Monday, July 6, 2009

The IMF and the Special Drawing Rights Bonds

As we mentioned before here, the IMF is planing to sell bonds for the first time in its history as part of its efforts to raise new funds. We have also explained that China and Brazil have announced their intention of buying the notes, denominated in special drawing rights (SDR). SDR is the IMF currency and is a basket of currencies. In my opinion, China and Brazil are being generous enough to lend IMF money mostly because both countries want a larger voting share at the IMF.

In any case, by July 1, the IMF announced that the board approved a framework for issuing notes to member states. Interest payments will be made quarterly SDR interest rate, a weighted average of 3-month interest rates in the U.S. dollar, euro, yen and pound sterling. The maximum maturity of five years, consistent with IMF lending under Stand-By Arrangements and Flexible Credit Line arrangements. The IMF already has welcomed commitments from Brazil and Russia to buy $10 billion of new IMF bonds each, and for China to purchase up to $50 billion of new debt. India, Korea and Saudi Arabia have also expressed interest.

For some analysts, the IMF bonds are not competing with US treasuries. According to Prasad these bonds could substitute for other reserve assets, meaning buying them might have little budgetary implications, and facilitating diversity of reserve holdings--which might boost yields of US bonds. Moreover if the assets were of limited duration (12-18m), EMs could restrict the timing of their financial support to press for governance reforms. These bonds would be traded only among the IMF and official agencies, i.e., central banks of member countries without a secondary market for private investors to acquire or trade these instruments. The bonds are likely to be denominated in SDRs and pay an interest rate linked to the SDR interest rate.

One should bear in mind that this extra funding was decided at the G20 meeting where authorities decided to triple the IMF funds to $750 billion. In this context, the issuance of these SDR bonds will come from the BRICs country as a way of accomplishing the $750 bn goal. Since August 2008 the IMF has lent approximately $50 billion. Most of the countries that have received IMF loans are emerging market countries and the extra funding will be lent to other EM that might need funding due to the global financial crisis.

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