By Greg Robb, MarketWatch
The Federal Reserve has ably led the first phase of the response to the financial shock from the coronavirus, supplying reserves to the U.S. financial system and now it’s time for the International Monetary Fund and World Bank to do something similar for the global economies, says Brad Setser, a senior fellow at the Council on Foreign Relations and an expert on capital flows.
The common denominator across global economies is a shortage of dollars. Lenders are unwilling to part with the currency in times of crisis and countries that need help the most are least able to get the currency they need.
In a blog post, Setser said the IMF and the World Bank should step up to the plate.
Specifically, he called for the IMF to make a special allocation of Special Drawing Rights, a move last undertaken during the financial crisis in 2009.
In 2009, the IMF made a special allocation of $250 billion of SDRs during the financial crisis “to help stop a serious capital drain and the contagion risk facing emerging market and developing economies,” according to a U.S. Treasury report to Congress of the action.
SDRs are not currency, but can be used to supplement existing official reserves of IMF member countries. Importantly, they can be converted into dollars or euros.
“Raising global reserves right now to meet a higher global need for reserves makes sense,” Setser said.
It is like the Fed increasing reserves on its balance sheet to get liquidity into all corners of the financial market.
Even the U.S. could benefit, because the SDRs could help bolster Treasury’s Exchange Stabilization Fund that is being used to backstop various Fed lending programs.
Because an allocation would be distributed according to a country’s IMF quota, now how many reserves a country now needs, an SDR allocation on its own is insufficient, Setser acknowledged.
He suggested that the IMF lending capacity could be raised. This could be accomplished during the IMF’s spring meeting from April 13-19 when officials will hold “virtual” meeting given the pandemic.
On the World Bank, Setser said he supported a “break the glass moment” advocated by the Center for Global Development to give the World Bank and other multilateral development banks the ability to dramatically increase their lending.
Under their proposal, the World Bank and other multilateral lending institutions would include in their capital base funding that has been promised funding from their shareholder countries, said Scott Morris, a senior fellow at the Center. Adding this “callable capital” would enable the banks to scale-up their lending by more than $1 trillion, Morris wrote in a blog.
On Wednesday, the dollar /zigman2/quotes/210598269/delayed DXY +0.02% was higher against a basket of its major trading partners, according to the ICE U.S. Dollar Index. The greenback is up 4.5% this year, according to the Wall Street Journal dollar index.