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Explaining IMF's Special Drawing Rights

IMG Auteur
Published : April 06th, 2009
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Last Friday, I reported that G20 leaders had agreed to a 250 billion SDR allocation.

 

(emphasis mine) [my comment]

 

"We have agreed to support a general SDR allocation which will inject $250bn (£170bn) into the world economy and increase global liquidity," it said. SDRs are Special Drawing Rights, a synthetic paper currency issued by the International Monetary Fund that has lain dormant for half a century.

In effect, the G20 leaders have activated the IMF's power to create money and begin global "quantitative easing". In doing so, they are putting a de facto world currency into play. It is outside the control of any sovereign body. Conspiracy theorists will love it.

[I will do a full entry explaining this "global quantitative easing" and SDRs later now]

 

IMF explains reports special drawing rights.

 

A Factsheet - February 2009
Special Drawing Rights (SDRs)

The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. SDRs are allocated to member countries in proportion to their IMF
quotas. The SDR also serves as the unit of account of the IMF and some other international organizations. Its value is based on a basket of key international currencies.

Why was the SDR created and what is it used for today?

The Special Drawing Right (SDR) was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in world foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets—
gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.

However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.

Today, the SDR has only limited use as a reserve asset, and its main function is to serve as the unit of account of the IMF and some other international organizations. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.

SDR valuation

The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies, today consisting of the euro
[34 percent], Japanese yen [11 percent], pound sterling [11 percent], and U.S. dollar [44 percent]. The U.S. dollar-value of the SDR is posted daily on the IMF's website. It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

The basket composition is reviewed every five years to ensure that it reflects the relative importance of currencies in the world's trading and financial systems. In the
most recent review in November 2005, the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies which were held by other members of the IMF. These changes became effective on January 1, 2006. The next review by the Executive Board will take place in late 2010.

The SDR interest rate

The
SDR interest rate provides the basis for calculating the interest charged to members on regular (non-concessional) IMF loans, the interest paid and charged to members on their SDR holdings, and the interest paid to members on a portion of their quota subscriptions. The SDR interest rate is determined weekly and is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies.

SDR allocations

Under its
Articles of Agreement, the IMF may allocate SDRs to members in proportion to their IMF quotas [This is what the G20 agreed to do]. Such an allocation provides each member with a costless asset on which interest is neither earned nor paid. However, if a member's SDR holdings rise above its allocation, it earns interest on the excess; conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall. The Articles of Agreement also allow for cancellations of SDRs, but this provision has never been used. The IMF cannot allocate SDRs to itself.

 

China Daily provides a graphic of global financial institutions.

 



[250 billion of special drawing rights will be distributed according to the quotas shown in the graphic above.]

 

DealBreaker.com questions whether SPRs are a redistribution scam.

 

Special Scamming Rights?
Posted by Equity Private, Apr 03, 2009, 12:30pm

An "irate taxpayer and emerging markets hedge fund manager" points out that, as currently proposed, the Special Drawing Rights option to the U.S. Dollar as a reserve currency has all the texture and stickiness of a redistribution scam [and he is mostly right]. He points out:

Basically, it is money-printing on a global scale, with the fruits being shared among all members of the IMF, including some of the world's most noxious regimes. Of course, the SDR consists only of USD, GBP, EUR, and JPY, so you can see whose citizens bear the cost and their currencies get diluted as the crap countries cash in their shiny, new SDRs. For example, international financial scofflaw Argentina gets over $2 billion worth of SDRs. The Nigerians, whose email scammers will surely now start dangling SDR-related propositions to already-fleeced Americans, will get a similar amount. Syria gets $350 million, perhaps some of that will go to protect Hezbollah from a painful devaluation that would push up the local currency price of Cemtex.

We aren't quite this caustic in our assessment of the SDR scheme (we mean this in the British sense of the word) but the points are not lost on us. Certainly, now that the United States is somewhat dazed by the present crisis, economic heel-nipping is easy. Let's just hope that some misplaced "capitalist guilt" doesn't cause this Administration, or the next, to buy into what amounts to a redistribution scheme.

 

My reaction: Special Drawing Rights, while complicated to understand, are a form of global quantitative easing.

1) G20 leaders have activated the IMF's power to create money and agreed to a 250 billion SDR allocation.

2) Special Drawing Rights (SDRs) is a potential claim on the freely usable currencies of IMF members.

3) In 1973, the SDR was redefined as a basket of currencies, today consisting of the euro (34 percent), Japanese yen (11 percent), pound sterling (11 percent), and U.S. dollar (44 percent).

4) The IMF may allocate SDRs to members in proportion to their IMF quotas, which is what the G20 just decided to do.

5) If a member's SDR holdings rise above its allocation, it earns interest on the excess; conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall.

6) The SDR interest rate is determined weekly and is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies.

Conclusion: Essentially, IMF SDRs allocations are really credit lines to IMF members funded by printing the euro, yen, pound and the dollar. Since SDRs are backed 44 percent by the dollar, the 250 billion increase in SDRs allocations involves the creation of 110 billion dollars to fund these credit lines. Claims that “the Special Drawing Rights option to the U.S. Dollar as a reserve currency has all the texture and stickiness of a redistribution scam” aren’t entirely wrong.

Personally, I believe the US/UK are using SDRs as a way to create more money in a way that most people won't understand.

 

Eric de Carbonnel

Market Skeptics

Support Market Skeptics with a donation  : please click here

 

Also by Eric de Carbonnel

 

 

 

 

 

 

 

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