November 13, 2011Special drawing rights enjoy rare moment in limelight
Let us, unusually, consider the Special Drawing Right, or SDR, undisputedly the world’s least snappily-named currency, but recently touted as an tool for solving the eurozone debt crisis.
While it might one day like to grow up to be a real currency, for the moment the SDR is a humble “reserve asset”. But it is enjoying a rare moment in the limelight – or at least poking its head gingerly out of the wings.
Originally created by the International Monetary Fund in 1969, the SDR is a favoured target of the gold standard crowd who dislike “fiat” currencies – those not backed by gold or other physical commodities – and who persist in seeing SDRs as a sinister conspiracy to create a new global fiat currency.
In reality, the SDR is a sort of monetary Esperanto. It might save effort if everyone used SDRs instead of national currencies, but that seems highly unlikely.
At the most basic level it is simply a unit of account, a basket of four currencies –the dollar, euro, yen and sterling – which can be used to denominate transactions to reduce the effect of individual exchange rate movements.
Multinational companies occasionally express expat salaries in SDRs, for example, but their employees are still actually paid in national currency.
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More interestingly – and here the goldbugs go on high alert and start talking about “printing money” – shareholder governments of the IMF can create SDR assets for themselves at the touch of an “Enter” key, as they did with a $250bn (SDR158bn) “allocation” in 2009 to inject liquidity into the system at the height of the financial crisis.
The assets are counted in countries’ foreign exchange reserves, but they only make up 4 per cent of global reserves. Governments can trade SDRs among themselves, but to actually intervene in financial markets or buy goods and services with them they have to be changed back into the constituent currencies. This need for easy conversion explains why the Chinese renminbi is at least several years off being added to the basket, being still subject to capital controls and little used outside China.
At its recent summit, the G20 canvassed the idea of eurozone countries pooling their SDR assets and lending them to Italy, and possibly creating more such assets. The idea was promptly rejected by the German Bundesbank.
In fact, the debate about using SDRs in the eurozone crisis is fundamentally another attempt to solve an underlying ideological problem through technocratic means.
In principle, pooling the eurozone’s SDRs to lend to Italy would be a more sensible way of increasing the eurozone’s bail-out “bazooka” than hapless attempts to leverage the European financial stability facility in private capital markets. But by doing so, given its current holdings of SDR assets, the eurozone could mobilise at most €60bn.
Creating new SDRs to build a trillion-euro weapon faces a much higher hurdle. New SDR assets go to each IMF member country according to their financial contribution to the fund, with the eurozone getting about a third. Such a large new allocation would be well over the level at which the US would need to seek authority from Congress – probability of success: somewhere between low and nil.
A lack of technocratic solutions is not the problem with the eurozone. The European Central Bank can finance an Italian bail-out if it wants, without even taking on Italian sovereign credit risk. Its founding treaty would allow it to lend directly to the IMF or possibly to a trust fund within the IMF, which would then lend on to Italy and take the credit risk.
The problem is ideological. The ECB, under heavy pressure from the Bundesbank, has so far fundamentally refused to accept that Italy might need large-scale financing to prevent it spiralling to default, and that it itself is very likely the only institution big enough to do it. Creating or pooling SDRs might help increase eurozone liquidity somewhat, but it is not a comprehensive solution.
And certainly it is not a clever technocratic way round the fundamental problem that the ECB, usually backed by the German government, has an analysis of the situation that is very largely about austerity – and rather little about official finance to help bring adjustment about.
