So the G20 has decided to pump an extra $250bn into the Special Drawing Rights (SDR) system of the IMF. The actual methodology of how this will be done is yet to be revealed (will quotas be reallocated? Will everyone simply get a fresh top-up equal to 10x their original? etc).
Either way, analysts have a variety of views. Here’s Standard Chartered on the matter:
The increased importance of SDRs may undermine the USD’s status as a reserve currency, though this admittedly this is likely to be a more relevant issue over the medium term.
And on China’s specific role and the SDR as it stands:
Russia proposed an IMF or G20 Working Group to look at the idea of a ‘global reserve currency’, but there was no word from Chinese officials on this, despite People’s Bank of China Governor’s Zhou Xiaochuan’s article promoting the idea a couple of weeks ago. We would expect support from China to come, though, as this is just a research group, and China has already participated in a UN-led panel on the same issue. This is very much a long-term, blue-sky idea. At present, the SDR is only a unit of account within the IMF, not a real currency – it is not traded, there are no SDR assets, and it is not used outside the IMF. Some baby steps are needed in the direction of the SDR becoming a real currency before we can even contemplate its role as a ‘reserve’ currency.
TD Securities Beat Siegenthaler’s, meanwhile, points out:
Boosting financing for the IMF is certainly positive, particularly for EM countries, and is easily the most tangible result of the G20 summit. Available IMF financing is being trebled from around $250bn to around $750bn, giving the IMF a much more solid war chest to support its member countries. Beyond that, however, we find that the numbers announced raise many questions, which we are not sure the G20 would have ready answers for. For example, it is not clear what exactly the $250bn in SDR (the synthetic IMF currency) will be used for. It is also not clear how the $250bn in trade finance will be implemented, given that this type of financing is usually channeled through national rather than multinational agencies. There is also no mechanism of sanctions for countries taking protectionist measures and there have been plenty of those. Much more trade is likely being destroyed by protectionist measures (despite the G20 pledge to avoid this) than it will ever be possible to boost with additional official sector trade financing.
All of which means there are still many many things to clarify.
However, in case you were curious about what $250bn can actually get you in the meantime (it being an IMF unit of account and a claim on other members’ currency reserves rather than anything else), there is one non-IMF area in where SDR use is fully established – international air travel. Or, specifically the resolution of baggage disputes in international air travel. As IATA rules dictate:
AIR CARRIER LIABILITY FOR PASSENGERS AND THEIR BAGGAGE
This information notice summarises the liability rules applied by Community air carriers as required by Community legislation and the Montreal Convention. Compensation in the case of death or injury: There are no financial limits to the liability for passenger injury or death. For damages up to 100000 SDRs (approximate amount in local currency) the air carrier cannot contest claims for compensation. Above that amount, the air carrier can defend itself against a claim by proving that it was not negligent or otherwise at fault.
Advance payments: If a passenger is killed or injured, the air carrier must make an advance payment, to cover immediate economic needs, within 15 days from the identification of the person entitled to compensation. In the event of death, this advance payment shall not be less than 16000 SDRs (approximate amount in local currency).
Passenger delays: In case of passenger delay, the air carrier is liable for damage unless it took all reasonable measures to avoid the damage or it was impossible to take such measures. The liability for passenger delay is limited to 4150 SDRs (approximate amount in local currency). Baggage delays: In case of baggage delay, the air carrier is liable for damage unless it took all reasonable measures to avoid the damage or it was impossible to take such measures. The liability for baggage delay is limited to 1000 SDRs (approximate amount in local currency).
Destruction, loss or damage to baggage: The air carrier is liable for destruction, loss or damage to baggage up to 1000 SDRs (approximate amount in local currency). In the case of checked baggage, it is liable even if not at fault, unless the baggage was defective. In the case of unchecked baggage, the carrier is liable only if at fault. Higher limits for baggage: A passenger can benefit from a higher liability limit by making a special declaration at the latest at check-in and by paying a supplementary fee. Complaints on baggage: If the baggage is damaged, delayed, lost or destroyed, the passenger must write and complain to the air carrier as soon as possible.
In the case of damage to checked baggage, the passenger must write and complain within seven days, and in the case of delay within 21 days, in both cases from the date on which the baggage was placed at the passenger’s disposal. Liability of contracting and actual carriers: If the air carrier actually performing the flight is not the same as the contracting air carrier, the passenger has the right to address a complaint or to make a claim for damages against either. If the name or code of an air carrier is indicated on the ticket, that air carrier is the contracting air carrier. Time limit for action: Any action in court to claim damages must be brought within two years from the date of arrival of the aircraft, or from the date on which the aircraft ought to have arrived.
Basis for the information: The basis for the rules described above is the Montreal Convention of 28 May 1999, which is implemented in the Community by Regulation (EC) No 2027/97 (as amended by Regulation (EC) No 889/2002) and national legislation of the Member States. Additional protection can usually be obtained by purchasing insurance from a private company. Such insurance is not affected by any limitation of the carrier’s liability under the Warsaw Convention, special contracts of carriage and/or applicable tariffs, or the Montreal Convention. For further information please consult your airline or insurance company representative.
Related links:
Soros gets his way with the G20 – FT Alphaville
A paper-gold reserve system? - FT Alphaville
Geithner not wrong, simply misunderstood – FT Alphaville
Two very different SDR scenarios, says Rogoff – FT Alphaville
Is a global super-currency on the agenda? – FT Alphaville
=XDR (or, one special drawing right) – FT Alphaville
One giant drop of cash for mankind? - FT Alphaville