I now understand it this way:

The IMF creates and allocates new SDR’s to its members.

There is no other source of SDR’s.

SDR’s exist only in accounts on the IMF’s books.

SDR’s have value only because there is an informal agreement between members that they will use their own currency to lend against or buy SDR’s from members the IMF deems in need of funding who also accept IMF terms and conditions.

Originally, in the fixed exchange rate system of that time, this was to help members with balance of payments deficits obtain foreign exchange to buy their own currencies to keep them from devaluation.

The system failed and now the exchange rates are floating.

Currently SDR’s and the IMF are used by members needing help with foreign currency funding needs.

Looks to me like Greece will be borrowing euro from other euro nations using its SDR’s as collateral or selling them to other euro nations.

Either way it’s functionally getting funding from the other euro members.

Greece is also accepting IMF terms and conditions.

The only way the US is involved is if a member attempts to use its SDR’s to obtain $US.

The US is bound only by this informal agreement to accept SDR’s as collateral for $US loans, or to buy SDR for $US.

SDR’s have no intrinsic value and are not accepted for tax payments.

It’s a lot like the regional ‘currencies’ like ‘lets’ and ‘Ithaca dollars’ that are also purely voluntary and facilitate unsecured lending of goods and services with no enforcement in the case of default.

It’s a purely voluntary arrangement which renders all funding as functionally unsecured.

There is no IMF balance sheet involved.

While conceptually/descriptively different than what I erroneously described in my previous post, it is all functionally the same- unsecured lending to Greece by the other euro nations with IMF terms and conditions.

The actual flow of funds and inherent risk is as I previously described.

No dollars leave the Fed, euro are transferred from euro members to Greece.

I apologize for the prior incorrect descriptive information and appreciate any further information anyone might have regarding the actual current arrangements.

Prior post:

I understand it this way:

The US buys SDR’s in dollars.
those dollars exist as deposits in the IMF’s account at the Fed.

The euro members buy SDR’s in euro.
Those euro sit in the IMF’s account at the ECB

The IMF then lends those euro to Greece
They get transferred by the ECB to the Bank of Greece’s account at the ECB.

The IMF’s dollars stay in the IMF’s account at the Fed.

They can only be transferred to another account at the Fed by the Fed.

U.S. taxpayers are helping finance Greek bailout

By Senator Jim DeMint

May 6 — The International Monetary Fund board has approved a $40 billion bailout for Greece, almost one year after the Senate rejected my amendment to prohibit the IMF from using U.S. taxpayer money to bailout foreign countries.

Congress didn‚t learn their lesson after the $700 billion failed bank bailout and let world leaders shake down U.S taxpayers for international bailout money at the G-20 conference in April 2009. G-20 Finance Ministers and Central Bank Governors asked the United States, the IMF‚s largest contributor, for a whopping $108 billion to rescue bankers around the world and the Obama Administration quickly obliged.
Rather than pass it as stand-alone legislation, President Obama asked Congress to fold the $108 billion into a war-spending bill to send money to our troops.

It was clear such an approach would simply repeat the expensive mistake of the failed Wall Street bailouts with banks in other nations. Think of it as an international TARP plan, another massive rescue package rushed through with little planning or debate. That‚s why I objected and offered an amendment to take it out of the war bill. But the Democrat Senate voted to keep the IMF bailout in the war spending bill. 64 senators voted for the bailout, 30 senators voted against it.

Only one year later, the IMF is sending nearly $40 billion to bailout Greece, the biggest bailout the IMF has ever enacted.

