World Bank warns Asian dollar reserves could trigger crisis

PARIS - Accumulation of dollar reserves by some Asian countries could spark a systemic foreign exchange crisis, the chief economist of the World Bank said in an interview to be published today.

Francois Bourguignon told the Les Echos newspaper it was too early to talk of a speculative bubble but that the United States had to cut its deficits to head off a crisis. The paper released the text of the interview ahead of publication.

"For the moment I would not speak of a speculative bubble but of the danger of a systemic crisis linked to the accumulation of foreign exchange reserves," Bourguignon told the paper.

"Some countries, particularly Asian ones, have no interest in the parities of major currencies being modified. As a result, they are financing the enormous American current account deficit.

"Today, the danger is that some dealers are starting to think they must change the rules of the game, play dollar depreciation and move towards the yen and the euro. That would confront us with a real systemic risk."

Cutting the US deficit was key, Bourguignon said. The World Bank foresaw an orderly adjustment with the United States announcing a progressive reduction in its budget deficit accompanied by interest rate rises.

"Too drastic a programme would plunge the United States into recession," he said.

Recent pronouncements by Alan Greenspan, chairman of the US Federal Reserve, suggested things were changing, he said, but "we are at the mercy of the nervousness of market dealers.

"Today, no catastrophe is anticipated in the coming six to nine months. So I am not yet totally pessimistic," Bourguignon added.

- REUTERS