My last update on the 2010 IMF reforms was in October 2012. So it’s clearly time for an update. That post also explained the reforms and the veto power that the US has in their approval.
In that regard a couple of weeks ago the US senate approved their next spending bill and did not include any mention of the IMF reform package. According to this NY Times article …
The structural changes to the fund have languished since Mr. Obama agreed to the “rebalancing” with great fanfare at the G-20 meeting in Seoul, South Korea, in 2010. Powers like China have chafed at their status as junior partners at the monetary fund, even as they become major international lenders.
In response, the world’s largest economies agreed to give up some of their authority at the fund — the international lender of last resort — to democratize the institution and head off efforts by China to create alternative funding sources.
“I have made no secret of the fact that I think it’s critical for us to finalize the ratification,” Treasury Secretary Jacob J. Lew said Thursday at the Council on Foreign Relations. “We made a full-court press to get it done and got close, but didn’t get it done this past week. We are continuing to stand by our commitment, and we will get it done.”
Under the agreement, the United States was required to shift $63 billion from the I.M.F.’s crisis fund to its general accounts, where a newly rebalanced board of directors would have more control. China would become the fund’s third-largest member, and Western Europe’s traditional dominance would wane.
Since the 2010 accord, every nation involved but the United States has ratified it. But the United States remains the monetary fund’s largest contributor, and without Congress’s approval, the restructuring cannot happen.
Of course I am certain that things could happen very quickly if they had too !?
However in the meantime we await the evolution of the IMF governance and quota structure, maybe some future SDR allocations, and maybe even a future change to the SDR currency basket (a 10-15% RMB weighting??).
Of course it might even be a more dramatic change?!
I have been taking the INET course on Money and Banking by Perry Mehrling. It is a superb course and has introduced me to this concept that the financial/monetary system requires elements of elasticity and discipline to live.
In Lecture 14 of the course he introduced why the Keynes concept of the Bancor (more elastic system) was trumpted by the SDR (more disciplined system) concept for creating this higher level of money in the hierarchy between gold and national currencies and this post is being made to capture that idea. In fact he occassionaly shows Gold and SDRs (paper gold ?) as being equivalent but that is another future discussion!
Of course the BANCOR favoured the deficit nations since it provided for no limit on any required monetary system elasticity (bank of last resort) and dealt with the asymmetry issue of rebalancing the global monetary system by actually charging the surplus nation a negative interest rate so that they would spend the money. Perry’s arguement was that the US looked at the Keynes model and concluded that since they expected to be the major surplus nation that this concept was not really in their better interests. Hence it did not happen.
Instead what ultimately developed was a paper reserve called the SDR (Special Drawing Rights). It was more like a gold standard in that there would only be a fixed quantity created. SDRs would have the qualities of a more disciplined system and would benefit the higher GDP nations as opposed to the emerging nations because in the new IMF model the highest GDP nations (read USA) received the biggest share of the SDR allocations (paper gold) being created. That way all those SDRs allocated to the USA could be loaned by the USA to deficit developing countries when needed ?!!
Today the USA is the major deficit nation but continues to receive the largest allocation of SDRs. No surprise that China is fighting for a different system !? The SDR is hence not disciplined or elastic enough in it’s current construct. So what is the future ? Some say it is adding the RMB to the SDR basket of currencies and increasing the number of SDRs allocated to nations ?
Of course Perry Mehrling indicated that the entire gold standard system could have been saved (at any time since the 1920s) by simply revaluing gold to a higher price ! Is that still part of the ultimate fix ? Gold priced higher as the discipline and maybe a BANCOR like currency (not based on any nation’s currency) as the next layer in the new hierarchy of money ?!
Regulators are beginning to express concerns about a potential collateral crunch causing a new market seizure. One solution might be to increase the use of SDRs.
THE SYSTEM NEEDS GOOD COLLATERAL
The collapse of Lehman caused a nasty back-up in the system.
Extended collateral chains of bonds and cash were severed and withdrawn because no one trusted their counterparties. This caused the great trading money-go-round that finances broker-dealers and hedge funds to grind to a shuddering halt. Liquidity collapsed, so even non-leveraged investors could not get business done. The bid-offer spread, on everything from cash bonds through to exotic options, gapped. The inherent fragility of the financial system was laid bare.
Since those dark days, regulators have been engaged in an effort to build greater resilience. One of the most important building blocks of this new financial architecture is collateral.
SDR BONDS AS COLLATERAL
Since we are delving around in relatively esoteric parts of global finance, let’s turn next to SDRs (special drawing rights). Strictly speaking the SDR is not a currency, rather a claim on member central banks maintained by the IMF. But it is a quasi-currency. In 2011 the IMF issued a paper, Enhancing International Monetary Stability – A Role for the SDR. It raised the prospect of issuing bonds in SDRs as a means of financing the IMF.
THE SDR BONDS WOULD BE AAA RATED COLLATERAL
What is certain is that SDR-denominated bonds would be triple-A rated. As such they would be in huge demand, for several reasons. One has already been stated: triple-A is becoming as rare as hen’s teeth. But there are other, subtler and interrelated, explanations. The likely biggest buyers of these bonds are asset pools that care most about return of capital – in particular, reserve managers at central banks and sovereign wealth funds. These entities are also looking for a way to diversify their large US dollar holdings.
THE SDR NEEDS TO BE REBALANCED TO INCLUDE THE RENMINBI AND AS A CONSEQUENCE THE US DOLLAR DEPRECIATED !
There is a small snag. The SDR is not as diversifying as it might be. It is made up of a currency basket of US dollar, euro, yen, and sterling. The dollar is 41.9% of the basket. If you add in sterling, the basket is more than 50% composed of net debtors. The eurozone is broadly in balance. By contrast, China has a net foreign asset position of more than 50% of GDP. In 2009 the chairman of the People’s Bank of China, Zhou Xiaochuan, called for the SDR to become a new global reserve currency. Implicit in his comment was the inclusion of the renminbi in the SDR basket. The next review of its constituents is in 2015.