IMF considers whether its currency could play greater role in world economy
They don't have fancy engraving, counterfeit-proof holographs or historical portraits on their face - in fact they do not exist in any physical form. In the evolution of money, the Special Drawing Rights issued by the International Monetary Fund are on the un-sexy end of the spectrum, without the quaint appeal of conch shells, the primal authority of gold, or the (current) popularity of good old American dollars.
But officials at the IMF and in some international economic policy circles are opening what they hope will be detailed talks about whether the fund's peculiar currency could play a greater, and helpful role, in the world economy.
SDRs are a hybrid concept, representing the value of a basket of highly-traded currencies, including the dollar, the euro and the yen. They are backed by the financial commitments of the fund's members and used to help countries facing a crisis. Under the agreements and treaties governing the fund, SDRs loaned to, say, Ireland or Greece, can be exchanged for any freely traded currency, converted at rates that change based on market values.
Examining the aftermath of the recent financial crisis, IMF officials wonder whether the SDR could play a broader role - taking some pressure off the dollar as a world reserve currency, and being used to reassure nations that they could have access to cash in a pinch.
In a seminar at the IMF on Thursday, Managing Director Dominique Strauss-Kahn spelled out some of the possible benefits: allowing nations that currently stockpile reserves, particularly in Asia, to feel comfortable holding less; being used to value trade and other contracts and thus lowering the currency exchange risk faced by traders; providing a global liquidity fund that could free the U.S. Federal Reserve from, in effect, being the world's lender of last resort. During the recent crisis the Fed opened "swap lines" around the world so that central banks in Europe and elsewhere had ample cash.
The IMF, Strauss-Kahn said, could potentially step into that role.
National currencies and nationally-driven economic policies "are not going to disappear," Strauss-Kahn said. "On the other hand globalization is here...The IMF can do more than it has been able to do in the past."
The discussion of monetary reform is being pressed not just by the IMF, but also by French President Nicholas Sarkozy, who wants the issue to be a centerpiece of discussion this year among the G20 group of major economies.
It is not an easy issue. Even revising the SDR "basket" to be more representative would require, for example, major changes in China's day-to-day currency management, and the underlying structure of its financial system.
And, despite the many pledges for more international cooperation made after the financial crisis, anything that involves an actual shift of authority from individual countries to the IMF is likely to face political opposition.
But there are reasons the U.S. might like the idea, said C. Fred Bergsten, head of the Peterson Institute for International Economics. Bergsten said the dollar's role as the world's preferred reserve currency is often assumed to be a good thing -- allowing the country to attract the investment it needs, for example, to fund its mounting debt.
However Bergsten said the country might benefit from the "external discipline" that would come from a more diverse system, where safe haven investors had more choices than U.S. Treasury notes.
The current reserve status, he said, is "too much of a good thing."
| February 10, 2011; 1:38 PM ET
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