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* The current SDR is a relatively small basket of currencies, this is both a strong point and weak point of the SDR.
* The current SDR is a relatively small basket of currencies, this is both a strong point and weak point of the SDR.
* The [[US Dollar]], [[Euro]] and [[UK Pound]] are contained in the SDR—these currencies have been losing value against a larger basket of secondary reserve currencies since the [[late 2000s recession]] started in 2007.
* The [[US Dollar]], [[Euro]] and [[UK Pound]] are contained in the SDR—these currencies have been losing value against a larger basket of secondary reserve currencies since the [[late 2000s recession]] started in 2007.
* The SDR does not contain the [[Chinese Yuan]], [[Indian Rupee]], [[Australian Dollar]] or [[Canadian Dollar]], which are important benchmark or secondary global reserve currencies.
* The SDR does not contain the [[Chinese Yuan]], [[Indian Rupee]], [[Australian Dollar]], [[Swiss Franc]] or [[Canadian Dollar]], which are important benchmark or secondary global reserve currencies.
* The lack of global banking support for consumers (that is to say private persons and businesses) for the SDR.
* The lack of global banking support for consumers (that is to say private persons and businesses) for the SDR.
* The possible loss of national sovereignty of the nations involved.<ref name="ronpaul.com">http://www.ronpaul.com/2009-04-03/ron-paul-global-reserve-currency-is-good-as-long-as-its-gold/</ref><ref name=Rothbard>{{citation |last = Rothbard|first=Murray N. |title=What Has Government Done to Our Money? |publisher=Ludwig von Mises Institute |publication-date=1990|isbn= 0945466102 }}</ref>
* The possible loss of national sovereignty of the nations involved.<ref name="ronpaul.com">http://www.ronpaul.com/2009-04-03/ron-paul-global-reserve-currency-is-good-as-long-as-its-gold/</ref><ref name=Rothbard>{{citation |last = Rothbard|first=Murray N. |title=What Has Government Done to Our Money? |publisher=Ludwig von Mises Institute |publication-date=1990|isbn= 0945466102 }}</ref>

Revision as of 16:51, 11 March 2010

A Special Drawing Right (SDR) is the monetary unit of the reserve assets of the International Monetary Fund (IMF). The unit was created in 1969 in support of the Bretton Woods system of fixed exchange rates to alleviate the shortage of U.S. dollar and gold reserves in the expansion of international trade.[1] The SDR unit is defined as a weighted sum of contributions of four major currencies, reevaluated and adjusted every five years, and computed daily in terms of equivalent United States dollars. Special Drawing Rights are not a currency, but they represent potential claims on the currencies of the IMF members. SDRs obtain their reserve asset power from the commitments of the IMF member states to hold and honor them for payment of balances. The IMF uses SDRs for its monetary unit of account. SDRs are denoted with the ISO 4217 currency code XDR.

Special Drawing Rights are allocated to member states as a low cost alternative to debt financing for building reserves. Such allocations provide an unconditional liquidity for the SDRs. After the collapse of the Bretton Woods agreement in 1973, only one allocation was made until 2009, when a third allocation enlarged the system by a factor of 8 and increased countries' holdings by about 75%. A further special allocation the same year compensated those countries which had joined the fund since 1981. As of September 2009, total SDR allocations amount to SDR 204 billion.[1]

Special Drawing Rights carry an interest rate that is computed weekly by the IMF. It is paid or received quarterly by the members for deviations of their SDR holdings from their SDR allocations.

Purpose

SDRs are used as a unit of account by the IMF and several other international organizations. A few countries peg their currencies against SDRs, and it is also used to denominate some private international financial instruments. For example, the Warsaw convention, which regulates liability for international carriage of persons, luggage or goods by air, uses SDRs to value the maximum liability of the carrier.

In the eurozone, the euro is displacing the SDR as a basis to set values of various currencies, including Latvian lats. This is a result of the ERM II convergence criteria which now apply to states entering the European Union.

In Japan, JETRO and others are using the SDR to calculate ODA, official development assistance aid.

SDRs were originally created to replace gold and silver in large international transactions and provide a cost-free alternative to member states for building reserves. Under the Bretton Woods system, the reserves of gold and U.S. dollars proved too limited to support the growth of international trade and exchange. Thus SDRs are credits that nations with balance of trade surpluses can draw upon from nations with deficits.

