With the IMF’s special drawing rights firmly on the table as the means for some sort of world helicopter cash drop or the basis of new global reserve currency, it’s probably worth pointing out how they might feature in the IMF’s radical overhaul in lending procedures as announced on Tuesday. As Reuters reports:WASHINGTON, March 24 (Reuters) – Changes in the way the International Monetary Fund lends to countries will apply to countries with existing programs and those currently in talks with the IMF, a senior Fund official said on Tuesday. The IMF approved a major overhaul of its lending framework on Tuesday and said it would streamline loan conditions, simplify costs, and increase access to resources. Addressing a news conference Reza Moghadam, director of the IMF’s strategy, policy and review department, said changes in loan conditions will apply as of May 1, while increases in resources will be effective immediately, and a new charging system will be implemented from August 1.
The changes to the IMF’s lending framework include:
• modernizing IMF conditionality for all borrowers,
• introducing a new Flexible Credit Line,
• enhancing the flexibility of the Fund’s traditional stand-by arrangement,
• doubling normal access limits for nonconessional resources,
• simplifying cost and maturity structures, and
• eliminating certain seldom-used facilities.
The IMF’s first deputy managing director John Lipsky said in the accompanying briefing SDRs could very well be utilised in implementing facets of the overhaul, but was not specific on the degree to which they could be used. As he stated:
With regard to the question about bonds, let me make it clear. The Fund has a series of potential sources of increased resources. One would be, and the most basic would be, to increase the size of the Fund through its increase in quotas, and as you have noticed, for example, the recent G-20 ministerial meeting called for a bringing forward of the next review of quotas. Another method could be allocation of special drawing rights, and that has been spoken of as well as a possibility. Another potential way of raising funds is as we’ve just seen and has happened before, a bilateral loan arrangement such as the one we just concluded with Japan. And as you probably know, that’s a limited timeframe, five years. The Articles of Agreement, the Fund’s Constitution, contemplate the possibility also of the sale of securities either to official institutions or more broadly. And finally, there are some open-ended agreements to provide funding on a contingent basis such as the general agreement to borrow and the new agreement to borrow that are not time limited. In other words, those are of infinite duration until altered. So all of those possibilities exist, and as you can see, all are being discussed and all could be possible. What is clear it seems to me is the intent of our membership to be sure and provide the resources necessary and a flexible approach toward the method for supplying that.
As far as SDRs being used as the basis for the creation of some new international reserve currency, Lipsky seemed more open to the idea saying it did merit further study and some serious consideration.
Meanwhile, Harvard economist and former chief economist at the IMF Ken Rogoff tells FT Alphaville, the overhaul as it stands will most likely dilute the case for the sort of SDR issuance proposed by George Soros and Ted Turner.
The main problem with issuing SDR under the exisiting system is that they go out pro rata to countries according to their IMF quota, which makes it a very blunt way to issue a credit line (which is what they are). The SDR has essentially no conditionality, which is why it is so popular. But the new IMF lending facility, the details of which were released yesterday, also comes with very few strings attached. The new lending facility, which stands to be by far the largest the IMF has ever instituted, would seem to undermine the case for an SDR issuance, if there ever was one.
But…
There is an entirely separate question of whether the IMF should have a currency, which the Russians and Chinese are now suggesting. This would basically be a global euro. The current SDR is really just a way of indexing loans, the underlying currencies are dollars, euros, etc. It is interesting to think about having the IMF issue its own currency, but lots of reasons to question whether world governance has reached the point where it is viable.
So to sum up, it is very important to differentiate the two scenarios. Scenario one – the Soros-style helicopter drop issuance to stave off financial pressure in peripheral states – is unlikely according to Rogoff, especially considering the recent IMF overhaul. Scenario two – the use of the SDRs as the basis for the formation of some type of global euro-zone and via that a new global reserve currency, is much more plausible. However, as Rogoff rightly points out, world governance is not in a position to support that sort of move in any near-term (whatever the ‘serious’ considerations and studies of some states and international financial institutions might find).
Related links:
Is a global super-currency on the agenda? - FT Alphaville
Transcript of a Press Briefing by International Monetary Fund First Deputy Managing Director John Lipsky on Steps to Reform IMF Financing Facilities - IMF