This is an ongoing story we have covered here on this blog for years now. Every now and then we see a renewed push to increase the allocation of SDR's at the IMF which most everyone understands could eventually lead to the SDR replacing the US dollar as a global currency. The pattern thus far is that a variety of advocates for the SDR around the world urge expansion of their use in the monetary system while the US mostly remains opposed to that for one reason or another (but primarily because they don't want competition for the US dollar as the global reserve currency).
Recently, this issue surfaced again due to the new financial crisis surrounding the coronavirus pandemic. We noted it here and continue to follow this story. Below is a kind of running account of recent news on the topic followed by some added comments.
-------------------------------------------------------------------------------------------------------------------------Our recent article covering this:
IMF Director Suggests a Boost in the SDR Allocation May Be Neeeded
"According to IMF Director Georgeiva, It appears that the US was supportive of the increased lending capacity sought by the IMF allowing it to boost it up to $1 Trillion. In this interview, the Director also indicates that further substantial increases in the allocation of SDR's may well be needed in her view."
US Reaction to the Idea of an Increased SDR Allocation per Reuters (excerpt below):
"Finance officials will debate the issue during this week’s virtual IMF and World Bank Spring Meetings, but multiple sources familiar with the Fund’s deliberations say the United States, the IMF’s dominant shareholder, actively opposes such a move.
The Trump administration opposes providing countries such as Iran and China with billions of dollars in new resources with no conditions, two of the sources said."
Project Syndicate article Calling on US to support an SDR Allocation Increase
"To be sure, any SDR allocation would require the support of at least 85% of the IMF’s membership, which means that the US, with its 17.45% quota, would wield veto power. But there is no good reason why the US would want to use it. The pandemic is generating an unprecedented contraction in the global economy, not to mention its immense costs in human lives. And besides, our proposed method of deploying SDRs would not require US taxpayer money, nor would it pose a challenge to the international status of the dollar."
"A stable and healthy global economy is in the US national interest. And in an election year, it is particularly in the interest of a certain incumbent leader."
Added informational note on the Project Syndicate article just above:
After he reviewed this Project Syndicate article, Dr. Warren Coats provided some additional information on how the SDR allocation process works that I felt would be a valuable note to add here for readers. Dr. Coats is the former head of the SDR Division at the IMF and without question a leading expert in the world on the SDR and how it is used at the IMF. He gave me permission to include his comments on this article which are quoted from his email just below:
"In “How to Use the SDR” Jim O’Neill and Domenico Lombardi propose to leverage an SDR allocation to increase the foreign exchange available to countries needing to finance the deficits of their financial sectors from the freezing of debt service payments resulting from the covid-19 epidemic. They “propose a simple scheme in which a country would stow its allocation as “equity” in an emergency vehicle, thereby avoiding the need to accrue higher net liabilities on its treasury’s balance sheet.” An SDR allocation would indeed supply a helpful addition to countries’ foreign exchange reserves and should be undertaken. However, O’Neill and Lombardi have misunderstood the functioning of the SDR system.
A country receiving an allocation of SDRs receives both a liability (net cumulative allocation) on which it pays interest, and an asset (SDRs) on which it earns interest at the same rate. It can sell these SDRs to other IMF members for U.S. dollars and other freely useable currencies. It can also pay SDR denominated obligations, lend them, and swap them. They are used actively in member financial dealings with the IMF. SDRs can only be used with other IMF members, the 16 international and regional development banks, the ECB specifically prescribed to hold them, and the IMF itself. They cannot deposit them “as ‘equity’ in an emergency vehicle” though they can “pledge” them to other holders for specified purposes. Using SDRs in any of these ways does not reduce or change a country’s SDR liabilities (net cumulative allocation), which is usually on the books of its central bank, though sometimes its treasury.
A more promising use of these SDRs would be to pledge them as the asset backing of digital SDR currency issued by a central bank or private bank or fintec firm and useable in the market like other currencies. The limited use and role of SDR so far reflects the limited allocation among IMF members but also the limited use of the SDR unit of account to denominate the price of oil and other privately traded goods and services and to denominate cross border borrowing (SDR bonds). Issuing digital SDRs for general market use that are fully backed by IMF issued SDRs pledged by official holders for that purpose could make a dramatic difference in the attractiveness and use of the SDR." - Dr. Warren Coats
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My added comments: If you follow the path of the list of articles above, you see the pattern we mentioned above playing out once again (so far). A push for more SDR's followed by opposition from the US. It appears that the authors of the Project Syndicate article have noticed this same pattern. The conclusion of that article which we posted just above urges the US to change its position and even appeals to the Trump Administration to think of it in terms of improving his chances for re-election.
Readers here know that we have long covered this issue even as it is mostly ignored by the general public and in mainstream media. Jim Rickards has been talking about this for many years and we have long covered his view that eventually the US may agree to this major change in the monetary system (although perhaps being forced to that position by crisis events as Jim explained to me in this recent article here).
After that article, Jim wrote this recent article where he pointed out that "Trump Says No" to more SDR's.
In discussing this a bit more by email with Jim Rickards, I think we both have the same view on where this situation stands for now. It seems unlikely that President Trump will agree to an increase in the allocation of SDR's at this time. The Administration made it clear (as noted in the Reuters article above) that the US does not want China and Iran to benefit from an increased SDR allocation. It also appears likely that President Trump will center his campaign around the idea that China failed the world by mishandling the virus and the US must demand that a price be paid by China. So it is very unlikely that the Administration would support anything that is perceived to benefit China economically at this time. (see this recent polling on this issue) - excerpt below:
"Yet a new poll shows that, outside the Beltway, the coronavirus crisis is actually bringing Americans together on the China issue. Republicans and Democrats now largely agree that the Chinese government bears responsibility for the spread of the pandemic, that it can’t be trusted on this or any other issue, and that the U.S. government should maintain a tough position on China on trade and overall, especially if Beijing again falters in its commitments."
If President Trump is re-elected, it will be interesting to see if the US position changes or softens during a second term. If former Vice President Joe Biden is elected, the prospects for an increasing role for the SDR likely go up for sure. Our view here is that we would not expect to see any dramatic changes on this issue until 2021 after the US election results are in.
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