Miguel Fernández Ordóñez: Presentation of the 2009 Annual Report Testimony of Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, to the Parliamentary Committee on Economic and Financial Affairs, on the occasion of the presentation of the 2009 Annual Report, Madrid, 22 June 2010. *  *  *  Ladies and gentlemen, The presentation of the Banco de España Annual Report for 2009 – the reason behind my testimony today – has taken place at an exceptional time for both the Spanish economy and the Economic and Monetary Union. The economic and financial crisis spanning 2008 and 2009, from which most European countries had started to emerge in recent months, has given way to a crisis in the euro area which was triggered by a specific episode, namely the Greek fiscal crisis, but whose systemic implications are proving most severe. In particular, the Spanish economy, along with that of other countries, has been seriously affected by these tensions and it is still too early to know whether the measures adopted in Europe to safeguard EMU and those currently under discussion will be capable of fully dispelling the doubts that have emerged in recent months over the soundness of this institutional framework. The responsibility of national authorities in this respect is also crucial. In recent years the diagnosis by the Banco de España of the Spanish economy pointed to the presence of major imbalances, which had progressively built up in the long expansionary phase from the mid-1990s to 2007.
Fifth, the risk of default on the country’s sovereign debt must be viewed as negligible, to ensure both that the currency is a stable store of value and that continuous, deep liquid domestic markets will be available regardless of the economic circumstances. Sixth, the country must have a credible central bank that is insulated from political interference and committed to keeping inflation low and stable – a necessary condition for a reserve currency to be a reliable store of value. I think that the U.S. dollar satisfies these general criteria. That is why over 60 percent of foreign exchange reserve holdings are denominated in dollars – a share that has been quite stable in recent years. The dollar’s share has remained steady despite the presence of a number of currencies that broadly satisfy the attributes that I have just discussed. But should the U.S. be concerned if more countries satisfy the attributes needed to be successful reserve currencies? Would it be problematic for the United States if the U.S.  BIS central bankers’ speeches  1  dollar share of foreign exchange holdings slipped over time because of progress made elsewhere? I think the answer to both of these questions is “no.” It would seem positive to me if a decline in the U.S. market share reflected the following developments: a greater number of stable and effective central banks and fiscal authorities, more investors who are reassured about countries’ institutional arrangements and financial stability, and deeper and more liquid capital markets outside the United States.