Thread by @WholePicture_

The IMF boss Kristalina Georgiewa wants to give the member states an allocation of special drawing rights worth 650 billion dollars. There are voices who want to turn it into a global cryptocurrency at the same time.

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Special drawing rights (SDR) are reserve credits that give entitlement to freely usable currencies of member countries of the International Monetary Fund (IMF). SDRs were created in 1969 to supplement the currency reserves of the member states.

The IMF is currently discussing the possibility of a special allocation of SRZ in order to provide additional liquidity to countries hit by the pandemic.

The G-20 discovered special drawing rights for crisis management

SDR allocations in billions

by @NZZ
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The value of the SDR is based on a basket of currencies made up of the dollar, the euro, the Chinese renminbi, the yen and the British pound.

What a country does with the allocated SDRs depends on its needs. A heavily indebted developing country can exchange its SDRs for dollars or francs to meet its obligations; a country like Switzerland can act as a counterparty.

Through bilateral exchange agreements with member countries, the IMF ensures that such exchange transactions function smoothly.

The allocation of SDRs should have a confidence-building effect and support the global economic and financial system during the crisis.

• IMF leader Kristalina Georgieva recently announced that she would have a proposal drawn up for an allocation of SDRs worth $ 650 billion by June this year. This week, she is likely to receive political support from the finance ministers and central bank governors of the G-20

$ 650 billion is the maximum amount that the US Treasury Secretary Janet Yellen can approve without the approval of the US Congress, which is traditionally critical of the IMF.
The Trump administration had categorically ruled out such a liquidity injection.

• Trump's rejection was based on the fact that 70 percent of the allocated funds would go to G-20 countries that actually hardly need it, while poor developing countries would only receive 3 percent.

Specifically, the USA wanted to prevent IMF member countries such as China and Iran from gaining new special drawing rights.

In order to secure the approval of the USA and to avoid that the enemies of the USA would be supported by it, the allocation should now be implemented as needed.

That means that those countries that do not need their liquidity injections can also hand them over to poorer countries.

The allocation of special drawing rights is, however, a cheap measure. It frees the finance ministers of the rich countries from the task of making direct donations to the IMF or the developing countries, but can be sold as a generous action for the benefit of needy countries.

The hard currency countries only incur costs if they had to finance the exchange of dollars for SDRs by issuing debt instruments.

In addition, these countries then receive what is known as the SDR interest rate on the SDR they receive to compensate at least in part.
So it's not completely free.

Attempts to further enhance the role of the SDR, for example in the direction of a global cryptocurrency, are doomed to failure. Because with the Americans, the fun stops if only somehow the status of the dollar as the dominant reserve currency is questioned.

home.treasury.gov/news/press-rel…
“Containing the pandemic around the world is of paramount importance to a robust economic recovery.

To this end, the Treasury Department is working with IMF management and other members on a general allocation of SDRs of US $ 650 billion to IMF member countries.

Addressing the long-term global need for reserves would support the global recovery from the COVID-19 crisis. "

"A strong global recovery would also increase the demand for US exports of goods and services - create US jobs and support US firms."

“Based on current global liquidity conditions, the Treasury Department does not currently support any additional SDR allocation beyond the proposed $ 650 billion.

The Treasury Department would only consider an additional SDR allocation beyond the proposed $ 650 billion at a later date if circumstances warrant it at that time. "

So for now there will only be the 650 billion. Depending on your mood, more!

An allotment itself caused the United States no direct costs.

Based on an allocation of $ 650 billion, the United States will receive $ 113 billion in SDRs. The idea that an SDR allocation is a financial burden stems from the possible exchange of SDRs for US dollars.

If countries wanted to sell their SDRs to the United States for dollars, the Treasury Department would exchange SDRs for dollars in the Exchange Stabilization Fund (ESF).

The US cash position would decrease and federal borrowing requirements would increase. However, the United States would also receive interest on the SDRs we purchased, which would largely (and possibly completely) offset an increase in Treasury Department borrowing costs.

