• Special Drawing Rights

    This post originally appeared on The Finance Buff.

    I’m only now getting around to writing up something that happened several weeks ago at the London G-20 summit. Among the achievements was an agreement to issue $250 billion in new Special Drawing Rights (SDRs).

    SDRs are diversified currency. A unit of SDR is a weighted sum of currency of the US (dollars), the Eurozone (euros), Japan (yen), and Great Brittan (pounds). They’re used as a unit of account by the IMF and traded and loaned like other currency (source). SDRs were created in 1969 to replace gold as the reserve asset. The idea was that exchange rates would be held fixed through SDR trades, a more convenient method than shipping gold. Today exchange rates float, obviating the original purpose of SDRs.

    When new SDRs are issued the funds do not go to the IMF. Rather they are distributed to IMF member countries in proportion to their quotas. Based on this system, about 60% of the $250 billion in new SDRs will go to the reserve currency countries (the US, Eurozone, Japan, and Great Brittan), none of which have a need for new SDRs.

    Some of the remaining 40% will end up in countries in greater need. A guide to SDRs published in The Economist reports that

    “[T]he increases in the reserves of some emerging economies are not trivial. South Korea’s will grow by $3.4 billion, India’s by $4.8 billion, Brazil’s by $3.5 billion and Russia’s by $6.9 billion.”

    Other poor countries can obtain more SDRs through loans from richer countries with higher quotas, something that could be done outside the SDR system as well.

    The G-20 SDR agreement has been confused by some as a move toward a dominant world reserve currency. Such a thing could only happen if large, regular increases in SDRs were issued, an idea supported by Martin Wolf and George Soros. The confusion may have stemmed from misinterpretations of a white paper by the People’s Bank of China governor Zhou Xiaochuan and statements by US Treasury Secretary Tim Geithner. Both support only a one-time increase in SDRs, such as was accomplished by the G-20.

    China may welcome the opportunity to purchase additional SDRs to diversify its foreign reserve holdings, though this is something it could do outside the SDR system.

    Therefore, the role of SDRs is rather limited and a one-time increase in issuance of them does little to change the fundamentals. It did, however, make for a nice, if somewhat inscrutable, G-20 talking point.

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