The IMF’s plan to issue bonds for the first time has attracted several large emerging countries looking to diversify investments to the detriment of the dollar, whose luster is dimming under the mushrooming US budget deficit.
After the G20 major developed and emerging market countries pledged in April to boost the IMF’s resources by US$500 billion, each country must determine just how to deliver.
To help gather such a colossal sum, the 185-nation IMF has decided to take the unprecedented step of issuing bonds.
“IMF staff will present the necessary documentation to the fund’s executive board to allow the issuance of notes as early as possible,” Dominique Strauss-Kahn, the managing director of the IMF, said on Wednesday.
Three countries lined up for the notes in the space of two weeks: Russia, China, then Brazil.
Both Russia and Brazil are in the market for US$10 billion in bonds, while China is aiming for US$50 billion.
Other G20 members could follow, such as India or Saudi Arabia.
The new bonds will be offered in the IMF accounting unit, Special Drawing Right (SDR), whose value is based on a basket of currencies, rebalanced daily, in which the dollar represents only a 41 percent share.
It is the dollar’s relative weakness in SDRs that has raised market concerns that some countries are seeking to distance themselves from the greenback, the world’s reserve currency.
Those concerns materialized in a spike in bond interest rates when, on Wednesday, the Russian central bank clearly said it wanted to sell US Treasury bonds to buy IMF bonds.
In an extreme scenario, “if countries use this issuance as a way to diversify reserve holdings out of dollars, these sales will prompt liquidation of Treasuries or other dollar-denominated securities held by central banks,” Carl Weinberg of High Frequency Economics said.
But for Weinberg, the market “is overestimating the importance of this,” given the small volume that IMF bonds would represent in the face of dozens of billions of dollars the US borrows each day.
Ted Truman, an expert on the IMF who advised the US Treasury Department before the G20 summit in London on April 2, also downplayed the impact of the IMF bonds.
“These will not be bonds that will be traded in the market. They are the type of instrument that countries will receive in connection with their short-term lending to the IMF ... I see no symbol in connection with reserve diversification,” he said.
Rather, the economist said demand for the multilateral institution’s bonds was an “indication of the relative external strength of these countries at a time of global economic crisis when in previous global crises their economies would have been severely affected.”
Eleven years ago Russia, for example, defaulted on sovereign loan obligations amid a financial crisis.
For some, the announcements by Russia, China and Brazil are troubling rumbles for the US.
“It is a clear sign that these countries are not comfortable with their large dollar holdings and should be read by the US as an additional signal of market unease about their large budget deficit,” said Desmond Lachman of the American Enterprise Institute, a Washington think tank.
The US, meanwhile, has not yet contributed the US$108 billion it pledged to the IMF. The funding is tied to legislation in Congress that is still being debated.
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