European Union ministers are reportedly going to back a call from the IMF to double its funds to $500bn when they meet at this weekend’s G20 meeting in London.
Raising funds, of course, could be done in two ways. One is simply by borrowing more from institutions already subscribed to the fund. The second, according to some commentators, is to boost the fund’s general allocation of special drawing rights (SDRs), the IMF’s own currency – a kind of global-scale quantitative easing.
According to the IMF a proposal for a special one-time allocation to double the number SDR in the system is already in place and has been awaiting approval since 1997. To go through it needs three fifths of IMF members (111 countries) with 85 per cent of total voting to accept it. As of March 2008, 131 members with 77.68 per cent of voting power had done so, which means approval by the US would easily put the amendment into effect.
There are currently 21.4bn SDRs in issue, which at the current value of $1.46 per SDR puts the total dollar sum within the IMF framework at about $31bn. A doubling of SDRs would, at most, increase the value of sums at the IMF’s disposal to a mere $62bn – hardly the $500bn the fund is after.
Nevertheless, that hasn’t stopped the likes of George Soros being among the proposal’s biggest advocates. He explained in the Huffington post in February how creating new money in this way — for that is essentially what it would be — could work:
The fact is that the IMF simply does not have enough money to offer meaningful relief. It has about $200 billion in uncommitted funds at its disposal, and the potential needs are much greater. What is to be done? The simplest solution is to create more money. The mechanism for issuing Special Drawing Rights (SDRs) already exists. All it takes to activate it is the approval of 85 percent of the membership. In the past the United States has been the holdout opposing it. Creating additional money supply is the right response to the collapse of credit.
That is what the United States is doing domestically. Why not do it internationally? Ironically, SDR would not be of much use in providing short-term liquidity, but it would be very helpful in enabling periphery countries to engage in countercyclical policies. This would be done by rich countries lending or, preferably, donating their allocations to poor countries.
The scheme has the merit that the IFIs would retain control over the disbursement of the lent or donated funds and ensure that they are spent in accordance with the poverty reduction programs that have already been prepared at the behest of the World Bank. This would especially benefit poorer countries that are liable to be hardest hit by the worldwide recession.
All in all, this would have the effect of a helicopter drop of cash. Because countries in the IMF either sit on their full allocation of SDRs, or have a drawn-down allocation or a surplus allocation, pumping in a new issue would effectively increase the number of funds rich countries have to contribute to poorer countries in the form of aid and re-assign a fresh allocation to those who have drawn their quotas down (or never received any in the first place).
This would be especially effective, according to Soros, if it was implemented on a large scale. Forget about the current proposal – Soros would want at least $1,000bn pumped into the system. As he explains:
This seemingly selfless act by rich countries would actually serve their enlightened self-interests because it would not only help turn around the global economy but also reinforce the market for their export industries. Since the SDR scheme is not of much use in providing short-term liquidity to periphery countries, that task would have to be accomplished by other means, notably the following three:
a) Chronic surplus countries could contribute to a trust fund that supplements the new STL facility. This would greatly enhance the value of that facility by removing the five-times-quota limitation. For instance, under STL Brazil can draw only $23.4 billion, while its own reserves are over $200 billion. A more flexible supplemental fund would give the STL facility more heft. Japan held out the promise of $100 billion. Other chronic surplus countries probably would not contribute unless the quota issue was reopened. Holding out the prospect of higher quotas could serve as an inducement to put together a supplemental fund that would be large enough to be convincing.
b) The central banks of the developed world should extend additional swap lines to developing countries, and they should accept assets denominated in local currencies to make them more effective. The IMF could play a role by guaranteeing the value of assets denominated in local currencies.
c) In the longer term, international banking regulations should facilitate credit flows to periphery countries. In the short term, the central banks of the developed countries should exert pressure on commercial banks under their aegis to roll over credit lines. This could be perhaps coordinated by the Bank for International Settlements.
Ted Truman, senior fellow at the Peterson Institute for International Economics, argued much the same thing in the FT last Thursday. His recommendation though was to issue fresh SDRs to a value of some $250bn, which he said would also be possible with an 85 per cent majority vote of the IMF membership, but more importantly be legislatively doable for the US — as the US Treasury secretary can vote for an SDR allocation of up to $250bn only.
While these are refreshing new approaches to the global crisis, it is worth noting, however, that until recently finding an economist who could actually explain the SDR system and how it worked, was not an easy task (FT Alphaville did try). And those who did, did not see it as a workable solution.
Ted Truman himself admits that arguments against an SDR boost do include the fact that extra credit could be extended without conditions on recipient countries’ economic policies, that a boost could be inflationary (although not a problem in the current deflationary world) or that a substantial amount of SDR allocation could go to countries that do not need it and would not use it. To that last point he says:
This is an empty argument. If a country did not need to do so, it would not mobilise the SDR-based credit. There would be no benefit, but also zero cost. Furthermore, under current uncertain circumstances, no country can be sure it will not need access to official international credit — witness Iceland.
Kenneth Rogoff, former chief economist at the IMF, meanwhile was against the idea of super-sizing the fund because of the additional governance involved. As he wrote in November (our emphasis):
The IMF’s lending resources have shrunk dramatically relative to world trade and income when compared over the past 50 years. But increasing its resources to a $1tn or more is not a realistic option, either. The IMF does not have an adequate framework for handling the massive defaults that could easily attend a huge surge in lending, much less the political will to distinguish between countries that are facing genuine short-term liquidity problems and countries that are actually facing insolvency problems.
The point being that super-sizing the fund would only provide the world with the perils of too much of a good thing.
A paper-gold reserve system? – FT Alphaville
Ken Rogoff: Super-sizing the IMF is wrong – The Guardian
XDR, or one special drawing right – FT Alphville
How the Fund can help save the world economy – FT.com
George Soros: A Plan for Economic Recovery – Huffington Post