Thursday, May 14, 2015

Greece and IMF SDRs—Gold Next?



The FT makes a hullabaloo out of Greece using special drawing rights (SDR) to pay the IMF earlier this week, referring to the step as "unusual." Zero Hedge predictably grabs the baton and runs as far as it can go with the story.

It's a good opportunity to revisit the SDR, a topic I last wrote about back in 2013.

The FT claims that the payment of SDRs to the IMF is "the equivalent of taking out a low-interest loan from the fund to pay off another." Here the FT has committed cardinal error #1 when it comes to understanding how SDRs work—SDRs are not lent out by the IMF.

I like to think of the SDR mechanism as comprised of 188 lines of credit issued to each of the IMF's 188 members. These lines of credit are denominated in SDR and apportioned according to each countries' relative economic size. Any line of credit needs a creditor. In the case of SDRs, who fills this role? Why, the 188 members of the IMF do. The SDR system is a mutual credit system, or what I referred to in my older post as the world's largest Local Exchange Trading System, or LETS. Where does the IMF stand in all this? It is simply an administrator of the system. So by paying the IMF in SDRs, the Greek government isn't taking out a low-interest loan from the IMF—rather, it's drawing down on the credit provided to it by 187 other countries. As for the IMF, it isn't getting another Greek-issued debt instrument. Rather, it is getting a mutual liability of 188 nations.

The second sin in the FT's article is the assumption that SDRs are "rarely tapped" and that therefore, Greece is doing something unusual in "raiding" its SDR account. As a quick glance to the data shows, that's simply not the case. The chart below (apologies for its extreme height, but it's the only way I can visualize the data) shows that over time,  countries have tended to spend down their SDR lines of credit. Any nation to the left of the 100% line (and illustrated in light blue) has drawn down on their credit line while those to the right (illustrated in darker blue) have accumulated SDR surpluses. Most countries lie to the left of the line. Greece, which after this week's transaction has just 5% of its total line of credit undrawn*, joins Macedonia, Iceland, Hungary, Serbia, Ukraine, and Romania near the low end of the range, many of whom drew down their balances to deal with the after-effects of the credit crisis.

Data Source


Nor is the FT article right in implying that it is unusual for countries to pay the IMF in SDRs. Consider that since the SDR's inception in 1969, 204 billion SDRs have been issued to 188 member nations. Logic tells us that each of these 204 billion SDRs must be owned by some combination of member nations, right? Not quite. The 188 nations collectively own only 189 billion SDRs. Who holds the missing 15 billion SDRs? Fifteen institutions, or proscribed holders, have been granted the ability to buy and sell SDRs in the secondary market, including the Arab Monetary Fund, the Bank for International Settlements, and the European Central Bank. Together they own about 1.2 billion SDRs. But the real sop here is the IMF itself, which owns around 13.5 billion SDRs. Because IMF members can use SDRs in transactions involving the IMF, namely the payment of interest on and repayment of loans (see here), the IMF has become the second largest owner of SDRs (after the U.S.).

So in general, the SDR mechanism has been characterized by steady drawdowns of SDR lines of credit by member nations, with surpluses accumulating to the IMF. Far from being unusual, Greece's decision to pay the IMF in SDRs is pretty much par for the course.

One thing I find interesting is that the SDRs that Greece used to pay the IMF are the property of the Bank of Greece, Greece's central bank, and not the Greek government (see here). This means that BoG Governor Yannis Stournaras had to willingly open his pockets to the Greek government to facilitate the IMF payment. In doing so, the central bank has accepted a Greek government-issued liability to pay back SDRs rather than the actual SDRs. As a claim on 187 nations, the latter is surely preferable to the former, which is a claim on a failing nation.

So what about the BoG's other larger unencumbered asset, its gold? According to its most recent balance sheet, the Bank of Greece now owns €5.4 billion of the yellow metal, or 3.62 million ounces. For more on Greece's gold, Ronan Manly has the details. Having just given up his SDRs, would Stournaras be willing to render this gold up to the Greek state in return for a gold-denominated IOU with finance minister Yanis Varoufakis's signature on it? If so, the Greek government could sell this gold on the market for euros to pay the IMF. Settling scheduled June and July payments would be a breeze. This would no doubt be a stain on the BoG's independence, but with the Eurogroup turning the screws, all chips may be in play.



