Opening the Market for SDR Securities
By JC Collins
The broader role of the SDR as a global reserve asset will allow America to reduce its position as the sole world banker. This diversification of credibility surrounding the USD denominated “high quality” financial assets will work towards the common goal of re-balancing the world monetary system.
As the shift towards an SDR and multicurrency framework accelerates US financial planners can shift their focus from playing banker of the world to address domestic objectives. This re-focus will facilitate and function alongside the depreciation of the dollar and an increase in exports and jobs. All of which have suffered under the “world banker” position which the US has had to maintain since the end of the war.
Much has been written about the SDR here on this modest site and much discussion has taken place. As we move closer to the initial issuance of SDR bonds and development of an SDR-based securities market it is important to understand the primary injection and transition points.
It is almost certain that SDR will be allocated to developing (creditor) nations in a much larger proportion than industrialized and debtor nations. Developing nations, being the world’s creditors, have a much greater demand for foreign exchange reserves. It is important to note that the US, though the largest debtor nation, will play a bigger role than other debtor nations because of its responsibilities as the worlds banker.
The initial market for SDR securities will begin with bonds issued from the US and developing nations, with the largest issuance coming from the BRICS nations headed by China. This market will expand further as private banks and public settlement systems are established.
The BRICS nations have already agreed upon using a large portion of their foreign exchange reserves in a reserve pooling function to support the shift in global liquidity. This reserve pool will help support new SDR allocations while the remaining foreign exchange reserves can be exchanged for SDR through the substitution account process.
The distribution of SDR will take place through both allocation and substitution processes. The World Bank alongside the BRICS Development Bank will begin to issue SDR securities. The “high quality” of these financial assets will be assured as China, the United States, and other developing nations (likely other BRICS members) begin to issue SDR denominated bonds and borrowing platforms.
The role of the United States in giving this system legitimacy cannot be understated. It will facilitate the development of legitimacy surrounding China and other BRICS nations as a non-USD securities market is developed. Such a securities market will benefit the US in the long run.
Monetary and geopolitical strategists within the United States understand that this rebalancing needs to take place and the role of the worlds banker needs to be reduced. The challenge has always been to prevent a loss of international leverage and power as the system shifts.
The on-going tension in Eastern Europe and the South China Sea are problematic and representative of the challenges facing the United States. The strategy from the US perspective is to prevent the loss of control and influence while handicapping Russia and China, whose goals are focused on regional consolidation and the spread of influence throughout the Eurasian region.
The best the US can hope for is a return to a cold war type framework where the major powers of the world are locked in a stalemate game which prevents either side from gaining advantages. This is the only logical explanation as to why geopolitical and military tension is increasing as cooperation on international monetary reform broadens.
The SDR securities market is coming. It is obvious at this point. Let’s see if America can work it to its own advantage. – JC