At the end of last week whilst most minds were focused on the upcoming G20 meeting and the non-farm payroll figures in America there was an interesting and revealing speech from the chairman of the International Monetary Funds’s policy committee, Youssef Boutros-Ghali. In case you are confusing him with his more famous namesake he is in fact the Egyptian Finance Minister and is the first official from an emerging economy to head the IMF’s International Monetary and Financial Committee.
What did he say?
“If we are going to start including funds made available to Europe, then the IMF is not properly resourced,” he said. “We need to increase Special Drawing Rights very significantly. But we also need to shift the structure of resources from mostly borrowing and some Special Drawing Rights to mostly Special Drawing Rights,” he continued, adding that members had been talking about a doubling of the Special Drawing Rights allocation.
Regular readers of my articles will be aware that there was a big expansion of the firepower or ammunition available to the IMF from the April 2009 meeting of the G20. So the first thought is have they spent or used it already? The second is if they have not used it they must be expecting a heavy drawdown of funds. Seeing as this is usually in an economic crisis it may make one wonder what exactly the IMF is expecting.
Mr.Boutros-Ghali went on to give us some idea of one of the areas he feels that trouble and hence further demands for funds might come from. He told the Reuters news agency that Greece’s problems were not over yet and there were doubts about its ability to implement the reforms demanded by the IMF and European Union in return for a 110 billion euro aid package.
“We are not out of the woods,” he said in the interview. “The measures they have been required to implement are fairly tough. And there are in some areas doubts whether they are able to continue implementing such tough measures.”
This is something of a devastating critique of the situation in Greece when you consider who it came from.. It is hardly reassuring that officials at the IMF feel that there are “doubts” whether she can complete her austerity programme. If you are looking for a possible impact of this speech then in spite of buying from the European Central Bank (the amounts of this will be updated today) Greek ten-year government bond yields have remained solidly above 8% recently, and they closed at 8.32% last night.
The IMF’s situation
It would appear that Mr. Boutros-Ghali was unhappy with the results of the April G20 meeting in two respects.
1. The IMF was left short of funds
2. More of the funds provided should have come from SDRs and less from borrowing.
Just to spell out what funds the IMF actually has available to help countries then its website tells us that it has as immediate available funds 161.7 billions worth of SDRs or approximately US $110 billion as the exchange rate is 1.47. (Actually it is expressed as a measure of the resources available for new financial commitments in the coming year, equal to uncommitted usable resources plus repurchases one-year forward less repayments of borrowing due one-year forward and less the prudential balance).
As Greece was the largest outright loan the IMF has ever made at US $ 30 billion you may be wondering again exactly what the IMF is expecting going forwards…
What did the G20 Meeting of April 2009 actually do?
This meeting led to a considerable expansion of the funds available to the IMF and increased it in 3 ways.
1. There was a general SDR allocation of US$250 billion which became effective on August 28, 2009.
2. The IMF also has the ability to borrow from member countries and had some bilateral loan agreements at the time of the G20 meeting. These were expanded as a temporary measure and then made more formal to include all G20 members. This initially was around US $250 billion and earlier this year built up to the target of US $500 billion.
3. In addition the IMF agreed to sell US $ 6 billion of its gold reserves to help finance it lending. In case you are wondering its website says that it holds 3005 tonnes of gold.
This was seen as an extraordinary expansion of the IMF and its resources at the time so it is a little confusing to find it wanting more only a year later. If you are wondering if it has loaned the money out well its numbers on its website are out of date (28/02/10) but allowing for what it has since promised to Greece it appears to have promised around US $ 221 billion in loans not all of which has been lent. Of course there is also the 250 billion Euros that were promised to the euro zone rescue package although the Special Purpose Vehicle to which it was linked does not yet exist!
