Submitted by Jan Nieuwenhuijs of Gainesville Coins
A bazooka issuance of 456 billion new SDRs (~$650 billion) by the IMF in August 2021, “to boost global liquidity,” has accomplished very little of what was intended. Numerous nations are teetering on the brink of collapse and global growth is declining. Paltry SDR trading volume over the past year confirms the flaws of this asset.
As we shall see, the SDR is mainly used to grease the IMF’s wheels of bureaucracy.
Before August 2021 total Special Drawing Right (SDR) allocations to International Monetary Fund (IMF) members stood at 204 billion. (1 SDR is currently worth about $1.3 U.S. dollars). Through the addition of 456 billion SDRs, total allocations increased by 124%. Yet the new issuance has done next to nothing of what IMF’s Managing Director Kristalina Georgieva promised in 2021:
This is a historic decision—the largest SDR allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis. The SDR allocation will benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy. It will particularly help our most vulnerable countries struggling to cope with the impact of the COVID-19 crisis.
When it sounds too good to be true, it usually is. First off, creating more SDRs doesn’t increase global liquidity (the quantity of international reserves). Nor does it benefit all members, build confidence, stabilize the global economy, or foster resilience.
The SDR disappoints because it’s not a currency, it isn’t backed by anything, there is no free market to exchange them, and trade is illiquid (difficult to convert large quantities into cash). Regardless, the IMF spreads falsehoods about the SDR to keep up appearances.
Let’s dispel the myths surrounding the SDR.
What Is an SDR?
Officially the SDR “is a potential claim on the freely usable currencies of IMF members.” The IMF can allocate new SDRs to all of its member states. The IMF can’t allocate SDRs to itself. At issuance a member gains a double book entry on its balance sheet based on its IMF quota. SDR holdings on the asset side are equal to the amount of SDR allocations on the liability side. Because holdings and allocations net out, a new issuance of SDRs doesn’t make any member richer nor poorer.
Only central banks or monetary authorities, and several international financial institutions such as the IMF and BIS, can hold SDR positions. SDRs cannot be spent on goods and services. Commonly, the only way for a member to make use of its SDR position is to exchange SDR holdings for freely usable currencies (dollars, euros, yen, etc.) with another member.
There is no free market for SDRs to relieve excess supply or demand. Members can exchange SDR holdings through the IMF’s SDR Department, or they can be exchanged directly between parties, though this is more rare. States will notify the SDR Department if they want to buy or sell SDR holdings, in what quantity, and in exchange for which currency. Next, they await if their orders are filled.
Only SDR holdings can be exchanged. A member's SDR allocations are static unless the IMF decides to issue new SDRs. The SDR exchange rate is set by the exchange rates of a basket of currencies designated by the IMF: the U.S. dollar, euro, Chinese renminbi, Japanese yen, and British pound.
Suppose member A and member B both hold an equal amount of SDR holdings relative to their SDR allocations. Member A wants to sell 100 million SDR holdings for Japanese yen, and member B, coincidentally, wants to buy 100 million SDR holdings with Japanese yen. Both notify the SDR Department, and the exchange is cleared. After A received yen and B received SDR holdings, A will have more SDR allocations relative to its holdings, and, conversely, B will have more SDR holdings relative to its allocations.
Member A will now pay the SDR interest rate to the SDR Department and B will receive the SDR interest rate. Simplified, every member that is a net seller of SDR holdings will pay interest until it has bought back those holdings and vice versa (net buyers receive interest until they sell back). The SDR Department manages all interest flows. Effectively, selling SDRs is borrowing currency and buying SDRs is lending currency.
The IMF states SDRs are not their liabilities. This is although a country having a net SDR holding (more holdings than allocations), and thus eligible for receiving interest, is a liability of the IMF. See the SDR Department’s balance sheet from a Quarterly Report below. A country having a net allocation is an asset for the IMF.
The SDR interest rate is based on short term interest rates of the currencies that comprise the basket of currencies used to calculate the SDR’s exchange rate. SDR interest is paid every three months in SDRs, and the floor rate is 0.05%.
