The Covid-19 pandemic has led to dramatic 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 USD 15 trillion by Q3 2020, hitting a new record of USD 272 trillion. 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. This opens the question of how such instabilities should be managed on the international stage and what role the IMF and its Special Drawing Rights (SDR) system can play in managing future macroeconomic stability.
In this article, we adopt the perspective of critical macro-finance and present an analysis of the real-world SDR system as a web of hierarchical interlocking balance sheets. The SDR system is a small payment community that comprises one institution of each IMF member state, called ‘participant’ (typically the central bank), the IMF General Department as well as prescribed holders, such as development banks and intergovernmental monetary institutions. We stress that the SDR system has an idiosyncratic accounting logic—the result of a French-American compromise made in the 1960s—which makes SDRs unlike any other financial instrument. The term SDR is effectively used to refer to three things: a unit of account (today defined as a currency basket), a non- tradeable liability of the participants (called SDR allocation), and an asset (called SDR holding) that is tradable within the SDR system. After the demise of the Bretton Woods System, the SDR system was long seen as a ‘solution in search of a problem’, with an unclear practical purpose.
Based on the analysis of original IMF data, we argue that the SDR system today has three different functions: First, it acts as a de-facto credit line for participants to borrow usable currency, predominantly USD, from other participants which can be obtained by selling SDR holdings. Second, it allows the IMF member states to pay contributions to the IMF General Department and to other prescribed holders. Third, it allows for those prescribed holders to ask for contributions in usable currency from IMF member states. Based on this analysis, we see the SDR system in its present form as serving a very minor and narrow role in the international monetary architecture. Given its accounting structure and functions, we caution against suggestions that this system can be used as a ready-made remedy against potential large scale solvency problems that may finally break out in the aftermath of the COVID-19 pandemic.
Presentations at the 13th Critical Finance Studies conference (09/2021) and the Warwick Critical Finance Manuscript Development Workshop 3.0 (09/2021)