(Or the Rise of the Supra-Multilateral Development Bank)
By JC Collins
For lack of a better term, the European banking structure is about to be gutted and the direct management of the system will be given to the European Stability Mechanism. This statement is not made flippantly or without regard to the facts and macroprudential policies which are being implemented globally.
As an extension of the post titled BRICS SDR to Bailout Eurozone, this installment will provide more detail on why the European Monetary Union is in the cross hairs for 2015 and how all paths towards the multilateral framework have now arrived at the systemic bottleneck called the Pillars of Hercules.
In addition, we will explore how the International Monetary Fund will move past the 2010 Quota and Governance Reforms and evolve into a Supra-Fund with the help of the BRICS Development Bank and other Multilateral Development Banks, or MDB’s. But not before discussing how American interests will be sidestepped, not just on IMF Reform, but also to ensure the Chinese yuan is included in the SDR basket by January, 2016.
While Europe will be the first mover in the transition to the multilateral financial system it will be soon followed by America in 2016. The American resistance to the 2010 Reforms which had been previously agreed upon has lead the other members of the fund and the G20 to prepare alternative measures in order to bring a more balanced structure to the international monetary architecture.
In January of 2015 the Peterson Institute for International Economics published a policy brief titled What Next for the IMF? The paper was authored by Edwin M. Truman and contains some enlightening concepts on how the quota and governance reforms could continue without the consent of the United States.
In brief, the paper discusses how the other members of the IMF could put in place an alternative reform package which not only would bypass American participation, but also eliminate the veto held since the funds inception. I find the best way to view this alternative is to imagine that the existing framework and governance structure of the IMF is copied and pasted. The original version stays the same and the copied and pasted version is adjusted to not just reflect the initial 2010 reforms, but will include additional measures to reduce the American influence.
This “new” version of the fund would establish a sort of Supra-Fund which operates separately from the source fund but is still fundamentally linked to the mechanics of the original. The Supra-Fund would be regulated under the same systemic procedures and governance obligations as the source fund, but would see majority voting reduced from the current 85% to 70%, which would reflect the economic realities of the emerging economies.
Eventually the new fund would expand larger than the source fund, making the original fund redundant. The full transformation would be complete by March, 2016, when the NAB, or New Arrangements to Borrow, is replaced by the updated quota amounts of the Supra-Fund.
It’s important to remember that the original 2010 Quota and Governance Reforms were meant to reduce the leverage of Western Europe on the IMF Executive Board while increasing the leverage of the emerging economies, such as China and Russia, and to a larger extent the BRICS countries as a whole.
Since Europe is the region of the world which has the most over-represented allowance in the current governance structure, we can expect that any alternative reforms which will be represented in the form of a Supra-Fund will also reduce the representation of Western Europe.
We will discuss this decreased European representation further along in the post, but as we continue consider the possible connections between the geopolitical proxy drama unfolding over Ukraine between the United States and Russia, and the multilateral transition which we are reviewing.
In the post War & Petroleum Reserves we contemplated the possibility of a larger war breaking out over Ukraine, or possibly the proxy fighting taking place in Syria, and the larger region of the Middle East. The fact that both proxy wars in Ukraine and Syria are between America and Russia is not a coincidence, as the representation and leverage of Europe is about to be dramatically reduced. I’m beginning to think of Europe as the swing vote, or minority, in the multilateral structure, and both the West and East would very much like to secure their alliance with the swing vote holder.
In May of this year there will be an “informal” review of the SDR composition followed by the official review in the fall, likely near the end of October. Any changes to the SDR composition will be implemented in January, 2016. The required votes to make these changes will be reduced from the current 85% majority vote to the new 70% majority vote on the IMF Executive Board.
Please reference back to the 70% majority vote which will be implemented in the Supra-Fund governance structure. This percentage is not thrown around randomly and it keeps turning up in further research on IMF alternative reforms and SDR composition changes.
Based on the reluctance of the US Congress to pass legislation supporting the 2010 Quota and Governance Reforms, we can expect that any inclusion of the Chinese yuan in the SDR composition, which is fully expected, will follow the same Supra-Fund process as detailed above, with the SDR existing in two forms, one associated and tied to the original source fund, without the yuan, and the other structurally integrated within the governance and framework of the Supra-Fund, with the yuan.
As with both funds, the original SDR will eventually be replaced by the Supra-SDR.
During the last SDR evaluation five years ago the argument was made that the yuan was not freely convertible and could not be included in the basket composition. That argument has now been made irrelevant as China’s currency is now ranked in the top 5 most traded currencies.