An SDR holding (“SDR” hereafter) provides the owner a potential opportunity to borrow freely usable currencies. An SDR is central bank collateral for a potential swap* without a specified maturity. I write, “potential opportunity to borrow,” and, “potential swap,” because there is little liquidity in SDRs and anything but a guarantee there is a seller of usable currency willing to buy SDRs. Hence, the SDR officially “is a potential claim on the freely usable currencies of IMF members.”
*In this case a swap means a “forward swap,” which has a spot and a forward leg. In the spot transaction a member sells SDRs for foreign exchange (FX)—and its counterparty does the opposite—and in the forward transaction this trade is undone buying SDRs with FX. A forward swap is the same as a collateralized loan. Hence, “swaps” often refer to lending/borrowing.
For more details, such as how the SDR exchange rate is calculated, please read my previous article.
The SDR’s Shortcomings
1. Trading in SDRs is illiquid because there is no free market. Only 190 countries and a few institutions can own and exchange SDRs; no private entities can expand the user base and improve liquidity. Nor does the IMF ever want to create a free market. When several Highly Indebted Poor Countries (HIPCs) want to sell (supply) SDRs for currency through the SDR Department, but demand is much lower, the IMF selects the HIPCs to prioritize. On this basis, the IMF will prefer to maintain a managed market. As with communism, managed markets come with a wide variety of problems.
When confronted with the SDR’s poor liquidity, IMF economists will point to the “designation mechanism.” This option should allow the IMF to decree which country must buy SDRs. All members have signed the IMF’s charter—the Articles of Agreement—that stipulates all rights and obligations. But when push comes to shove the Articles of Agreement can’t overrule sovereign nations.
In 1971 the U.S. unilaterally suspended gold convertibility, ended Bretton Woods, and introduced an era of free floating exchange rates. In 1973, “not a single IMF member was any longer in conformity with the Articles of Agreement,” according to Benn Steil, author of The Battle of Bretton Woods. Just as the Articles of Agreement couldn’t force countries to sustain fixed exchange rates in 1970s, today they can’t force countries to buy SDRs in quantities dictated by the IMF.
2. The last SDR issuance was, according to the IMF website, “to boost global liquidity.” It seems the IMF (the Fund) wants us to think that an SDR issuance increases the total amount of convertible currencies. SDRs can’t be spend on goods and services, though, and thus an increase in SDRs “does not increase the total liquidity of the global monetary system.” Why the Fund states new SDRs increase net international reserves is due to the subtle art of accounting.
There is a discussion on creating and trading SDRs and its effect on the money supply in a paper from 2011 that reads, by the IMF’s own admission: “Overall, the creation and use of SDRs is likely to have a neutral effect on the global money supply.” So why all the talk about issuing SDRs to boost global liquidity and meet the global need for reserves? (By the way, why not revalue gold if there is a global need for reserves?)
3. Newly allocated SDRs are distributed among members based on their IMF quota. In general, due to how quotas are calculated, wealthy developed countries that have large economies are being allocated the most SDRs, and poor undeveloped countries that have small economies get the least. About two-thirds of the SDR allocation implemented in August 2021 went to developed economies.
4. All the literature about SDRs is focused on the benefits of selling SDRs, how many developing countries can or have sold SDRs, and so on. It is as if this instrument is designed to be sold. What about buying and owning SDRs?
Buying SDRs is risky. Suppose China buys 10 billion SDRs with U.S. dollars. Over time, these holdings grow due to compounding interest. If China can ever sell those SDRs to get back currency when needed is uncertain. The Fund may prioritize other countries, provided there are buyers. The more SDRs the bigger the risk.
5. The SDR only pays out a short-term interest rate. For central banks that have a long-term investment strategy, the SDR isn’t suitable, as it doesn’t offer a long-term interest rate, which is normally higher than the short-term rate.
6. According to the Fund, SDRs are not a claim on the IMF. In court this statement might hold true; in practice the counterparty of a net SDR holding—the one responsible for paying the SDR interest rate—is the IMF. Furthermore, members rely on the IMF for being able to exchange SDRs. Long story short, SDR owners are greatly exposed to the Fund and thus all its members. What happens when members default? Counterparty risk increases.
7. More than once the IMF has changed the essence of the SDR in the past and can do so again in the future. What an SDR is today can be something different tomorrow.