It has also been suggested that having holders of US dollars convert those dollars into SDRs would allow diversification away from the dollar without accelerating the decline of the value of the dollar.[2][3]

Definition

When Special Drawing Rights were created in 1969, when the Bretton Woods system was still operational, one SDR was defined as the value of 0.888671 grams of gold, the same as the U.S. dollar.[1] The SDR retained this value, however, even as the U.S. dollar devalued in 1971, 1972, and 1973, by the last of which the dollar was worth SDR 0.828948. Effective July 1, 1974, after the breakdown of the fixed exchange rate system, SDRs were defined in terms of a basket of major currencies used in international trade and finance.[4]

For the period of 2006-2010, one SDR is the sum of 0.6320 US Dollars, 0.4100 euro, 18.4 Japanese yen and 0.0903 pound sterling.

Due to varying exchange rates, the relative value of each currency varies continuously and thus the SDR value fluctuates. The IMF fixes the value of one SDR in terms of United States dollars daily, based on the exchange rates of the base currencies, as quoted at noon at the London market. If the London market is closed, New York market rates are used, and if both markets are closed, European Central Bank reference rates are used. The latest U.S. dollar valuation of the SDR is available from the International Monetary Fund web site.[5]

Before the introduction of the euro in 1999, its position was taken by the Deutsche Mark and the French franc. The weight of each currency in the definition is determined by the IMF Executive Board in accordance with the relative importance of the currency in international trade and finance every five years.

Definition of 1 XDR (and approximate relative contribution)[6]
Period United States USD Germany DEM France FRF Japan JPY United Kingdom GBP
1981–1985 0.540 (ca. 42%) 0.460 (ca. 19%) 0.740 (ca. 13%) 34.0 (ca. 13%) 0.0710 (ca. 13%)
1986–1990 0.452 (ca. 42%) 0.527 (ca. 19%) 1.020 (ca. 12%) 33.4 (ca. 15%) 0.0893 (ca. 12%)
1991–1995 0.572 (ca. 40%) 0.453 (ca. 21%) 0.800 (ca. 11%) 31.8 (ca. 17%) 0.0812 (ca. 11%)
1996–1998 0.582 (ca. 39%) 0.446 (ca. 21%) 0.813 (ca. 11%) 27.2 (ca. 18%) 0.1050 (ca. 11%)
Period United States USD Europe EUR Japan JPY United Kingdom GBP
1999–2000 0.5820 (ca. 39%) 0.2280 (ca. 21%) 0.1239 (ca. 11%) 27.2 (ca. 18%) 0.1050 (ca. 11%)
= 0.3519 (ca. 32%)[nb 1]
2001–2005 0.5770 (ca. 45%) 0.4260 (ca. 29%) 21.0 (ca. 15%) 0.0984 (ca. 11%)
2006–2010 0.6320 (ca. 44%) 0.4100 (ca. 34%) 18.4 (ca. 11%) 0.0903 (ca. 11%)
  1. ^ When the euro was introduced in 1999, it simply replaced the mark and franc at the fixed conversion rate. The IMF officially quoted the amounts of converted marks and francs separately.[7]

Interest rate

Like any national currency, Special Drawing Rights carry a weekly determined interest rate.[1] The rate is based on a weighted average of the representative short term rates in the money markets of the base currencies. The SDR interest rate is paid by the IMF members on any shortfall of SDR subscriptions (below their cost-free allocation), and on non-concessional IMF loans. The IMF pays its members the interest rate on the fraction of their SDR subscriptions that is above their allocation quota.[1]

Allocations

SDR allocations by the IMF are officially authorized by the G-20 conferences and published by the International Monetary Fund.[1]

Allocations began in 1970 in yearly installments, creating an initial pool of SDR 9.3 billion by 1972. A second series of installments brought the total to 21.4 billion by 1981. Since then, up to the 2008 banking crisis, no new allocations took place. On 2 April 2009, the G-20 authorized the issuance of $250 billion in new SDRs to augment the foreign reserves of IMF members and quickly channel resources into emerging economies.[8] Increases in the reserves of some emerging economies will be substantial, e.g., South Korea’s will grow by $3.4 billion, India’s by $4.8 billion, Brazil’s by $3.5 billion, Russia’s by $6.9 billion and China's by $7.3 billion.[9]

Chronology

The following Special Drawing Rights allocations have been effectuated by the International Monetary Fund:[1]

  • 1970-1972: SDR 9.3 billion in yearly installments
  • 1979-1981: SDR 12.1 billion in yearly installments
  • 2009-08-28: SDR 161.2 billion
  • 2009-09-09: SDR 21.5 billion

This brings the total allocation to SDR 204.1 billion as of September 2009 (currently equivalent to about $324 billion).

Other uses

SDRs are the basis for the international fees of the Universal Postal Union, responsible for the worldwide postal system.

