the cases of mexico and chile where approaches to controlling foreign reserve accumulation have been adopted. these recent measures in chile and mexico to reduce foreign reserve holdings and to limit foreign exchange growth suggest that in some latin american countries the cost of holding additional foreign reserves may be exceeding the benefits. mexico, for example has put in place a policy to limit the growth of foreign exchange reserves by selling foreign currency according to a pre - determined formula. impact on other economies of holding surplus reserves the argument against countries holding too large a stock of reserves has another dimension. it is argued that struggling economies with high levels of foreign exchange reserves are really financing the development of other large economies by holding their government securities. this argument has not been sufficiently persuasive as to stop reserve accumulation, simply because most developing countries generally do not find themselves in a position where they hold such excessive stocks of reserves. even in botswana, a diamond rich country, where reserves are equivalent to over 3 years of imports, it is debatable whether this is excessive given how rapidly fortunes can change. the greatest risk to the holding country of holding excessive reserves is depreciation of the currency in which the reserves are held. where large reserves are held then the impact of the risk of depreciation of the currency is greater. by buying other hard currencies one can hedge against depreciation, since the depreciation of one hard currency is often matched by appreciation of others. without getting too deeply into currency diversification issues, this makes the point that countries can hold large stocks of reserves and yet reduce their exposures through currency diversification. g7 countries are beginning to argue that the counterpart to the asian bloc ’ s current account surpluses and acquisition of dollar reserves – which has been large current account deficits in the united states – could, in due course, cause investors to start to worry about the us ’ ability to repay. this, it is suggested, could then contribute to potential instability of the international financial system. however, the international system is already taking corrective measures. data already show that the share of us dollars in the official holding of global foreign exchange reserves has declined from 71 % in 1999 to 65. 9 % in 2004, mostly reflected in a shift to the euro. reserves and their impact on government spending it is sometimes argued that high levels of foreign exchange reserves allow the borrowing country to be less circumspect in assuming debt where they are a good credit risk, as financing is always available. there

a centrally planned economy like china is not a politically correct economy. nor, today, is venezuela. such countries see themselves as needing to avoid placing themselves in a position where they are forced to change their regimes. this comment is not in any way intended to be judgmental about any regime, but it is interesting to note that it was not until indonesia came close to running out of foreign exchange reserves in the mid nineties that it was forced to change its regime from the family - run government system which had been in place for several decades. they had to privatise a number of family businesses, many of which were owned by the government in power. while this is not to condone their system, it is quite likely, that had they not come close to running out of foreign exchange reserves, they would have been able to continue with that system of government for many years. there is evidence from the case of china that substantially high levels of foreign exchange reserves add political clout. robert pringle in reporting on the growth of china ’ s reserves, notes that its economic dynamism and vast foreign reserves meant that its views needed to be listened to more respectfully than had been the case in the past. he notes that china ’ s reserve accumulation has not only secured insurance against shocks but also the world ’ s respectful attention. however, though accumulation of reserves adds confidence, over - accumulation in a single currency can in itself bring vulnerability. it is argued that massive us payments deficits are beginning to undermine confidence in the dollar and for large dollar holders there may be a point beyond which there is over exposure to the dollar and therefore vulnerability can set in. this introduces issues of currency composition, portfolio management and duration, which need to be taken into account but are not intended to be the subject of this presentation, as that constitutes a different subject in itself. guaranteed security and foreign exchange reserves while reserves add to financial security, there is the political security which can result from where foreign exchange reserves are placed. in the bis, for example, access to foreign reserves is guaranteed. according to its post - war charter, foreign reserves placed with the bis cannot be impounded or frozen, as happened in the case of panama, several years ago. so, depending on one ’ s political vulnerability, it is not only important to have large reserves, but it is also important to be mindful of where they are held. capital account liberalization and reflows of foreign exchange reserves the level of foreign