Who Are the Largest Buyers and Sellers of SDRs?
Although detailed SDR trading data is not available, it can be said the bulk of SDR trading comes from transactions between the Fund itself and member states. The biggest buyer of SDRs is the Fund and the largest sellers are developing countries. Consequently, the largest wallet is the IMF’s General Resources Account (GRA). In July 2022 the GRA held 23 billion SDRs, while the second-largest owner, the U.S., held 4.6 billion SDRs. From the IMF:
Broadly, most SDR transactions relate to Fund-related operations versus uses of SDRs unrelated to GRA … operations (see … Annex Figure 3).
Regarding residual trading activity, SDRs are mostly sold by poor countries to rich countries.
A chart of all SDR holdings shows how big of a buyer the IMF exactly is.
The Fund’s operations in a nutshell: members have to pay a subscription to the IMF (based on their quota) mainly in their national currencies and reserve currencies. In line with its mandate the IMF then lends out these funds to nations with balance of payments problems. If the borrowers want to repay those loans they can do so in SDRs, to a certain extent, and hence the Fund’s GRA tends to amass.
Strangely, as the SDR has existed since 1969, no basic SDR trading data is published on a recurrent basis. An imperfect option is to collect position data from all participants in the SDR universe and track changes month by month. Or, for more figures, wait until special reports are published.
Based on the first option I estimate 36 billion SDRs have changed hands over the twelve month period since the end of July 2021. By comparison, trading volume in the global repo market is $3.5 trillion U.S. dollars (2.7 trillion SDRs) per day! A meager 36 billion exchanged in a year after 456 billion SDRs were issued reflects the disadvantages of this asset.
Although it’s possible actual trading volume was somewhat higher or lower, I would like to stress it’s much lower if we subtract trades related to IMF transactions.
Here is an example of how monthly changes in SDR holdings (my measurement of trading volume) are often affected: in August 2021, Argentina was allocated 3 billion SDRs. Up until February 2022 Argentina managed to sell nearly all its SDRs (+3 billion in trading volume). From August 2021 till February 2022 the Fund was the biggest buyer of SDRs, having mopped up 30% of all (and thus Argentina’s) sales. In March 2022, the IMF approved a loan to Argentina worth $44 billion U.S. dollars. Argentina received part of this loan in 5 billion SDRs from the IMF’s GRA (+5 billion in trading volume). Since March Argentina has mostly been selling, and so the cycle of shuffling SDRs between Argentina and the GRA can repeat.
Argentina has been responsible for nearly 10 billion of my total estimate of 36 billion in SDR trading volume, though 75% of it was sent back and forth with the Fund.
In 2009, trading after the 183 billion SDR issuance was also lackluster. During the twelve months that followed the allocation in 2009, only 3.4 billion SDRs changed hands in non-IMF-related transactions. The sellers were mostly developing nations, of which more than 80% sold at least 75% of their new SDRs. After an initial “spike,” volumes came down, save a few larger trades in 2015. Just 5 trades accounting for 35 million SDRs were executed in 2020. See the table below.
Before the 2009 issuance the Fund projected annual volume in non-IMF-related transactions to be 20 billion SDRs, which turned out to be 83% lower at 3.4 billion. Disappointing indeed.
In its first ever Annual Update on SDR Trading Operations, released in October 2021, not much is written about SDR trading volume after August 23, 2021. Without making a distinction between IMF-related and non-IMF-related transactions, it’s stated total volume was 6.9 billion SDRs in August and September 2021. My estimate of trading volume—based on month to month changes in positions of all participants—is roughly equal for this period. All sellers were developing countries, on average selling 82% of their new allocations.
According to the IMF, SDRs can be used by members to borrow FX unconditionally as opposed to the Fund’s regular lending operations that come with strings attached. I’m having a hard time acknowledging the unconditional aspect, because “most SDR transactions relate to Fund-related operations” and every member is largely depended on the Fund’s managed market to trade SDRs. The SDR is misrepresented by the Fund.
In my view, the SDR is an instrument used to reinforce the IMF’s right to exist. Certain theories of bureaucracy state that officials, too, “are motivated by their own self-interest [income and power] at least part of the time.” Like every other bureaucratic entity in existence the Fund wants to grow. Its inherent mission has produced a narrative about how the SDR is to “benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy.” A great pitch, of which little is true.
