The IMF’s creation of a $650 billion Special Drawing Rights (SDRs) programme in August was well received. Most commentary focused on the size – at one stroke it nearly doubled the outstanding size of the SDRs created in the four previous occasions the IMF had pulled this out of its toolkit, the last being in 2009 after the global financial crisis (that one was $250 billion). At $650 billion, it’s as big as it could be without US Congressional approval.
But there are two largely unaddressed questions: the first is: why now? SDRs are essentially a liquidity tool. But, unlike in 2008, aren’t we continually being told that the global financial system passed this liquidity test with flying colours?
That’s the consensus, but suddenly here are $650 billion in SDRs. Perhaps this suggests that all’s not well under the hood of the global monetary system. It’s akin to the decision by the PBOC to cut its reserve requirements by 50bp in July: the conventional reading was that it was a stimulative policy, whereas historical correlation with previous cuts, such as in October 2018, suggest it’s a reaction to international monetary tightness.
Perhaps this suggests that all’s not well under the hood of the global monetary system
The second question is why use such a blunt tool? If, as was explained, the new issuance of SDRs is to help emerging markets respond to the crisis, then is this the best way to do it? After all, $375 billion will go to developed market countries.