SDRs, or Special Drawing Rights are IMF-issued supplementary foreign reserve assets issued to member countries as a claim to currency held by the IMF. The SDRs are redeemable for a basket of currencies, conisisting of the US dollar, Euro, British Pound and Yen.
Q. So the fiscal cliff conversation inevitably leads to one about the national debt and to the future of the dollar as a reserve currency… and SDRs is one idea about where this all heads.
A. Yes. These are a creature of the IMF called “Special Drawing Rights”. Although many people think they are brand new, they’ve actually been around a long while, and were originally created as a mechanism to support the old Breton Woods fixed currency exchange system. In any event, they are pieces of paper, issued by the IMF, that can be exchanged for a specific mix of a basket of currencies: US Dollars, Euros, Yen and UK Pounds.
Q. So they’re backstopped by the IMF?
A. No. The IMF makes that very clear. They’re redeemable by presentation to the countries the IMF designates, which have major holdings of foreign reserves. The redemption issue isn’t huge right now, because there are only a few hundred billion out there, but substantial new issuances are under consideration.
Q. So how does all this help with the basic issue of a world reserve currency? Don’t they essentially just create a group of 4 reserve currencies?
A. Well, the basket in subject to re-weighting , and even more importantly to the inclusion of new currencies. Obviously, the question is whether – or maybe now the question is when – the Chinese yuan will start to be included. And, just as obviously, the inclusion of the Euro might very well need to be adjusted. But all that shows you is the value of flexibility. And any individual country could still devalue their own local currency… so countries like the PIIGs wouldn’t be stuck as they are now.
Q. So, what are the odds that SDRs really do become a big thing in the future?
A. The ideas behind them are very attractive, but there are a giant pile of practical questions in the way, including the basic logistics of a real market to issue and redeem SDRs in sufficient quantities and timliness to underpin global trade. But a lot of observers do think that SDRs or something like them will eventually win out.