Here's my theory of why new SDRs are issued periodically. Because the Fund is the biggest buyer and owner of SDRs, it’s also the largest recipient of SDR interest. As mentioned above, many developing nations sell 80% of their SDRs instantly when new ones are issued. In the course of time paying SDR interest becomes a problem for these countries as they run out of SDRs. For the Fund there is an incentive to issue new SDRs to bail out these countries and thus itself. When all countries get new SDRs, the ones in debt (having sold SDRs) can continue paying interest to the Fund. Yes, several countries had almost no SDRs left before August 2021.
In the Proposal For a General Allocation of Special Drawing Rights, published in July 2021, the IMF writes: “Potential additional SDR inflows to the GRA resulting from increased use by members of SDRs for transactions with the Fund would be closely monitored and are expected to be manageable.” Ironically, the IMF knows that buying too much SDRs is risky.
The SDR's “value as a reserve asset derives from the commitments of members to exchange SDRs for freely usable currencies…” SDRs have no value outside the SDR system, and if members aren’t committed to the system anymore, for example because other members default or oppose the political views of partner members, the SDR value drops to zero.
The SDR will never be more than a fringe reserve asset, and thus can’t replace the dollar as the world reserve currency, like some economists want to believe.
New York Refuses To Give More Money For Offshore Wind Projects As Cheap “Green” Myth Implodes
New York Refuses To Give More Money For Offshore Wind Projects As Cheap "Green" Myth Implodes
By Irina Slav of OilPrice.com,
The New York…
By Irina Slav of OilPrice.com,
The New York state authorities have rejected a request by Orsted, BP, and Equinor for raising the price of electricity in future power purchase contracts featuring offshore wind energy.
Offshore wind developers have been pressured by rising raw material and component costs, and higher borrowing costs, which has cast doubt over the viability of many projects. Indeed, Reuters reported that some projects planned for the waters off the coast of New York may need to be reconsidered in light of the authorities’ decision.
"Sunrise Wind's viability and therefore ability to be constructed are extremely challenged without this adjustment," Orsted told Reuters.
Sunrise Wind is an offshore project with a planned capacity of 924 MW that could supply electricity to 600,000 households. According to Orsted, it would also involve several hundred million dollars in investments in the state and 800 jobs.
"These projects must be financially sustainable to proceed," the president of Equinor Renewables Americas told Reuters, referring to the offshore wind projects the Norwegian energy major is leading in the U.S.
Per Reuters, Equinor is involved in three projects with BP—the 816 MW Empire Wind 1 and the 1.26 GW Empire Wind 2, as well as the Beacon Wind farm, with a projected capacity of 1.23 GW.
Indeed, rising costs have compromised the financial sustainability of many wind power projects and earlier this year led to the cancellation of a large-scale one off the coast of the UK.
Swedish Vattenfall, which led the Norfolk Boreas project, said it would quit it after it saw costs rise by 40%, which made the project unviable.
To tackle the rising cost problem, wind developers have turned to governments, asking for additional tax incentives and higher electricity prices, busting the myth of cheap wind power.
The New York Public Service Commission said that if they had agreed to do what the wind developers wanted, that would have added 6.7% to New Yorkers’ electricity bills, which are already among the highest in the State.
Russia Denies Talks Of A Gas Cartel
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By Michael Kern of OilPrice.com
There are no plans for the creation of a natural gas cartel similar to…
By Michael Kern of OilPrice.com
There are no plans for the creation of a natural gas cartel similar to the OPEC cartel in crude oil, Russia’s Deputy Prime Minister Alexander Novak said on Friday.
“There are no discussions to set up a (gas) cartel,” Novak told RT Arabic TV as quoted by Reuters.
The Gas Exporting Countries Forum (GECF) is an organization of gas producers and exporters but it is not coordinating supply to the market the way OPEC does. Russia is a member of the GECF and its top energy official Novak said in the televised interview that the gas organization was “mostly about exchanging views.”
Since the Russian invasion of Ukraine and the halt of most of Russian pipeline gas supplies to Europe, the EU has turned to LNG imports and increased deliveries via offshore pipelines from Norway and North Africa to replace the Russian supply, which accounted for around one-third of all European gas imports before the war in Ukraine.
