Reforming the International Monetary System in the 1970s and 2000s
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Transcript Reforming the International Monetary System in the 1970s and 2000s
Reforming the international monetary system in the
1970s and 2000s: would an SDR substitution account
have worked?
Presentation by Robert N McCauley*
Senior Adviser, Monetary and Economic Department
To the joint Asian Development Bank/Centre for International
Governance Innovation/Hong Kong Institute of Monetary Research
conference on “The BRICS & Asia, Currency internationalisation, and
international monetary reform”, Hong Kong, 10-11 December 2012
* Views expressed are those of the author and not necessarily the views of the BIS
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Global crisis gives new evidence of dollar dominance…
Dollar shortage as non-US banks scramble for dollars
European banks need $ to fund US mortgage securities, loans to
Asian borrowers
Dollar used in 90%+ of forward transactions
Huge premium for dollars in forward markets
Natural experiment in Polish & Hungarian forex markets: local
currencies trade vs € for months then back to $: $ stable equilibrium
Unlimited Fed swaps to major central banks
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…but also brings back a long-standing alternative: the SDR
Ted Truman convinced US Treasury to support issuance of SDR
Still SDR single-digit percentage of forex reserves
Gov Zhou embraces Triffin, SDR-based international monetary system
2008 BIS Annual Report argues that an SDR based system would still
required last-resort lending in constituent currencies
Truman proposes that IMF issue SDRs to Fed/ECB/… to fund swaps(!)
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A single point of failure: a need for pluralism?
Kindleberger: leadership in global finance is stabilising
Political scientists dub this hegemony
Pluralism in international monetary system promises:
Joint control of growth of international liquidity
Fair sharing of rents
Protection against errors/ self-interest of hegemon
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Varieties of Triffin
Original: US s-t debt growing with global econ undermines gold link.
Like 1st speculative attack model of Henderson & Salant/Krugman.
Ignored that Bank of England managed gold link with little gold.
Genberg & Swoboda argue: It’s the policies, stupid!
Generalised: Padoa-Schioppa: national policies unlikely to lead to
global liquidity (however defined) growing at global optimum
Fiscal version: US government debt growing with global demand for
reserves is inconsistent with US fiscal sustainability.
Ignores generation of safe assets w govt guarantees.
Ignores ability of banks and other sovereigns to produce safe
assets in the dollar.
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Hard to argue a global lack of liquidity (by any def)!
True, 2011 CGFS report uses “shortage” twice as much as “excess”.
But see Caruana speech to SEACEN governors in Ulaanbator.
Central bank balance sheets swollen; over ½ of US Treas held by off’s.
Safe assets shrinking with downgrades but expanding w deficits and
expansion of agency debt
So those seeking more pluralism may look to substitution-type
remedies that lower dollar share without increasing global liquidity.
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Downgrades take toll on government bond markets
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International monetary reform
Recurring doubts about ability of US dollar to continue to serve as the
primary global reserve currency
Exorbitant privilege: unbalanced adjustment
Relative size of US economy declining
Dollar exchange rate weakening
Size of US external liabilities rising
Vulnerability to ‘tipping point’: disruptive transition to multipolar
or other dominant asset
1960s, 1970s, 2000s: revival of old proposals: Kenen (2010), Bergsten
(2007), Camdessus (2009), Landau (2009), Palais Royale Initiative
(2011), Angloni et al (2011), Farhi et al (2011)
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Reform plans
1961-67: Special Drawing Right (SDR)
Composite valuation, right to borrow convertible currencies
Triumph of consensus over clarity
Not a big reserve asset (2.6% global reserves)
- Strictly official sphere of exchange
- Unit of account, store of value, not a means of exchange
How to make SDR more “useful” to allow it to take on the
properties needed to be a reserve asset
New push: SDR “serves as the light in the tunnel for the reform
of the international monetary system”: Zhou (2009)
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Substitution Account 1974
1973-74: Part of C20 proposals
Exchange USD for SDR through a Substitution Account (at IMF)
US worried about return paid on dollars in the Account
Others want US to pay off its liabilities
William Dale (US): “Unless the proponents of the various
schemes had some practical way of dealing with the problem
of financial obligation on the part of the reserve centers [i.e.
the United States], little progress could be made”
Overtaken by oil crisis
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Substitution Account 1978
IMF MD Witteveen proposes rich countries “deposit” dollars
equivalent to a fresh allocation of SDR into an Account at the IMF
(dollars to be invested in US Treasury coupon securities)
Prevent SDR allocation from increasing international liquidity in
inflationary environment
Begin to replace dollar reserves with SDR reserves
Rejected by United States and Europe
US would have to borrow dollars to deposit
Could weaken confidence in dollar
Some view as too lenient on US – want US to pay off liabilities
Too small to make a difference
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Lessons and unresolved issues of early versions
US support crucial to any scheme’s success, but US Treasury is
ambivalent over setting up a reserve rival to the US dollar.
