Econ 101 for Lagarde

Econ 101 lesson for Lagarde about seizing or not seizing CBR assets:

Seizing CBR assets will have zero impact on markets, bond prices or G7 reserve currency status

* The move to immobilise CBR assets in 2022 saw little movement of other assets out of G7 jurisdictions, or impact on asset prices, and there is little difference in perception from investors between immobilisation and seizing as the FX reserves have been put beyond the reach of Russia. A move to seize CBR assets will not move markets, as its already in the price.

* There was no movement out of G7 reserve assets as there are few liquid alternatives to G7 currency and bonds for the $7 trillion in FX reserves of states such as China, India and the Gulf states. They don’t trust each other so won’t invest in each other’s assets.

* Any move by Saudi, China et al to move from G7 reserve currencies/bonds would be self defeating - it would crash bond prices, and the value of their own portfolios (they would suffer immediate huge mark to market losses), global interest rates would rise, expectations of global growth would drop resulting in lower oil and commodity prices (hurting Saudi Arabia, et al and risking their dollar pegs) and actually would then encourage a flight back to quality, back to the dollar, Euro, Sterling, bunds, et al, and hence actually would increase the reserve currency status of G7 assets, so would prove counterproductive. It is not going to happen as Saudi, China et al value global market stability above all else. Talk is cheap - action will cost Saudi, China, etc al dearly, and they are not going to risk losses to themselves to help Putin.

BUT

Not seizing CBR assets will have a negative impact on the reserve currency status of the Euro, and will increase borrowing costs for Europe because:

* Ukraine will remain underfunded, the war will extend for many years yet, risking a defeat for Ukraine, and huge (tens of millions) population outflows out of Ukraine to Europe, destabilising Europe socio-economically and politically - another gift to the far right;

* A long Ukraine war, or Ukrainian defeat, would increase European defence spending by 2-3% pa (€600-900bn), increasing budget deficits by similar amounts, and most of this will be funded thru increased borrowing - more supply means higher yields for Europe.

* Higher bond yields in Europe will mean lower growth, lower budget revenues and higher budget deficits and a vicious cycle of more borrowing, higher borrowing costs and lower growth.

* Higher defence spending will divert funds from social spending, which with lower real GDP growth will reduce social cohesion, increasing support for populist, far right parties.

* Europe’s failure to be able to fund Ukraine to win quickly will be a huge humiliation for Europe, and the lower growth, higher deficits and borrowing needs, and higher debts resulting will be a confidence blow to the whole of Europe, and a critical blow to the very credibility of the Euro, and whole European project.