*I'm assuming that Greece paid 517 million SDRs to the IMF, worth 650 million euros at current SDR-to-euro exchange rates.

4 comments:

  1. Quick interpretation with conundrum:

    I’m having difficulty visualizing some kind of aggregate SDR balance sheet as a derivation of your diagram. Such an interpretation should not be affected by the fact that the IMF is only an administrator. I would think it should be analogous to “funds under management” that are not shown on a bank balance sheet (i.e. a bank’s investment management activities such as mutual fund offerings).

    If Greece is representative of the stock/flow interpretation, then the 100 per cent vertical line represents an undrawn credit line and the white gap on the left represents a drawn line. A drawn line is a balance sheet liability for the drawer of the line. So I would think the sum of the gaps for those with drawn lines represents the aggregate liability, which is the same as the aggregate asset of an aggregate SDR balance sheet. The sum of the while gaps appears to be a pretty healthy chunk, which should correspond to the 204 billion SDRs in your narrative description.

    Similarly, I would think that the sum of the dark colored “surpluses” on the right hand side of that line represent the aggregate liability of the SDR balance sheet, which should be the same as the aggregate asset of those with surpluses.

    Is that a correct interpretation? If so, how is there a gross 204 billion SDR asset-liability equivalence given that the surpluses as shown still account for 189 billion of the gross surplus (according to your explanation of the source of funds side), yet there seems to be some inevitable mismatch in the numbers given the relative sizes of those sections I’m referring to. And even if the drawn and surplus depictions are only percentages, the surplus nations seem quite small to account for the bulk of the gross balance sheet size.

    I’m sure there must be an explanation. One explanation might be that your diagram does not represent an outstanding stock position of deficit and surplus positions but rather some sort of historical flow. Yet your Greece example doesn’t seem to read this way. Another is that I’m completely misunderstanding the nature of what goes on as an implied balance sheet. Yet again your Greece example seems to suggest an actual draw which is analogous to a draw on a bank loan which again is a balance sheet position. A bank credit line is not a balance sheet position but a drawn portion is.

    My defense for misunderstanding is that I’ve done no other reading on this. But again, the IMF role as administrator shouldn’t be relevant to the concept of a balance sheet in drawn SDRs as far as I can see.

    ReplyDelete
    Replies
    1. Hi JKH,

      Here's a description of the actual way SDR's are accounted for on national balance sheets. For ease, assume that the 204 billion SDRs are apportioned to 2 nations rather than 188 nations. At the outset, Nation 1 gets 100 billion SDRs and Nation 2 gets 104 billion. Unlike a regular line of credit, SDRs are immediately recognized as a liability of each nation, even if they are not drawn.

      Nation 1
      A/L
      100b/100b

      Nation 2
      A/L
      104b/104b

      IMF
      A/L
      0/0

      Now assume that Nation 1 makes a payment of 50 billion SDRs to Nation 2. Perhaps it purchases some of Nation 2's national currency:

      Nation 1
      A/L
      50b/100b

      Nation 2
      A/L
      154b/104b

      IMF
      A/L
      0/0

      Now assume that both nations decide to make 25 billion SDR payments to the IMF. Perhaps they are settling some old outstanding debts to the IMF:

      Nation 1
      A/L
      25b/100b

      Nation 2
      A/L
      129b/104b

      IMF
      A/L
      50/0

      Nation 1 represents the "sum of the white gaps" as you refer to it. Nation 2 the sum of the "dark coloured surpluses." Does that help?

      Delete
  2. Thanks.

    That makes sense and corresponds to how I would have interpreted individual transactions.

    N1 is in a net liability position (white gap), nation 2 is in a net asset position (dark surplus), and the IMF is in a net asset position.

    That doesn't really answer my question, which concerns my puzzlement over the nature of the proportionality (or lack thereof) that the graph seem to depict in contrast to the actual numbers you cite.

    Don't worry about it. I can always dig deeper into the numbers sometime.

    ReplyDelete
    Replies
    1. what I mean is that the IMF doesn't account for much of the gross asset-liability mismatch

      so I'm looking for more proportion between the sum of the white gaps and the sum of the dark surpluses - even if they are percentage expressions

      Delete