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.