However set against this again according to its website are the Quotas of the member nations of the IMF which amount to US $333 billion and additional pledged resources which amount to some US $600 billion. As often with the IMF the rules of arithmetic do not seem to apply as you can see in theory there is still plenty of money to lend if required… As many things are opaque with the IMF let me explain quotas and SDRs
The IMF Explained
A member’s quota subscription determines the maximum amount of financial resources the member is obliged to provide to the IMF. A member must pay its subscription in full upon joining the Fund: up to 25 percent must be paid in SDRs or widely accepted currencies (such as the U.S. dollar, the euro, the yen, or the pound sterling), while the rest is paid in the member’s own currency.
Special Drawing Rights (SDR)
The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system when the international community decided to create a new international reserve asset under the auspices of the IMF. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR, serves as the unit of account of the IMF and some other international organizations
The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar.
So apologies if these definitions are not entirely clear but I have done my best (and in my view they have contradictions in them) and I think that they do help to focus the mind. If we start from the beginning that countries have shares or quotas and this is the sum total of their liability then the first issue that comes to my mind is what is an SDR actually worth and who backs it? The phrase “neither a currency, nor a claim on the IMF” troubles me somewhat as it poses the question what is it then? And who is liable? as well us from where is it created?
Over the past year there have been two increases in the allocation of SDRs. According to the IMF website
1.The third general allocation was approved on August 7, 2009 for an amount of SDR 161.2 billion and took place on August 28, 2009
2.The special allocation was implemented on September 9, 2009. It increased members’ cumulative SDR allocations by SDR 21.5 billion using a common benchmark ratio as described in the amendment.
Fantastic isn’t it,can we all have some? I notice that there does not appear to be any mention of quotas or liability as these took place. I also notice that for 30 years there had been no additional allocation of SDRs. So when it might be reasonable to expand them when the world is growing economically we refrained but when it is shrinking we expand the supply of SDRs…..
Oh and my understanding is that around 20% of the quotas has never actually been paid as the currencies of some countries are considered to be untradeable and are not actually collected.
Having been given a considerable boost to its firepower only last year I feel that the IMF should be forced to answer some serious questions before it is given any more. Further I feel that several things should take place.
1. It has plainly changed from an organisation which helps with balance of payments problems to one which helps with fiscal deficits. Whilst this may suit politicians, taxpayers and voters should in my view be concerned about the moral hazard of one group of politicians voting to increase funds available to help another group of politicians which may include themselves.
2. If you take the IMF’s definition of liability then its members are liable for a total of US $333 billion.How far are we willing to let its role expand beyond this? I wrote on this subject on the 26th April.
I have a question for my readers here and it relates to the recent increase in loan capital for the IMF. This was announced to great fanfare at the April 2009 G20 meeting by the UK Prime Minister Gordon Brown. He announced it as if it was a rabbit from a hat. However there are potential implication from it, for example what would happen if some of the money was lent and the loan was not repaid? Who is then liable? Has there in any country been a debate on this? As the largest player the biggest potential burden is on the taxpayers of the United States but all G20 countries are involved and liable. This strikes me as an off-balance sheet liability for the taxpayers of the G20 nations.
As I have discussed earlier loan capital and SDRs are proliferating aren’t they? So how can the liability be fixed? I have seen this sort of thing before where just because something has not happened yet people assume that it cannot happen but what happens if the IMF hits financial trouble? Just as another example if 20% of the quotas are never actually paid then we are down to a share capital of around US $265/270 billion.
3. Thinking of SDRs and increases in loans to the IMF makes me think that we need some measure of a world money supply. As these moves which show all the signs of a creation of a type of fiat money are expansionary and an inflationary influence on the world economy. As we do also face deflationary pressures at this time I am not saying that this is all bad but there should be more explanation and debate.
4. Politicians should stop implying that the help provided by the IMF is in effect free. For example US Treasury Secretary Geithner suggested that moves to expand the IMF “wouldn’t cost a dime”. This is one of those superficially true statements that are very dangerous. If you are liable for something it does not cost anything until it goes wrong. Just to quote the IMF itself there are “doubts” over Greece. Any proper accounting system allows for the possibility of things going wrong. After the experience of the last two years we should know the implication of sticking your head in the sand like an ostrich and assuming there are no problems around…