As a spinoff from the International Postal Union value transfer rules that use the SDR (but via the International Telecommunications Union as sister UN agency) the SDRs unit of value is used to transfer roaming charge files between international mobile telecoms operators and charges for some radio communications.[citation needed]

  • However, within the European Union (and Norway, Iceland and Liechtenstein), prices for roaming have been regulated with regular prices specified in Euros instead of SDR. Both the fees paid by the customers to the phone companies, and the fees paid between the companies, are regulated with amounts given in EUR.

SDRs limit carrier liability on international flights (see Montreal Convention, Warsaw Convention), as well as ship owner liability for cargo damages and oil pollution.

Banking and finance system support

SDR-denominated accounts are, in general, not available from commercial banks.

The African Development Bank's own "currency", the Units of Amount (UA), equals the SDR currency basket.

In late March 2009 Zhou Xiaochuan, governor of the People's Bank of China proposed using the SDR as a worldwide reserve currency in place of the dollar as a way to cope with the multitude of problems associated with the US Dollar and the Euro being used as world reserve currencies.[10][11][12][13] However, independent economists point out that the SDR is unlikely to emerge as an alternative reserve currency in the foreseeable future.[14] A few of them, in fact, argue that China's proposal may be motivated by political, rather than economic, considerations.[15]

Potential pitfalls as a reserve currency

There are potential pitfalls of using the SDR as a reserve currency.

  • The current SDR is a relatively small basket of currencies, this is both a strong point and weak point of the SDR.
  • The US Dollar, Euro and UK Pound are contained in the SDR—these currencies have been losing value against a larger basket of secondary reserve currencies since the late 2000s recession started in 2007.
  • The SDR does not contain the Chinese Yuan, Indian Rupee, Australian Dollar, Swiss Franc or Canadian Dollar, which are important benchmark or secondary global reserve currencies.
  • The lack of global banking support for consumers (that is to say private persons and businesses) for the SDR.
  • The possible loss of national sovereignty of the nations involved.[16][17]
  • The potential harm of further centralization of power over monetary policy. See inflation.[16][17]

Other important externalities that have been occasionally cited by economists, but where economic research relating to these externalities may not be readily available

  • China & India's (Gold/Silver/Platinum/Palladium) Physical Reserves are not equivalent in size to those of the US with respect to SDR conversion.
  • The Gulf States, that is to say the Petrodollar states, have (Gold/Silver/Platinum/Palladium) Reserves that are potentially undersized for the current recessionary conditions.
  • Many other nations that could move over to the SDR have (Gold/Silver/Platinum/Palladium) Reserves that are too small for the size and importance of their economies.

See also

References

  1. ^ a b c d e f g "Special Drawing Rights (SDRs)". International Monetary Fund.
  2. ^ Special drawing rights : Here's a good way to solve the dollar problem - International Herald Tribune
  3. ^ FT.com / Comment & analysis / Comment - How to solve the problem of the dollar
  4. ^ de Vries, Margaret G. (1985), The International Monetary Fund 1972-1978: Cooperation on Trial, International Monetary Fund, ISBN 0939934434
  5. ^ "SDR Valuation (updated daily)". International Monetary Fund.
  6. ^ Antweiler, Werner. "Special Drawing Rights: The SDR Fact Sheet". University of British Columbia. Retrieved 2008-04-29.
  7. ^ "IMF Incorporates the Euro into the SDR Valuation and Interest Rate Baskets" (Press release). International Monetary Fund. 1998-12-31. Retrieved 2009-11-14. {{cite press release}}: Cite has empty unknown parameter: |trans_title= (help)
  8. ^ Special Drawing Right (SDR) via Wikinvest
  9. ^ Held in Reserve, The Economist
  10. ^ China backs talks on dollar as reserve -Russian source, Reuters, 19 March 2009
  11. ^ http://www.pbc.gov.cn/english/detail.asp?col=6500&id=178 People's Bank of China - Reform the International Monetary System
  12. ^ http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html Financial Times - China calls for new reserve currency
  13. ^ http://www.economist.com/finance/displayStory.cfm?story_id=13382566&source=features_box2
  14. ^ China's super currency call may not float by Venkatesan Vembu, Daily News & Analysis, 26 March 2009
  15. ^ 'China cannot really dump the dollar', an interview with Michael Pettis, by Venkatesan Vembu, Daily News & Analysis, 13 July 2009
  16. ^ a b http://www.ronpaul.com/2009-04-03/ron-paul-global-reserve-currency-is-good-as-long-as-its-gold/
  17. ^ a b Rothbard, Murray N. (1990), What Has Government Done to Our Money?, Ludwig von Mises Institute, ISBN 0945466102

Recent discussions about SDR in the mass media:

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