Last Friday, the IMF pumped $250bn into foreign-exchange reserves worldwide, as called upon to do by G20 leaders last April.
It used the mechanism of a special-drawing-right issue to achieve the task. SDRs are notes which countries can covert into hard currencies through “voluntary trading arrangements” with other members; the currency value of an SDR is determined by summing the values in dollar terms of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, and pound sterling).
As the IMF explained on its website:
About $110 billion of the combined allocations will go to emerging market and developing countries, including over $20 billion to low-income countries. Many of these countries currently face difficult spending decisions as they decide how to address the fallout from the global crisis. For them, the SDR allocation means potential access to unconditional financial resources that could limit the need for adjustment through contractionary policies and allow greater scope for countercyclical policies in the face of recession and rising unemployment.
In total, $283bn of SDRs will be created. Interestingly, as stated above, only $130bn will go to emerging market, developing and low-income countries.
The remainder, some $153bn, will go (due to the proportional quota system, we imagine) to very much developed states. You can see the full allocation list here.
If voluntary trading arrangements fail to generate enough liquidity to make the notes a viable funding option for countries wanting to use them, the IMF said it would step in to activate a so-called “designation mechanism”, which guarantees buyers by forcing members with sufficiently strong external positions to exchange freely usable currencies in their reserves for SDRs.
Countries like, err, China, which currently holds 792m SDRs. That represents some 334 per cent of the country’s previous allocation and is worth some $1.23bn.
As the IMF put it:
This arrangement serves as a backstop to guarantee the liquidity and the reserve asset character of the SDR.
But that sort of action probably won’t be needed judging by the recent spate of SDR exchange activity going on in the international sovereign reserve arena. Activity, by the way, which has seen some very much developed countries selling-off SDR reserves in exchange for hard currencies – versus relatively stagnant SDR positions before.
A quick perusal of the IMF website, for example, shows that:
- UK SDR reserves stood at $405m on July 9, representing some 13 per cent of the UK’s old allocation, compared to holdings worth some $444m back in May.
- Spain’s SDR holdings stood at $68.38m in June versus a position of $219.91m in May.
- Italy’s SDR holdings stood at $185.20m in June versus a position of $262.11m in May.
- Germany’s SDR holdings stood at $2.068bn in June versus a position of $2.216bn in May.
- The Netherlands’ SDR holdings stood at $899m in July versus a $1007m in May.
- Poland’s SDR holdings stood at $53.21m in June versus $107.32 in April.
- Switzerland’s SDR holdings stood at $241m in June versus $263m in March, $124m in April and $111m in May.
- Hungary’s SDR holdings stood at $0.28m in July, versus $47.13m in April and $90.70m in October before the financial crisis took hold.
A lot of the fluctuations in countries like Hungary may well be attributable to IMF aid packages. What accounts for the sudden SDR fluctuations in countries like Spain and Switzerland, however, we cannot tell.Either way, it will be very interesting to see which countries put their fresh SDR allocations to use this month, and by how much.Related links:
What can $250bn SDRs get you? – FT Alphaville
Soros gets his way with the G20 – FT Alphaville
A paper-gold reserve system? - FT Alphaville