Special Drawing Rights (SDRs)
Special Drawing Rights were established in 1969 to support the then prevailing Bretton Woods fixed exchange rate system. The SDR is an international reserve asset and can be thought of as a potential claim on the freely usable currencies of IMF member countries. Since their creation, SDRs have played a limited role in the international monetary system. However, in the context of the current challenges facing the global economy, they represent a potentially useful policy option that warrants further examination.
SDR allocations have to be agreed on by a supermajority of IMF members representing at least 85 percent of the institution's total voting power. Allocations of SDRs are typically in proportion to the quota held by each member country and are determined on the basis of a long-term global need to supplement existing reserve assets. Since their creation, the IMF membership has voted in favor of allocations just four times -- the last two of which were in response to the 2008 global financial crisis. In August 2009, following a G-20 endorsement, a general allocation of SDR 161.2 billion or $250 billion was implemented. An additional special allocation for SDR 21.5 billion (about $33 billion) was also approved. Currently, the overall stock of SDRs issued totals SDR 204.1 billion or $322 billion, representing approximately 3.1 percent of total world non-gold reserves as of September 2011.
The IMF membership could decide on a general allocation of SDRs as a way to provide confidence and generate additional financing that could be partially mobilized toward the euro-area crisis. This would provide an important relaxation of the constraints currently complicating the financing of the European rescue fund -- the EFSF. Since the rescue fund relies on guarantees provided by the euro-area member states through their respective treasuries, any step up in the guarantees to the EFSF triggers a corresponding increase in the contingent liabilities to be borne out by that member's public-sector budget. For France, this could entail losing its AAA rating status.
If approved, the SDRs allocated to member countries through their fiscal agents -- typically, national central banks -- could be mobilized to this purpose, thus relaxing the constraint on the public-sector budget. Operationally, euro-area member countries could use their SDRs to provide a guarantee to an EFSF's "vehicle," which could in turn leverage such guarantees in order to further expand its financial capability.
Such an arrangement, where euro-area members use their SDR allocations to guarantee a vehicle, would bear zero cost for the guarantors as long as the SDRs were not called upon. If the guarantee was triggered, and assuming the counterpart was a non-official sector entity, then the SDRs would need to be exchanged with assets denominated in any freely usable currency, such as the euro. The transaction would trigger an "open" position in SDRs for which euro-area members would bear a cost equal to the SDR interest rate, which is indexed to money market rates. For the week of Dec. 5-11, the SDR annual interest rate stood at 0.15 percent, while yields on Italian one-year bonds stood at 5.33 percent, on Spanish bonds at 4.17 percent, and on French bonds at 0.66 percent.
A general allocation would provide euro-area members with SDRs in proportion to their quotas (they together hold 23 percent of total IMF quotas), which could be used in the way described above. This would also allow some smaller, developing economies to increase their liquidity buffers as a protection against global liquidity shocks that might arise if market turmoil continued. Other members, in particular those with large reserve assets, could join a "pool of the willing" by exchanging their SDR allocations to buy euro-denominated bonds issued by the vehicle described above. These euro bonds would yield some percentage on an annual basis, which would be a multiple of the SDR rate charged on the "open" SDR position. To give an idea, currently EFSF bonds yield approximately 3.5 percent against the SDR rate of 0.23, which an IMF member would be charged in "opening" its SDR position. Moreover, assuming that such members would have diversified in euros anyway, they would not need to hedge against exchange rate exposure.
Yet such a special issuance would pose substantial redistributive questions within the membership of the IMF. It would also cause non-negligible procedural problems, as it would require an amendment to the IMF's Articles of Agreement, for which a supermajority of "three-fifths of the members, having 85 percent of the total voting power" would be needed. To illustrate how arduous such a task would be, the latest quota reform package endorsed by G-20 leaders in Seoul in November 2010 and approved by the IMF board of governors one month later may not be ratified in time for the agreed-upon deadline of fall 2012. After almost a year, only slightly fewer than 25 IMF member countries have ratified the amendments embedded in the quota and governance reform package.