Right now, 17 percent of the IMF funding pool that the $40 billion bailout is being drawn from comes from U.S. taxpayers. If that ratio holds true, that means American taxpayers are paying for $6.8 billion of the Greek bailout. Although the $108 billion extra that Congress approved for the IMF in 2009 hasn‚t yet gone into effect, you can bet that once it does Greek bankers will come to the IMF again with their hat in hand. And, if other European Union countries see free money up for grabs they could ask the IMF for bailouts when they get into trouble, too. If we‚ve learned anything from the Wall Street bailouts it‚s that just one bailout is never enough.
To hide the bailout from Americans already angry with the $700 billion bank bailout, Congress classified it as an „expanded credit line.‰ The Congressional Budget Office only scored it as $5 billion because IMF agreed to give the United States a promissory note for the rest of the bill.
As the Wall Street Journal wrote at the time, „If it costs so little, why not make it $200 billion. Or a trillion? It‚s free!‰

Of course, money isn‚t free and there are member nations of the IMF that won‚t be in a hurry to pay it back. Three state sponsors of terrorism, Iran, Syria and Sudan, are a part of the IMF. Iran participates in the IMF‚s day-to-day activities as a member of its executive board.

If the failed bank bailout and stimulus bill wasn‚t enough to prove to Americans the kind of misguided, destructive spending that goes on in Washington this will: The Democrat Congress, aided by a few Republicans, used a war spending bill to send bailout money to an international fund that‚s partially-controlled by our enemies.

America can‚t afford to bail out foreign countries with borrowed dollars from China and certainly shouldn‚t allow state sponsors of terror a hand in that process.

This has to stop if we are going to survive as a nation. Congress won‚t act stop such foolishness on its own. The only way Americans can stop this is by sending new people to Washington in November who will.

Sen. Jim DeMint is a Republican U.S. Senator from South Carolina.

15 Responses

  1. since fed already has open swaps to other countries, is this really any different from just that?

  2. good point, both unsecured lending, though the imf does impose terms and conditions the fed doesn’t

    fed currently says that window is closed, waiting for the ECB to request a line to consider acting on it

  3. Warren,

    This page says


    “IMF support will be provided under a three-year €30 billion (about $40 billion) Stand-By Arrangement (SBA)—the IMF’s standard lending instrument. In addition, euro area members have pledged a total of €80 billion (about $105 billion) in bilateral loans to support Greece’s effort to get its economy back on track. Implementation of the program will be monitored by the IMF through quarterly reviews.”

    The IMF is just like any other organization which has a balance sheet. They make money using power instead of some PM skills. Its just an organization which borrows and invests.

    The 30 billion euros which hits the Greece Treasury’s account – either at the Bank of Greece or some bank in Greece – should appear from somewhere. Either the IMF sells some assets to obtain currency or expands its balance sheet by issuing SDRs. Assuming the latter, the IMF can either sell the SDR to some NCB or the ECB in the EZ or to the Fed. Both are possible.

    In case the IMF sells the SDRs to the Fed, it can write a cheque to the Greek Treasury which will deposit it at either a bank in Greece or the Bank OF Greece.

    In the first case (bank), the Greek Treasury’s account is replenished in euros and the Greek bank’s dollar account at a US bank is replenished in dollars and the Fed transfers dollars from the IMF’s account at the Fed to the US bank’s reserve account. All this is assuming someone fixes the exchange rate.

    In the second case where the Greek Treasury “drops the cheque” at the Bank of Greece, the latter replenishes the Treasury’s account and the Fed moves dollars from the IMF’s account at the Fed to the Bank of Greece’s account at the Fed. Things are not over in this. The ECB requires foreign assets be moved to its books so the ECB does an FX transaction with the Bank of Greece and the Fed has to move the dollars from the Banks of Greece account to the ECB’s account at the Fed.

    There is of course the possibility that the IMF obtains Euros directly. In this case, the IMF obtains the euros by selling SDRs to some EZ government and/or NCBs and/or the ECB.

    In the end, the SBA (standby arrangement) will appear in the IMF’s assets and SDRs in the liabilities. The SBA will appear on the Greece Treasury’s liabilities.

