In a speech given in Washington last night, Dominique Strauss-Kahn warned a lack of action to reform the international monetary system could sow the seeds for the next crisis and he called for renewed international cooperation for a better and stronger global recovery.
In particular, Strauss-Khan warned, while some may argue that the dollar served well as a reserve during the crisis, that an overreliance on it will ultimately be detrimental to full recovery and could lead to future crisis.
“Global imbalances are back, and issues that worried us before the crisis – large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves – are on the front burner once again.
“Reforms to the international monetary system could both bolster the recovery and strengthen the system’s ability to prevent future crises.”
Strauss-Khan suggested that, over time, there may be scope for a greater role for the IMF’s international reserve assets, the Special Drawing Right (SDR), to contribute to a more stable monetary system.
He argued, while a number of obstacles remain in the way, increasing the global stock of SDRs, the nominal value of which are derived from a basket of currencies including the Japanese yen, US dollar, British pound and euros, could help alleviate global imbalances by reducing the need for an excessive build-up of reserves.
He added that issuing SDR-denominated bonds could create a potentially new class of reserve assets, and that use of the SDR to price global trade and denominate financial assets would provide a buffer from exchange rate volatility.