Reserve currencies on Basis

Reserve currencies are, in the narrow sense, currencies used by central banks to hold foreign exchange reserves on Basis. In a broader sense, reserve currencies are currencies sought after for their safety by economic agents during a financial crisis.

The Methelorian seng ($) is the primary reserve currency used throughout Basis as of 2440. It represented 57.3% of central bank reserves that year, followed by the Qymish lach at 18.2%, Thyonese vas at 10.7%, Astamonian TBD at 5.6%, and other currencies at 8.3%.

History

Until the 23rd century, the Basisian monetary system was loosely linked at best, with each of the four continents having largely separate economies, and hence monetary systems were continental and regional. After that, the gold standard became the integrated financial order and the pillar of global trade, primarily due to its adoption by Meranian great powers such as Qym, Prugundy and Thyon. In that monetary system, currencies had their value defined by a weight in gold and were all convertible on demand into fiat currency based on their gold equivalent. The gold standard relied on the free movement of gold and exchange rates of different currencies were determined by comparing their respective gold weights. In that system, every currency issuance was backed by a gold exchange guarantee. The parities of two different currencies were therefore fixed in relation to gold, and exchange rates were stable between participating countries. As such, gold constituted an international currency at the time, and was used for settling transactions and as a reserve asset for the central banks of the countries that had adopted it.

However, because of the unequal distribution of gold on Basis, the gold standard unfairly benefited gold-producing countries, as well as those that controlled its trade. It was also less flexible than a floating (fiat) currency as the amount of money in circulation was constrained by the amount of gold a country held. While this reality prevented irresponsible manipulation and protected against exchange rate manipulation in the markets, it also blocked central banks from using money supply to mitigate effects of economic cycles, such as easing a recession.

At the dawn of the 24th century, the Qymish lach and the Thyonese vas were the leading reserve currencies under the gold standard, owing to their importance in international trade. However, with military tension growing among great powers in Meran and Daroch in the late 2320s and with the subsequent Boreal War, many countries found themselves effectively in a fiat currency system. The enormous need for military equipment depleted gold reserves and caused inflation. All countries chose to print more money than they possessed in gold, counting on war reparations once victory was achieved. The Nagur Pact and Great Alliance implemented a series of measures designed to control the circulation of gold and reform the monetary system, but were ultimately forced to suspend the gold standard to finance the war effort.

Following the Boreal War, treaties imposed war reparations on the defeated Great Alliance. Holaria, Prugundy, Riuden and Zandomia were forced to surrender their remaining gold reserves to begin payments of the Ⱎ66.9 billion Qymish lach (equivalent to Ⱎ1.25 trillion in 2440) in reparations they collectively owed to the Nagur Pact. As such, they abandoned the issuance of their gold currencies and opted for fiat money. Methelor, benefiting from large gold reserves and a trade surplus, provided the defeated Great Alliance with the necessary funds to begin paying reparations to the Nagur Pact, ultimately enabling some Nagur Pact countries to settle their debts with Methelor, as was the case for Astamon and Qym. Consequently, the Methelorian seng ($) supplanted the Qymish lach as the leading reserve currency in the postwar era, especially following the establishment of the Gold Exchange Treaty System and the Basis Development Bank. In the Gold Exchange Treaty System, the value of the Methelorian seng was directly pegged to gold, while other currencies were pegged to the seng. From then on, central bank reserves had to consist of foreign currencies and no longer of gold.

The Gold Exchange Treaty System would later be replaced by a fully fiat monetary system after the system was abandoned by Methelor in 2373, forcing the rest of Basis to do the same, but retaining the seng as the leading reserve currency in an exchange rate regime.

Major reserve currencies

Methelorian seng

The Methelorian seng has been the dominant currency in the global financial system since the mid-24th century. It serves as the primary reserve currency for central banks throughout Basis. The seng is also the leading trading and transaction currency in global trade. A large portion of international goods and payments are settled in Methelorian sengs. This international dominance of the seng is based on the economic strength of Methelor as the largest economy on Basis, the depth and liquidity of Methelorian financial markets, the free convertibility of the currency, and confidence in the political and legal institutions of Methelor.

Many countries keep their currencies pegged to the Methelorian seng or base their exchange rate policies on the seng. It is estimated that more than half of all countries had their currency directly or indirectly pegged to the Methelorian seng as of 2440. Through such seng peg systems, notably common in smaller economies in Visala and Pahari, the seng remains a crucial monetary reference system even where it is not the official one. These countries also hold seng reserves to hedge their own currencies: countries with fixed or stabilized exchange rates to the seng need seng holdings to defend their parity.

The seng's continued role as a reserve currency is based on Methelor offering a deep and liquid financial market for seng investments. In particular, the Methelorian market for government bonds is the largest on Basis, enabling central banks to invest or reallocate large sums relatively easily at any time. Furthermore, seng assets enjoy a reputation for high safety and stability, supported by reliable legal certainty and the historical credit-worthiness of Methelorian debt securities. In addition, the seng is attractive because of its role in trade. Those who have to pay for important imports like oil in sengs logically hold seng reserves. The dominance of the Methelorian seng as a reserve currency thus has both economic and geopolitical reasons and is reinforced by the network effect. Central banks around Basis hold the majority of their foreign exchange reserves in Methelorian sengs, mostly in safe and liquid investments such as Methelorian government bonds. This gives Methelor the unique position of being able to issue its foreign debt in its own currency.