  4. i think greece just uses its sdr’s to borrow or buy euro.

    the imf simply ‘grants’ sdr’s to member nations the way i understand it.

    members have sdr accounts at the imf and can transfer/sell them to each other

    but sdr’s aren’t actually ‘redeemable’ for anything but can be used as collateral or sold to other members on a voluntary basis.

    looks to me to be a very odd system, strictly a form of unsecured lending between members

    1. Its like a country with just a central bank, no government, no households, no banks, no production firms.

      The SDRs are like currency since it appears on the liabilities of the IMF. The IMF seems liable only in SDRs which further proves its a central bank. By making such an arrangement, it has made sure that it cannot go bankrupt.

      The IMF pays an interest on reserves and the payment is in SDR only. Only the IMF can reduce its SDR liabilities by selling “foreign currency” (foreign to itself) i.e, selling some of its assets.

  5. What was wrong with your yesterday’s post?

    If I remember, you said that when the US buys SDRs, the IMF account at the Fed gets credited with dollars and same thing at the ECB (or any other member country).

    That makes sense to me. Is it wrong?

    1. the US doesn’t actually buy SDRs, the IMF gives them to the members for no charge.

      so i was correct that no dollars leave the fed.

      and if a member wants to use his SDRs to get dollars he has to either sell them to the US or borrow from the US using his SDRs as collateral.

      But the IMF also has a lending facility and makes loans to members as well.

      This will be getting posted soon.

      It’s all an arrangement that obscures the underlying fundamentals

  6. seems like a lot of uncertainty on monetary operations here

    everybody has a balance sheet

    if the IMF creates SDR’s as a liability, what is the corresponding asset?

    inquiring minds want to know, instead of just assuming it away as “obscuring the underlying fundamentals”

  7. Anon,

    According to me: The IMF is a central bank. Its balance sheet is neither in USD nor in EUR or any other currency but SDR. The balance sheet is here http://www.imf.org/external/pubs/ft/ar/2009/eng/pdf/a6.pdf Page 3 says “in millions of SDRs”

    The IMF has an extra power to set the exchange rate as well.

    There are many ways the monetary operations can happen – though I am equally unsure as to how this happens, but my comment above atleast is an attempt to figure one possibility – there are other possibilities as well.

  8. right.

    the imf currency is the sdr, and its balance sheet is the sdr

    but there are no taxes payable in sdr

    so value is entirely voluntary.

    members agree to lend against/buy sdr’s of other members

    it was designed to stabilize the fixed fx system by facilitating nations with trade surpluses to lend fx to nations with trade deficits to support the fixed exchange rates.

    it failed pretty quickly as expected, and the nations floated their exchange rates.

    but they left the imf there anyway to figure out something else to do, so now it lends to nations in trouble with terms and conditions designed to fix their economies. that has largely failed as well, also as expected, as their remedies most always make things worse.

  9. There is something funny about the SDRs – the annual report says:

    SDR holdings

    SDRs are not allocated to the IMF, but the IMF can hold SDRs which it acquires from members in the settlement of their financial obligations to the IMF, and it can use SDRs in transactions and operations with members. The IMF earns interest on its SDR holdings at the same rate earned by other holders of SDRs.

    Its like writing currency notes in Fed’s Assets

  10. yes, the imf doesn’t issue any to itself, that would be as meaningless as the concept of the US having a reserve of dollars…

    and if i recall correctly the interest is in more sdr’s

  11. From one of my favorite authors 🙂

    Is Sovereign Debt Crisis Contained to Subprime?

    by Peter Schiff

    As Americans observe the chaos in Greece, most assume that the strength of our currency, the credit worthiness of our government, and the vast expanse of two oceans, will prevent a similar scene from playing out in our streets. I believe these protections to be illusory.

    Once again the vast majority fails to see a crisis in the making, even as it stares at them from close range. Just as market observers in 2007 told us that the credit crisis would be confined to the subprime mortgage market, current analysts tell us that sovereign debt problems are confined to Greece, Spain, Portugal, and perhaps Italy. They were wrong then, and I believe that they’re wrong now.

