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The IMF has been making a lot of noise recently, but their biggest move almost managed to slip
through completely unnoticed.
for the first time since the 1970's. The IMF has only sold SDRs in times of global financial crisis.
What do they know that we don't?
The reason why the IMF dusted off the SDR program in 2009 was because of pressure from the world's lenders - namely China.
China's central bank chief proposed a sweeping overhaul of the global monetary system, outlining how the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right (SDR).
The Asian creditors of the world are getting nervous holding dollars, and recently Euros. They can see that another downleg to this Great Recession could be catastrophic. They want to diversify, but they can't start selling without crushing the value of their remaining holdings.
Additionally, let's look at the announcements of the past few weeks.
The IMF has been busy issuing warnings over the past couple weeks. If this massive expansion of lending resources is a direct reaction to their recent statements, then we are looking at a severe financial shock in the near future.
Two weeks ago the monetary fund's chief, Dominique Strauss-Kahn, said that Europe needed a "Fire Brigade" to deal with any potential banking crisis.
"What I think is needed is a European Resolution Authority, armed with the mandate and the tools to deal cost-effectively with failing cross-border banks," the monetary fund's chief, Dominique Strauss-Kahn, said in the text of a speech delivered to a conference on banking supervision in Brussels.
The weakness of the European banking sector is not a secret. German banks are unable to lend. High unemployment in Spain is threatening their banking system. Sweden's banks were overextended in the Baltics. Britain's banks came within just three hours of total collapse. Ireland's banks require another round of bailouts. Austrian banks are overexposed to eastern Europe.
The list goes on and on.
Of course Greece is getting the lion's share of the blame for this condition. The on-again off-again bailout from the
EU/IMF has been the gossip of the markets for months. The term PIIGS even has its own wikipedia page.
"Current fiscal policy is unsustainable in every country (in its study). Drastic improvements in the structural primary balance will be necessary to prevent debt ratios from exploding."
Which brings us back to the IMF's new lending capabilities. Debtor nations being forced to monetize en mass because they can no longer support their spending habits causes price inflation, which hurts almost everyone. But it hurts the people who hold that nation's debt the most.
That's where the SDR comes in. They simply swap out their dollar-based debt for SDRs.
The reason for the IMF rolling this out now might be two-fold: 1) an approaching financial crisis that the IMF needs to build up its reserves to prepare for, and b) the demands of Asian creditors to diversify their holdings in order to help avoid the impact of that coming financial crisis.
When you look at this chart above, and see the projections of debt/GDP ratios of 200%, 300%, and 400% by 2040, remember the quote above: "Historical data shows that once public debts near 100% of GDP they act as a ball and chain on wealth creation."