The appropriate return on SDR/USD liabilities/assets in the Account?
The need for the US to take on a substantial share of any burden of
keeping a scheme’s assets as large as its liabilities.
The desire of the Europeans that the United States amortise its
obligations, making the international monetary system symmetric.
Governance of IMF: since less developed countries seek an important
voice in negotiations, need to look beyond G10 if IMF to be involved
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Substitution Account MD de Larosiere proposal 1978-80
Cautious response, no drive from Ministers March 1979
US Treas Solomon: enhance use of SDR w/o hurting $ confidence
G5 deliberations (UK, DE, FR, US, JP) April-August 1979
Legal obstacles, burden of adjustment and exchange risk
June 1979 Financial Secretary Nigel Lawson: “we should not
waste valuable manpower on matters such as the IMF
substitution account. Over the years I can recall no aspect of the
financial scene where so much high-powered effort has been
expended to so little return”
August 1979: IMF Exec Bd prolonged wrangling gives no positive
advice to Ministers
October 1979: Ministers meeting Belgrade: $ crisis, no progress
April 1980: Abandoned
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Obstacles by 1980
Political – needs to pass national legislatures
No mechanism to ensure US pays off its liabilities (shift from
central banks to IMF)
Rich countries would benefit most (constrains use of IMF
resources)
Ensuring solvency
How set returns on SDR liabilities and $ assets
Burden sharing (US vs others)
Terms of liquidation
IMF simulations suggest possibility of substantial losses (up
to 35% of capital)
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Issues
Open economy Fisher hypothesis that higher yields offset
depreciation did not hold: USD depreciation exceeds modest yield
premium over SDR rates
Interest payable options:
Treasury bill rate
20 year Treasury bond rate
Whitelaw: “Ultimately, the substitution account could be effectively
guaranteed only if the US Government followed economic policies
that tended to maintain the value of the dollar”: but fear that
mechanism reduces discipline on US
US can’t undertake to guarantee the SDR value of the Account – so
how is the risk shared?
US vs creditors (at least 50-50)
IMF – via gold reserves
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Graph 1
SDR and US Treasury bill yields, 1980-2010
In per cent
Source: IMF.
SDR rate payable on SDR claims on Account
US Treasury bill rate earned by dollar liabilities of Account
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Graph 2
US Treasury bill and bond yields
In per cent
Note: Due to data break from January 1987 through September 1993, the 10-year bond yield is used instead.
Source: Federal Reserve Economic Data.
Majority view: US should pay higher of 20-year bond rate or
Treasury bill rate
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Burden sharing
Participants contribute callable capital
IMF pledges gold to support the value of the Account
20-25 million ounces (out of total 32 million) to cover fund
of SDR50 billion
20% of value of Account
Equivalent to amount of gold sold to benefit less developed
countries
Gold proposals contested
Would benefit rich countries, contravene IMF Articles
At what point is the decision on liquidation taken?
How long will unrealised losses be allowed to run?
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Simulations
SDR50 million in deposits of dollars
Profits of 25 million ounces of gold
Optimistic timing:
mid-1980 start, Treasury bill rate paid on dollars
Historically more realistic
Mid-1981 start (need to gather the participants and enact
legislation where required)
20-year Treasury bond rate (would work)
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Graph 4
Substitution Account’s solvency: baseline scenario
In billions of SDRs
As a percentage of assets
Sources: IMF; authors’ estimates.
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Graph 7
Account’s solvency: start mid-1981; pay Treasury bill rate
In billions of SDRs
Sources: IMF; authors’ estimates.
Insolvent within 5 years and would not have
recovered, even given rise in price of gold since 2008
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Graph 8
Substitution Account’s solvency: start 1980; pay Treasury bond yield
In billions of SDRs
As a percentage of assets
Sources: IMF; authors’ estimates.
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Conclusions
Existing studies don’t take account of the complex reasons for
failure in 1980
These obstacles still persist (burden sharing, risk sharing,
amortisation, politics of main beneficiaries)
Start date is critical to outcome (but hard to judge ex ante): our
scenarios start with USD trough (more favourable)
Optimistic scenario that IMF gold was deployed is still not
enough to ensure solvency unless US was convinced to pay 20year bond yield (currently 2-5 yr bonds usually held as reserves)
Need to keep re-opening the Account to make an impact on
distribution of reserves (SDR50bn cumulates to 5% reserves by
2010) but timing etc. complicated
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