The EU aims to ditch Russian gas by 2027.
Having lost the European market, Russia has raised pipeline exports to China and its global LNG exports, which are neither sanctioned nor too shunned in gas-starved Europe.
This year, the exports of Russian gas giant Gazprom to Europe have slumped and dragged its profits down. Gazprom has reported a massive drop in its first-half net profit as deliveries to Europe plunged compared to the same period in 2022 when Russia was still supplying pipeline gas to its European customers.
The major drop in Gazprom’s gas deliveries to key customers was due to the halt of Russian pipeline gas exports to nearly all European countries.
Gazprom started to reduce supply via the Nord Stream pipeline to Germany in June 2022, claiming an inability to service gas turbine maintenance outside Russia due to the Western sanctions against Moscow for the invasion of Ukraine. This was weeks before the sabotage of the Nord Stream pipelines at the end of September 2022, which definitively closed all pipeline gas routes of Russia’s gas to Germany.
Carnival Cruise Line enforces a key main dining room rule
Cruisers love to debate every aspect of eating in the main dining room, but Carnival has drawn a line in the sand on one key issue.
During the day families and friends may go off in different directions, but on most nights they gather in the main dining room for a multicourse dinner experience that generally takes about 90 minutes.
Cruise lines have more small tables, so in many cases you're not sitting with strangers as often as you would have been in the past, but dinners in the main dining room remain an important part of cruising.
Dinner brings everyone on a trip together and creates shared memories even when days are spent in different places.
The main dining room , of course, is not the only option. You can opt for specialty dining or the buffet, or you can just grab a pizza. Still, with the capacity to serve the entire ship across multiple seatings, the main dining room dinners remain a crucial part of the cruise experience on Carnival, Royal Caribbean (RCL) - Get Free Report, MSC, and Norwegian sailings.
Cruisers, of course, love to debate any changes and rules that are enforced or not enforced in the main dining room. Thousands of social-media posts argue how and whether each cruise line enforces its dress code, with some people wanting to wear shorts, hats or flip-flops while others lament that passengers no longer wear tuxedos on formal nights.
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Don't be late for your Carnival main dining room time
Heald spends most days answering questions from Carnival's customers. Sometimes he shares notes that have been sent to him and solicits public response.
In this case, he shared what happened to one family when it arrived 40 minutes late to its designated meal time.
On our recent Pride cruise from Rome, we had a table of 10. After long days in port, we did not always make it on time for early seating and came into the main dining room at intervals. This really threw our servers off and therefore, OUR service suffered. One evening, we were all 40 minutes late That is all.. The restaurant manager told us we had to eat at the buffet or come back to see if there was a table available at the late seating.
Carnival, like most cruise lines, offers early and late seatings as well as "anytime" dining options. People who have a specific seating will eat at the same table every night, while people with flexible time seating will eat in a different dining room.
The family that arrived late shared more info with Heald.
That is not acceptable with teenagers. If Carnival puts a cruise together with long stays in ports then expect many to be late. We were punished for being 30 mins late. Unacceptable !!! You are monsters!
Carnival's brand ambassador tried to be understanding but also backed the main dining room management's decision.
I also understand as a parent myself that getting a family ready for dinner on time is not easy, especially after a long day in port. However, the waiter has not just this table to serve but others and moving back to serving appetisers while everyone else is about to be served their main course really can cause a massive dollop of stress for the waiter. If perhaps they had Your Time Dinning or late seating it might have been manageable but early seating, nope, I support what the Maitre D did by asking them to use the Lido or come back later for a table
Heald also posted a poll asking his followers to vote on whether directing guests who were 40 minutes late to their seating to the buffet was a correct choice.
His followers overwhelmingly agreed with the cruise line: 97% agreed with the decision and 3% said the cruise line should have tried to accommodate the family.
A comment from Pam Miller Downey seemed to illustrate how most people felt about the issue.
"They were late...that means not on time..that means they eat somewhere else. Most people who are 40 minutes late wouldn't even dream of going to the MDR. They would automatially go to Lido or one of the other eateries," she wrote.china
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