Of course, there can also be alternative costs if you compare how much interest the US would get by issuing a 10-year US government bond. With the same dollar cash, the US could theoretically generate more or less interest, depending on the interest rate.

“If countries want to sell their SDRs to the United States for dollars, the Treasury Department would exchange SDRs for dollars in the Exchange Stabilization Fund (ESF).

The US cash position would decrease and federal borrowing requirements would increase. However, the United States would also receive interest on the SDRs we acquired, which would largely (and possibly fully) offset an increase in Treasury Department borrowing costs ”

“In 2016, the IMF estimated the global reserve gap to be between $ 430 and $ 1.4 trillion. This shortage of international reserves is likely to be greater now.

In addition, many low-income and developing countries continue to be limited in their ability to issue debt in international markets to either replenish reserves or finance household expenditures.

The provision of reserves will help prevent countries from buying foreign currency that could weaken their currencies and further build US trade and current account deficits. "

“SDRs are given out by the IMF to IMF members and can only be used by IMF members and a limited number of international institutions. SDRs cannot be exchanged by private entities and all transactions with SDRs must be processed through the IMF's SDR department.

In order to use SDR, a country must find an IMF member willing to provide a usable currency (generally dollars, euros, or yen) in exchange for SDR. "

"A US $ 650 billion SDR allocation would provide US $ 21 billion in SDR liquidity support to low-income countries and US $ 212 billion to other emerging and developing countries (excluding China)."

“The United States reserves the right to refuse to purchase SDRs from any country we select, including those that fall under US sanctions regimes, and we are working to coordinate with other countries to do the same.

Because all IMF members receive an SDR allocation commensurate with their quota share, some countries whose policies the United States oppose receive an SDR allocation. However, these countries will not necessarily be able to exchange their SDRs for hard currencies.

First, the country's authorities must be recognized by IMF membership. Then the country would have to find a country willing to provide them with hard currencies in exchange for their SDRs. "

"WILL A SDR ALLOCATION Jeopardize the DOLLAR'S RESERVATION STATUS?
The dollar currently accounts for 57% of global reserves while SDRs account for only 2%.

Under the proposed allocation, the SDR's share of global reserves would only increase to around 7%, while the dollar would be around 54%, more than three times the next most important currency.

In addition, restrictions on who can hold and operate SDRs and the role of the IMF in clearing all SDR transactions severely limit the SDR's ability to act as a substitute for the dollar's reserve currency status. "

A total of 73 poor countries are eligible for temporary debt relief under the Debt Service Suspension Initiative (DSSI) of the G-20.

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The group of the major economies launched the initiative in spring 2020 with the placement of the International Monetary Fund and the World Bank as an immediate measure to support poor countries during the Covid-19 pandemic.

In 2020, 43 countries benefited from the initiative and were able to defer payments to bilateral state creditors worth $ 5.7 billion (interest and repayments).

The initiative will run until mid-2021 and by then it should grant the qualified states a further deferment worth $ 7.3 billion. The G-20 is currently discussing whether it wants to extend the DSSI until the end of 2021.

Of the 73 eligible countries, 23 are in Asia and Oceania. Of these 23, 10 have applied for DSSI debt relief so far.

by @NZZ
The G-20 debt postponement is first and foremost a Pakistan initiative

Potential savings thanks to DSSI from May to June 2021, in million $ (as% of GDP)

@NZZ
Which countries Pakistan owes the most money in 2021
Debt servicing due 2021 (top five creditors), in billion $

It is no surprise to whom Asian countries owe the most money: China. In the full year 2021, for example, interest and principal payments to China worth $ 2.2 billion will be due for Pakistan, in the case of Burma it will be $ 464 million.

To what extent China will actually keep its commitments that it has entered into as part of the G20 initiative and actually grant the promised suspension of payments is currently unclear.