The fragmentation of the euro currency will make room in the SDR composition for the Chinese yuan. The European Monetary Union itself will remain fundamentally intact, but the move back into domestic currencies will happen as the banking failure in Europe spreads from Greece, through Germany, and moves westward towards the beaches of Normandy.
This brings us to the last segment of this post, in where we discuss the rise of Multilateral Development Banks and how the IMF Supra-Fund will likely take on the characteristics of a Supra-Multilateral Development Bank.
The world has numerous regional development banks, which are as follows:
- African Development Bank
- Asian Development Bank
- European Bank for Reconstruction and Development
- Inter-American Development Bank
- Islamic Development Bank
- World Bank Group
- European Investment Bank
- International Fund for Agricultural Development
- Development Bank of Latin America
The above list of MDB’s are made up of member countries which have both lender and borrower status. There are some “sub-regional” Multilateral Development Banks which are designated as borrower only, such as the Eurasian Development Bank. This means that these banks, supported by member countries, cannot make loans but only accept loans from the larger regional MDB’s listed above.
This is telling us something extremely important when it comes to the current Greece and Eurozone crisis. The MDB’s offer funding which is outside of the international capital markets, and as such can provide lower interest rates than what is available in the capital markets, or even US Treasury bonds.
The emerging and developing economies have large foreign exchange reserves which can be “invested” and loaned through the Multilateral Development Bank structure. These loans can be used to help European countries as the systemic banking failure in the Eurozone spreads and alternative sources of liquidity are required.
There are two MDB’s which are not on the above list, and they are:
- The BRICS New Development Bank, established July, 2014, and expected to be operational by 2016, just in time for the emergence of the Supra-Fund and Supra-SDR.
- The Asian Infrastructure Investment Bank, established in October, 2014.
The emerging multilateral architecture is integrating itself within the existing governance structure and will make adjustments as it begins to rise upward, allowing for the old governance structure to fall away underneath it. This is the same process we discussed above as the new pasted and copied IMF fund will eventually supersede the original source. Like Hercules collapsing the world which came before, the pillars of the unipolar USD world well crumble under the strength of the multilateral self-imposed demigods.
From the Global Economic Governance policy brief titled:
Securing the Future of Multilateral Development Finance: Time for Europe to Take the Initiative
- Signal support for initiatives that would allow emerging economies to increase their shares and votes in the ‘old’ development banks in line with their growing economic weight, accepting reductions in relative European shares again reflecting changing economic realities
- Radically consolidate the currently fragmented and excessive number of European Chairs.
- Ensure that these banks use appropriate, evidence-based, technical, economic, institutional, environmental and social appraisal to ensure loans support sustainable development.
- Eradicate Extreme Poverty and Hunger
- Achieve Universal Primary Education
- Promote Gender Equality and Empower Women
- Reduce Child Mortality
- Improve Maternal Health
- Combat HIV/AIDS, Malaria, and other Diseases
- Ensure Environmental Sustainability
- Develop a Global Partnership for Development
The last item is what we have been specifically focused on with our analysis and thesis on the multilateral financial and governance structure.
It’s hard not to look at the above list and see the mandates of our mass media over the last 15 years. Almost every item on that list has been culturally and socioeconomically engineered and packaged to the disorganized masses through our television programing, Hollywood productions, educational curriculum, music, and all other CSI points across the conscious and subconscious spectrum.
We also cannot discount or ignore the role of the alternative media in distracting the aware masses away from the systemic process of this transition. There are a multitude of so-called alternative and freedom reporters, as well as economic and geopolitical analysts, who are attempting to promote and spread a script of good guys versus bad guys storyline. The obvious nature of these “operations” and “characters” can be found in their reluctance to provide much in the way of factual evidence, and to a larger extent, they ignore the vast amount of official and supporting evidence which we cover here.
While everyone is waiting for the BRICS countries to save the world from the evil international bankers, the framework of the new global governance structure is being constructed right in front of us. As Edwin Truman states in his latest policy brief:
“The international community must therefore prepare for the likelihood of a new world order, in which the IMF augments its funding and reforms its governing structure without the full US participation… The US leadership role would not be so much reduced as abandoned in a self-inflicted wound.”
The United Nations is set to announce a new set of Development Goals for the years after 2015. We should see them announced in the next few months. In the meantime, watch the official video below on the Millennium Development Goals, complete with the eye of providence. – JC[youtube https://www.youtube.com/watch?v=npGOcqaJkXI]