Monday, August 29, 2016

G20 Summit - What to Watch For

Soon the G20 Meeting will be underway in China. While the G20 covers a broad array of topics, our focus here is on any news that relate to the potential for monetary system change. Since anything that would tend to dislodge the US dollar as the global reserve currency falls into this category, we will keep an eye out for whatever the G20 (and especially China) says regarding an increased role for the SDR. The SDR is one candidate to some day replace the US dollar so we keep up with news on it.


We already know that G20 will release some kind of statement in support of the SDR. In the July communique they tell us that. Below are a couple of excerpts and then some added comments.



Communiqué G20 Finance Ministers and Central Bank Governors Meeting

 Item # 8. We endorse the recommendations towards further strengthening the international financial architecture (IFA) developed by the IFA Working Group. Building on the ongoing work by relevant IOs, wewill continue to improve the analysis and monitoring of capital flows and management of risks stemming from excessive capital flow volatility. We look forward to the IMF’s review of country experiences and emerging issues in handlingcapital flows by year-end. We note the ongoing work on the review of the OECD Code of Liberalization of Capital Movements. We support work to further strengthen the Global Financial Safety Net (GFSN), with a strong, quota-based and adequately resourced IMF at its center, equipped with a moreeffectivetoolkit, and with more effective cooperation between the IMF and Regional Financing Arrangements (RFAs), respecting their mandates. In this respect, we welcome the upcoming CMIM-IMF joint test run and call for further work regarding the IMF’s lending toolkit. We look forward to the completion of the 15th General Review of Quotas, including a new quota formula, by the 2017 Annual Meetings. We reaffirm that any realignment under the 15th review in quota shares is expected to result in increased shares for dynamic economies in line with their relative positions in the world economy, and hence likely in the share of emerging market and developing countries as a whole. We support the WBG to implement its shareholding review according to the agreed roadmap and timeframe, with the objective of achieving equitable voting power over time. We underline the importance of promoting sound and sustainable financing practices and will continue to improve debt restructuring processes. We support the continued effort to incorporate the enhanced contractual clauses into sovereign bonds. We support the Paris Club’s discussion of a range of sovereign debt issues, the ongoing work of the Paris Club, as the principal international forum for restructuring official bilateral debt, towards the broader inclusion of emerging creditors, and welcome the admission of the Republic of Korea to the Paris Club. We welcome China’s regular participation in Paris Club meetings and intention to play a more constructive role, including further discussions on potential membership. We support examination of the broader use of the SDR, such as broader publication of accounts and statistics in the SDR and the potential issuance of SDR-denominated bonds,as a way to enhance resilience. We call for further work by the IOs to support the development of local currency bond markets, including intensifying efforts to support low-income countries. We will extend the IFA Working Group’s mandate into 2017.

 Reports received

#16.The IMF’s Note on Role of the SDR—Initial Consideration

Issues for further action

#12.We look forward to the IMF’s paper on examining ways in which the SDR can contribute to strengthening the international monetary system by January 2017.


My added comments: This is what G20 has already released so this will not be news when announced in September. We note that the IMF report on the SDR is not due until January 2017. Ahead of the upcoming meeting, the World Bank has announced it will issue 2 Billion in SDR denominated bonds payable in Chinese renminbi. So here we have more official support for the SDR at least from a symbolic standpoint. Observers will watch to see the market response for bonds like this. One early report stated the market for these bonds is not very strong

What we watch for here are a couple of things. One would be bigger news related to the SDR that signals that a more serious move towards the SDR might be coming. Willem Middelkoop has written recently about the concept of an SDR substitution fund at IMF that would allow for a very large swap of SDRs for US dollars in a short time frame. While it is not expected that something like that would be announced at G20, it would be very big news if and when it was announced and the kind of signal we watch for. Keep in mind that an agreement to do something like this would require member approval of 85% and the US holds a 16% vote which essentially works sort of like a veto.

That leads to the second thing to watch for at the G20, which is the reaction to any SDR news announced by both China and the US. We expect that China will be very enthusiastic about an expanded role for the SDR. Some experts wonder if the US shares that enthusiasm. So we will watch to see if the US sounds supportive or lukewarm about the SDR, or if it says anything at all about it. It will also be interesting to see how the western financial press covers SDR news versus how the eastern press presents it.

We will just keep an eye on it here and report what we find after the meeting in September.

Update 8-31-16: World Bank has now issued the first batch of SDR Bonds ($700 million) per this Reuters update: --- Interest rate is .49% on the 3 year bonds.

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