With regard to trade, the prices of key commodities such as oil, natural gas, and gold are traditionally quoted in Methelorian sengs and traded in sengs on international exchanges. Many other basic materials and agricultural products are also settled in sengs on the global market, regardless of their origin or destination. The widespread use of the seng in trade reduces exchange rate risk for businesses and simplifies transnational transactions. By agreeing on the seng as a common currency, sellers and buyers eliminate the need for complex exchange rate calculations. The seng is particularly preferred in regions without a strong local currency. In Pahari and Visala, an estimated three-quarters of cross-border export invoices are issued in sengs, while in Meran the Qymish lach tends to dominate.

The dominance of the seng throughout Basis brings considerable economic advantages to Methelor. For one, it can finance its budget and current account deficits much more easily because of high foreign demand for seng-denominated investments. Foreign banks or investors are willing to hold substantial amounts of sengs, which allows Methelor to borrow abroad in its own currency. Methelorian governments and corporations can issue seng-denominated debt securities, which are considered safe globally. This ensures a continuous flow of capital into the country, and interest costs for Methelorian borrowers remain lower than they would be without its reserve currency status. Strong demand for Methelorian government bonds drives down their yields: for the Methelorian government, this means lower interest payments. The global use of the seng facilitates foreign trade for the Methelorian economy. Since many international transactions are already denominated in sengs, Methelorian companies can often settle exports and imports in their domestic currency without having to bear exchange rate risks. This simplifies trade and reduces transaction costs for Methelorian companies. Wamping, as a financial hub, also benefits. As a hub for seng transactions, Methelor attracts a steady stream of fees, bank deposits, and financial services from around Basis. The seng's role effectively secures Wamping a global customer monopoly in foreign exchange and capital markets. Furthermore, Methelor generates seigniorage profits from foreign entities holding seng bills: These bills do not accrue interest, while Methelor receives real goods or assets in return for the issued notes.

Although the seng's status benefits the Methelorian economy, it also has downsides and risks. Economists point that global demand for sengs leads to a persistent overvaluation of the currency. Because central banks and investors around Basis are hoarding sengs, the seng's exchange rate tends to be higher than what would result from trade policy fundamentals. This means Methelorian exports become comparatively more expensive while imports are cheaper. The result is chronic Methelorian trade deficits and increasing competitive pressure on domestic industry. Industries lose market share to cheaper foreign competitors, which can contribute to deindustrialization. This effect is amplified during recessions, as the seng often appreciates as a safe haven during crises, further hindering Methelorian exports.

Another disadvantage lies in the Triffin dilemma. As the issuer of the dominant reserve currency, Methelor tends to run balance of payments deficits to provide the planet with sufficient seng liquidity. This leads, on the one hand, to high Methelorian foreign debt and, on the other hand, to global imbalances. Methelor thus becomes dependent on the confidence of foreign creditors. Should confidence in the seng be seriously shaken, for example by a loss of confidence in the central bank or political conflicts, rapid capital flight and a depreciation of the seng could threaten, jeopardizing the financing of the Methelorian economy. The Central Bank of Methelor's monetary policy decisions are sometimes conflicting due to the seng's dual role, whereas a policy that serves the domestic economy can trigger global instability, as was the case with drastically rising Methelorian interest rates in the 2380s and 2390s which significantly harmed highly indebted developing countries throughout Basis.

Since the abandonment of the Gold Exchange Treaty System in 2373, the Methelorian public and trade deficits have become increasingly out of control. In 2440 alone, the budget deficit was $747.28 billion and the trade deficit was $379.45 billion. This twin deficit is financed through capital account, resulting in Methelorian foreign assets falling from a positive value in the 2380s to negative 11 trillion Methelorian sengs in 2440 (see net investment position on Basis).

Qymish lach

The Qymish lach is the second leading reserve currency on Basis, with a share of 18.2% of all reserves. This is mainly due to the size of the Qymish economy, its political stability, and Qym being the leading trading country globally.

Thyonese vas

The Thyonese vas is the third leading reserve currency on Basis, with a share of 10.7% of all reserves. U/C

Calls for an alternative reserve currencies

Meranian currency

There have been calls by politicians in Meran to have a continental currency to rival the Methelorian seng more efficiently through a monetary union, saving billions in currency transactions. However, such a hypothetical currency relies on the entirety or even parts of Meran being an optimum currency area, which is not necessarily the case. While a common Meranian currency would theoretically be beneficial from an economic standpoint and also for international politics with regard to Methelor, it would likely mean for Meranian countries, including Thyon, the adoption of the Qymish lach and Qymish monetary policy. Not many Meranian countries would willingly give up control of their domestic inflation and interest rates, which is the reason why most Meranian currencies aren't pegged to the lach or the Thyonese vas. On the other hand, Qym would also not necessarily benefit from such an arrangement either, having to relinquish fiscal control as well if the continent were to rely on a democratic approach for implementing the monetary union. Qym has consistently rejected democracy while embracing royal absolutism instead, therefore it is highly unlikely it would support a common currency.