    During the housing boom, subprime and prime borrowers made many of the same mistakes. Both groups overpaid for their homes, bought with low or no down payments, financed using ARMs instead of fixed rate mortgages, and repeatedly cashed out appreciated home equity through re-financings. The market largely overlooked the glaring similarities, and instead merely focused on FICO scores. Yes, prime borrowers had better credit, but their losses on underwater properties were no less devastating. As the magnitude of home price declines intensified, prime borrowers defaulted in levels that were almost as high as the subprime crowd.

    So when mortgage-backed securities started to go bad, it wasn’t as if the problems emanated in subprime and subsequently “contaminated” the rest of the market. All borrowers were infected with the same disease, but the symptoms merely expressed themselves sooner in subprime. The same is true on a national level, whereby Greece plays the part of the subprime borrower. Though the U.S. is considered to be the highest order of “prime” borrower, based on historic precedent, our debt to GDP levels are at crisis levels, and are not that much lower than Portugal or Spain. When off-budget and contingency liabilities are properly accounted for, one could argue that we are already in worse financial shape than Greece.

    Most importantly, like Greece (and homeowners who relied on adjustable rate mortgages), we have a high percentage of short-term debt that is vulnerable to rising rates. The one key difference is that while Greece borrows in euros, a currency it cannot print, America borrows in dollars, which we can print endlessly. In reality however, this is a distinction with very little substantive difference.

    What if Greece had not been a member of the euro zone and had instead borrowed in their former currency, the drachma? First, given its past history of fiscal shortfalls, Greece would not have been able to borrow nearly as much as it had (they may well have been forced to borrow in euros anyway). Under those circumstances, creditors would have been more reluctant to lend without the possibility of a German-led bailout. Had Greece never adopted the euro as its currency, but nevertheless borrowed in euros, it would now face the same difficult choices, but would not be offered the carrots or sticks provided by other euro zone nations that are worried about the integrity of their currency. The IMF would have been Greece’s only possible savior.

    Many of our top economists now argue that all would be well in Greece if the country was in charge of its own currency. In such a scenario, Greece would indeed have had no problems printing as many drachmas needed to pay its debts. However, would this really be a “get out of debt free” card for Greece?

    The main reason the Greeks are protesting in the streets is that they do not want their benefits reduced or taxes raised to repay foreign creditors. But despite the likely domestic popularity of a drachma-printing policy, would it really get the Greeks off the hook? They would stiff their creditors by repaying them in currency of diminished value. But the same result could be achieved through an honest debt restructuring, which would involve “haircuts” for all creditors. In a restructuring, the pain falls most squarely on those who foolishly lent money to a “subprime” borrower.

    But with inflation it’s not just foreign creditors who would suffer. Every Greek citizen who has savings in drachma would suffer. Every Greek citizen who works for wages would suffer. Sure nominal benefits are preserved and taxes are not raised, but real purchasing power is destroyed. If the cost of living goes up, the reduction in the value of government benefits is just as real.

    Of course, the negative effects on the economy of runaway inflation and skyrocketing interest rates are worse than what otherwise might result from an honest restructuring or even outright default. It is just amazing how few economists understand this simple fact.

    Just because we can inflate does not mean we can escape the consequences of our actions. One way or another the piper must be paid. Either benefits will be cut or the real value of those benefits will be reduced. In fact, it is precisely because we can inflate our problems away that they now loom so large. With no one forcing us to make the hard choices, we constantly take the easy way out.

    When creditors ultimately decide to curtail loans to America, U.S. interest rates will finally spike, and we will be confronted with even more difficult choices than those now facing Greece. Given the short maturity of our national debt, a jump in short-term rates would either result in default or massive austerity. If we choose neither, and opt to print money instead, the runaway inflation that will ensue will produce an even greater austerity than the one our leaders lacked the courage to impose. Those who believe rates will never rise as long as the Fed remains accommodative, or that inflation will not flare up as long as unemployment remains high, are just as foolish as those who assured us that the mortgage market was sound because national real estate prices could never fall.

    May 8, 2010

    Peter Schiff is president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse. His latest book is How an Economy Grows and Why It Crashes.

  12. James, any reason you posted this?

    bunch of confused out of paradigm nonsense.

    let me know

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