foreign reserves

RyanPopa said:

I am very curious where do foreign reserves come from? You can find anything about them on the internet but I saw nowere explained where do the money come from.

There countris with high currency reserves are also exporters. But there are also countries like Romania that have seen gov deficites and year after year and curent account deficites but they have still record high reserves.

So I figured out, freign reserves are not made of money left over to the governmrnt(surplus).

Can anyone please explain their source.

Thanks alot,
Ryan

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Depth Trade said:

China is the only country that has a surplus. Every other country is at a massive deficit.
It's just paper and ink, how hard is it to print more?

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Depth Trade said:

China is the only country that has a surplus. Every other country is at a massive deficit.
It's just paper and ink, how hard is it to print more?

Click to expand...

RyanPopa said:

I am very curious where do foreign reserves come from? You can find anything about them on the internet but I saw nowere explained where do the money come from.

There countris with high currency reserves are also exporters. But there are also countries like Romania that have seen gov deficites and year after year and curent account deficites but they have still record high reserves.

So I figured out, freign reserves are not made of money left over to the governmrnt(surplus).

Can anyone please explain their source.

Thanks alot,
Ryan

Click to expand...

spreader_legger said:

As well as earning foreign exchange through exports, a country also earns money from foreign investors. So in a country such as Romania, a lot of reserves can come from such sources.

Foreign investors can also purchase government bonds particularly where interest rates are attractive. These are usually domestically denominated. However when these become unsustainably high, investors will worry about sustainability and increased risk of governments monetising its debt (turning the printing presses on) - this would reduce their potential returns - consequently the investors will sell their bonds denominated in Romanian Lei & buy back US dollars .... naturally the speculators will also be waiting in the sidelines and cause a run on the currency.

A depreciating currency will further speed up the process as investors quickly try to recoup their initial investments. The central bank can always step in to prop up its currency with reserves gained from activities (mentioned above), but this is by and large unsuccessful (note the Geroge Soros and Pound Sterling fiasco during the ERM crisis - not exactly pertinent to the situation described above, but you get the picture)

A current account deficit (which includes trade & investments) is seen to be problematic where economic growth is low and incapable of sustaining such future debt.
When this is coupled with government or fiscal deficit .... alarm bells should start ringing. Although such twin deficits can be sustainable over shorter periods of time, when these stretch for too long ... a currency crisis becomes inevitable.


Hope this helps

The greatest

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RyanPopa said:

Thanks fo your answare,
but still my question is unanswared. The Romanian National Bank holds record high reserves. Where did they have the money to but those reserves? if investors come and buy romanian treasuries and bonds, this does not account for romanian foreign reserves.

One thing I heared is that the money in reserves are actually the fractional reserve comercial banks need to keep with the central bank, loans received from IMF and not yet spent etc.

I also heared the explination that the national bank printed romanian lei, which they changed for other currencies. I don't think this is the source because of the inflation levels whick were bellow 8% for many years.

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