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February 03, 2009

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Barkley Rosser

Good point, Dani. Actually I have been wondering for some time how and why it was that SDRs had faded so much in the system as a whole. There was a time some decades ago when there was a non-trivial coterie of countries that pegged their currencies to the SDR, an obvious strategy for having a generally stable currency while not being too closely tied to anyone in particular. As it is, I do not think there is a single country today that does, although if there is, it is not more than about one or two, and it or they would probably be pretty small or obscure (not to insult any countries out there).

Mr. Nosuch

Call me stupid, but I didn't know what an SDR is, so if you're going to use an acroymn with no explanation, perhaps you could link to something for some background, like this:

http://www.imf.org/external/np/exr/facts/sdr.htm

joebhed

I could be wrong but my guess would be that we haven't actually abrogated our sovereignty to the BIS as of yet.
Coming soon, I am sure, in a bipartisan capitulation.

Slightly Optimistic

For interest, here is a research paper [2001] from the IMF on considerations relevant to an allocation of SDRs. http://imf.org/external/np/tre/2001/111601.pdf


Extracts from the conclusion:

This paper considers factors relevant to the assessment of whether there is a long-term global need to supplement existing reserve assets via a general allocation of SDRs . . Executive Directors may wish, inter alia, to touch on the following issues:

· Is the current slowdown in the world economy projected by WEO relevant to a finding of long-term global need? If not, under what circumstances and in what manner would growth in the world economy be relevant?

· Should the sizable projected increase in the demand for reserves during 2002–2006 be met through an SDR allocation or through some combination of external adjustment and borrowing?

JD

I'm all for adding massive liquidity into the global markets right now, but the long term impact of a massive allocation of SDRs could be costly. Correct me if I'm wrong, by allocation SDRs the IMF would be letting members borrow at the basket interest rate, currently 0.65%. Undoubtedly, this is significantly below the prevailing rate on most countries debt. What would be the impact on global rates and FX in the US, UK, Euro and Japan. If big enough, would there be a significant impact? I think SDRs might be a good way to provide stimulus, but not too sure of the costs.

Richard

On a more practical level, new SDR allocations are difficult to do. SDR allocations require formal approval by 85% of the IMF's voting power, including approval of the U.S. Congress (due to budgetary implications, I believe). New allocations are also given out with respect to quota, meaning the countries that most need additional financing at this point would benefit little from a SDR allocation. For example, if the 27 billion SDR allocation approved in principal in 1997 were to gain approval from the U.S. Congress (which would push it over the 85% barrier), Turkey would benefit by only 0.11 million SDR. Chump change.

Slightly Optimistic

It would be possible "for the IMF to engineer a vast new SDR allocation". Long term global need would be the justification.

A key problem though is that the Washington-based IMF is widely perceived as biased. A member of one of the world's biggest think tanks has reported that economic initiatitives, such as this, would not be possible until the United States is ready to stop using the IMF as an instrument of U.S. policy.
Its actions are less than even-handed was how the Fund's Internal Audit put it - quite a criticism of this key UN agency. Incidentally the Internal Audit section was created primarily because of complaints about the IMF from many quarters over the years.

The amount and distribution of the 'free' money would need to be well defended. But it's well worth pursuing.

Erik

Great Article Dani. I couldnt agree more with you. I have been wondering for a long time why sdr's faded as well.

Dave

As Richard points out, the problem is that a new SDR allocation would be based on IMF quotas, meaning the majority would go to developed countries that do not need it. Also, an SDR allocation would go to all IMF member countries, including countries under U.S. sanctions (such as Sudan and Zimbabwe). This means that the U.S. would be legally required to oppose the new SDR allocation. U.S. support is required, since a SDR allocation requires 85% of votes. Not a bad idea in theory, but it doesn't work in practice.

Slightly Optimistic

National politics is holding up so many matters - including SDR allocations and the regulation of the global economy.

From this week's 'Economist':

"There are those who think the fund’s [IMF's] mission should go beyond doling out money to helping prevent the build-up of global financial imbalances that led to this crisis.
"Discussing reforms to the IMF’s governance is on the agenda when the leaders of the Group of 20 meet in London on April 2nd. . . The big powers will be reluctant to give ground. . . But if they do not, the risk is that the developing world will be tempted to build even larger piles of reserves to insure itself against future crises." http://www.economist.com/finance/displaystory.cfm?story_id=13062102

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Very interesting, but can you please explain specifier about SDR and it's role in global economics. I know some issues from the economic field, but not in such level:) Thanks.

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National politics is holding up so many matters - including SDR allocations and the regulation of the global economy.

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Good point, Dani. Actually I have been wondering for some time how and why it was that SDRs had faded so much in the system as a whole. There was a time some decades ago when there was a non-trivial coterie of countries that pegged their currencies to the SDR, an obvious strategy for having a generally stable currency while not being too closely tied to anyone in particular. As it is, I do not think there is a single country today that does, although if there is, it is not more than about one or two, and it or they would probably be pretty small or obscure (not to insult any countries out there).

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