The COVID-19 pandemic has led to drastic increases in government borrowing. The Institute of International Finance (IIF) has gone so far as to speak of an “attack of a debt tsunami”, as global debt increased by over $15 trillion by Q3 2020, hitting a new record of $272 trillion. While developed countries showed the largest absolute increase of an additional $7.1 trillion between Q3 2019 and Q3 2020, developing countries saw much larger increases in their debt/GDP ratios, with Thailand, Malaysia, and Korea showing increases of more than five percentage points in the same period (IIF, 2020). Even though government borrowing rates have so far remained at historic lows for many countries, such developments are also a recipe for possible macroeconomic instabilities over the longer term.
The new wave of public indebtedness opens the question of how such instabilities should be managed on the international stage. One possible platform for such engagement could be the International Monetary Fund (IMF) which had originally been set up in order to manage the instabilities resulting from the fixed-rate exchange system under Bretton Woods. The IMF has recognized a possible role, stating that it “has responded to the coronavirus crisis with unprecedented speed and magnitude of financial assistance to help countries, notably to protect the most vulnerable and set the stage for economic recovery” (IMF, 2020). In this context, the Special Drawing Rights (SDR) system has been brought back into the spotlight. Policymakers discuss a new round of SDR allocation, the fourth in the history of the system founded in 1969, as a potential remedy to the debt crisis of emerging market economies and least developed countries.
In this article, we adopt the perspective of critical macro-finance and present an analysis of the SDR system as a web of hierarchical interlocking balance sheets. We stress that the SDR system has an idiosyncratic accounting logic which makes SDRs unlike any other financial instrument. Adequate analysis requires to systematically distinguish between SDR as a unit of account, defined via a currency basket since 1974, and two types of SDR instruments—SDR allocations, which are non-tradable liabilities of central banks, and SDR holdings, which are tradable assets among central banks. SDR instruments are neither asset- nor credit-money but rather akin to US-Dollar overdraft facilities, with some similarities to Federal Reserve swap lines. On the basis of publicly available data, there remain gaps in the understanding of how and why states have actually used the SDR system over the last half century. While we see some narrowly circumscribed potential in a new SDR allocation to deal with liquidity problems in global USD markets, we caution against suggestions to use the system as a remedy against solvency problems that emerged due to the COVID-19 pandemic. A new SDR allocation is not like the issuance of helicopter money that would help states to repay their sovereign debt but rather like substituting treasuries’ US-Dollar debt with an opaquer form of central bank debt.