SDRs sneaking in as new global currency
Richard Moore
On top of the pledge to increase the IMF’s resources by the Group of 20 leading and emerging nations, the creation of SDRs – the first such decision since 1981 – might be regarded by some as a further shift towards global economic management of liquidity and the financial system.
...a widely misunderstood remark by Tim Geithner, US Treasury secretary, who welcomed the SDR allocation but not ending the dollar’s reserve currency role.
Nor will it make the IMF itself bigger or more powerful. As the IMF says: “The SDR is neither a currency, nor a claim on the IMF.”
Unless the creation of SDRs is repeated regularly, or countries create on a large scale assets denominated in SDRs, their role is likely to remain limited.
G20 pledge on SDRs unlikely to threaten dollar
One of the more surprising elements in the package assembled by the G20 was the decision to create $250bn in special drawing rights, a form of basket “currency” used by the International Monetary Fund.
On top of the pledge to increase the IMF’s resources by the Group of 20 leading and emerging nations, the creation of SDRs – the first such decision since 1981 – might be regarded by some as a further shift towards global economic management of liquidity and the financial system.
The issue was given more prominence when a recent paper by Zhou Xiaochuan, governor of the People’s Bank of China, the Chinese central bank, mooted the idea of the SDR supplanting the dollar as a global reserve currency – together with a widely misunderstood remark by Tim Geithner, US Treasury secretary, who welcomed the SDR allocation but not ending the dollar’s reserve currency role.
Indeed, experts say a single creation of SDRs is a long way from a fundamental remaking of the worldwide economic order.
Nor will it make the IMF itself bigger or more powerful. As the IMF says: “The SDR is neither a currency, nor a claim on the IMF.”
The SDR is not much more than an accounting unit used between governments and the IMF, made up of a basket of four widely-traded currencies – the dollar, the euro, sterling and the yen. One SDR is worth about £1, so a dollar buys 0.67 SDRs. SDRs are counted as part of government reserves and may be used as collateral for borrowing, meaning that their creation in effect can mean increasing the global money supply.
The $250bn (€185.4bn, £169bn) in SDRs will go not to the IMF but to the member governments, according to their “quotas” or contributions to the fund. Since the larger quotas are held by richer countries, they must give or lend shares to poorer countries to achieve the aim of helping emerging market governments struggling with a loss of confidence and liquidity.
But since SDRs are an aggregation of existing currencies, creating more will not automatically supplant the dollar. Brad Setser of the Council on Foreign Relations points out: “If China wants to diversify its reserves out of the dollar, it can do so right now. There is nothing to stop a country like Brazil issuing debt denominated in SDRs and nothing to stop China buying them.”
Some experts think China wants to redenominate some of its huge dollar holdings into SDRs without selling dollars on the open market – which would risk a crash in the US currency and a fall in the value of its reserves. But they say the US and the other countries whose currencies make up the SDR are unlikely to agree.
Unless the creation of SDRs is repeated regularly, or countries create on a large scale assets denominated in SDRs, their role is likely to remain limited.
Copyright The Financial Times Limited 2009