator.