George Soros, general investment luminary and chairman of Soros Fund Management, writes in Monday’s FT how the forthcoming Group of 20 meeting in London on April 2nd will likely be a make-or-break event.
Determining its success will be relations between two parties in particular. The US – which has recognised that the collapse of credit in the private sector can be reversed only by using the full faith and credit of the state to the full – and Germany, still traumatised by the memory of hyperinflation.
If the two fail to find common ground, the risk is greatest to what Soros terms the ‘periphery countries’, for if they fail the damage to developed countries will be great.
Accordingly, Soros returns to the master solution he has been advocating for some while — the super-issuance of special drawing rights, otherwise known as the IMF’s paper-gold reserve unit – a move he says will greatly help the peripheral states. As he explains (our emphasis):
As things stand, the G20 meeting will produce some concrete results: the resources of the IMF are likely to be doubled, mainly by using the mechanism of the “new arrangements to borrow”, which can be activated without resolving the vexed question of reapportioning voting rights.
This will be sufficient to enable the IMF to help specific countries at risk but it will not provide a systemic solution for the less developed countries. Such a solution is readily available in the form of special drawing rights. SDRs are complex but they boil down to the international creation of money. Countries that can create their own money do not need them but periphery countries do. The rich countries should therefore lend their allocations to the nations in need.
In addition to the one-time increase in the IMF’s resources, there ought to be a big annual issue of SDRs, of say $250bn, as long as the recession lasts. It is too late to use the April 2 G20 meeting to agree this, but if it were raised by President Barack Obama and endorsed by others, this would be sufficient to give heart to the markets and turn the meeting into a resounding success.
While the idea may not be to the taste of everyone (note this critique of the plan from the former IMF executive director Onno de Beaufort Wijnholdsbut) it has certainly caught the imagination of two very important global states — “we’re running out of international reserves” Russia and “we’re a little worried about our dollar investments” China.
On Monday, China’s central bank chief Zhou Xiaochuan stipulated concretely his support for such a move in a speech published on the PBOC website in English (our emphasis):
Special consideration should be given to give the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency. Moreover, an increase in SDR allocation would help the Fund address its resources problem and the difficulties in the voice and representation reform. Therefore, efforts should be made to push forward a SDR allocation. This will require political cooperation among member countries. Specifically, the Fourth Amendment to the Articles of Agreement and relevant resolution on SDR allocation proposed in 1997 should be approved as soon as possible so that members joined the Fund after 1981 could also share the benefits of the SDR. On the basis of this, considerations could be given to further increase SDR allocation.
The speech goes on:
The centralized management of its member countries’ reserves by the Fund will be an effective measure to promote a greater role of the SDR as a reserve currency. To achieve this, the IMF can set up an open-ended SDR-denominated fund based on the market practice, allowing subscription and redemption in the existing reserve currencies by various investors as desired. This arrangement will not only promote the development of SDR-denominated assets, but also partially makes the management of the liquidity in the form of the existing reserve currencies possible. It can even lay a foundation for increasing SDR allocation to gradually replace existing reserve currencies with the SDR.
Russia, meanwhile, officially announced its support for the SDR last week on its government website. Here are some of its key proposals on the issue:
4. Reforming international monetary and financial system In the present conditions, it is crucial to support calculations and pricing in multiple currencies whose issuers comply with international requirements. These should be applied to the level of economic and financial system development, budgetary and monetary policies, investment control and financial operations. We call for a reform of the international monetary and financial system to enhance its stability and eliminate global economic disproportions (or to reduce the risk of their emergence).
With this in view, we suggest that IMF (or an Ad Hoc Working Group of G20) should be instructed to carry out specific studies to review the following options:
- Enlargement (diversification) of the list of currencies used as reserve ones, based on agreed measures to promote the development of major regional financial centers. In this context, we should consider possible establishment of specific regional mechanisms which would contribute to reducing volatility of exchange rates of such reserve currencies.
- Introduction of a supra-national reserve currency to be issued by international financial institutions. It seems appropriate to consider the role of IMF in this process and to review the feasibility of and the need for measures to ensure the recognition of SDRs as a “supra-reserve” currency by the whole world community. The obligation to diversify currency structure of the reserves and operations of national banks and international financial organizations should also be provided for. In our view, it would be appropriate to submit the results of those studies to the Ministers of Finance and Presidents of the Central Banks of the G20 States with a view to define the most efficient additional steps to harmonize the existing national monetary policies and to implement an efficient reform of IMF. We also believe that discussion of the elaborating harmonized rules of “clearing” transborder debts, including by way of coordinating the actions of countries “representing” creditors and debtors, can be launched as part of our action on countering financial protectionism.
We believe we should consider whether it would be practical to transfer some of the following functions to other supra-national structures not associated with the IMF:
- monitoring and establishment of a crisis early warning system on the basis of a constantly updated evaluation of systemic risks; – serving as a global lender of last resort;
- monitoring of the SURF implementation;
- acting as the issuer of a global reserve currency. The proposals to reform the international monetary system and international financial institutions should be discussed and analyzed in detail, probably within the IMF. We believe that in order to ensure that this process receives the best expert assistance it would be advisable to go back to discussing the establishment of an international commission of competent independent experts (“financial gurus”).The big question is if Russia, China and Soros do get their way, what impact would it have on a global financial model moulded around a fiat-dollar reserve system?
Of course in that case it’s worth remembering that the dollar still comprises at least one fourth of the value of one special drawing right - a complete abandonment of the greenback system, therefore, it would not be.
Related links:
One giant drop of cash for mankind? – FT Alphaville
A paper gold reserve system? – FT Alphaville