China Wants To Buy IMF Bonds If Issued

First it was Japan, then Russia, and now China. They all want to loan money to IMF, International Monetary Fund. Japan already did back in February.

China explores buying $50bn in IMF bonds (6/5/09 Financial Times):

"China is “actively considering” buying up to $50bn of International Monetary Fund bonds, the country’s State Administration of Foreign Exchange has said."

"Friday’s statement by China said any investment would be made according to its usual criteria of “safety and reasonable returns”, but made no mention of Beijing’s wish for more power in IMF decision-making, in return for financial support.

"Safe, which controls almost $2,000bn of China’s foreign exchange reserves, added it was ready to help the IMF explore more ways to raise finance."

Russia ready to invest $10 bln in IMF bonds-Kudrin (5/27/09 Reuters, via Guardian UK):

"Russia is ready to invest up to $10 billion in bonds which may be issued by the International Monetary Fund (IMF), Finance Minister Alexei Kudrin said on Wednesday.

"The IMF has said it is considering issuing bonds on top of the funds it is receiving from some members, as well as through a Special Drawing Rights issue. The bond issue would be a first for the Washington-based global institution."

IMF Signs $100 Billion Borrowing Agreement With Japan (2/13/09 IMF announcement):

"Japan has provided the IMF with an additional $100 billion to bolster the Fund's lendable resources during the current global economic and financial crisis.

"Managing Director Dominique Strauss-Kahn and Shoichi Nakagawa, Minister of Finance of Japan, signed the terms of Japan's $100 billion commitment on February 13 under a borrowing agreement designed to temporarily supplement the Fund's financial resources.

"The initial period of the commitment by Japan is for one year, and may be extended by the IMF for up to a total of five years if warranted by the Fund's liquidity situation and its actual and prospective borrowing needs. Each drawing will carry interest at the interest rate on the IMF's Special Drawing Rights, which is currently 0.62 percent."

Japan's loan is almost as large as one-third of total IMF quotas, which stood at US$325 billion as of March 31, 2009. (Data: IMF)

All these three countries are said to want to have more say in IMF, as well as more influence in international economic and financial matters which have been dominated by the US.

The following is the quotas of China, Russia, and select countries measured in IMF's SDR. The country's quota roughly translates to voting power (influence). For China and Russia to exert more power at IMF, they indeed need something extra. As of June 5, 2009, US$1 is SDR 0.645799. (Data: IMF)

• China: 8,090 million SDR (3.72% of total quotas)
• Russia: 5,945 million SDR (2.74%)
• Japan: 13,312 million SDR (6.13%)
• Saudi Arabia: 6,985 million SDR (3.21%)
• France: 10738 millin SDR (4.94%)
• UK: 10,738 million SDR (4.94%)
• Germany: 13,008 million SDR (5.99%)
• US: 37,149 million SDR (17.09%)

I personally think the move by China and Russia, even of Japan, is their effort to ditch at least some of the US dollar denominated foreign reserves they are stuck with: US Treasuries and agency bonds. All three countries have LOW gold reserves (see this wiki page on official gold reserve), their currencies just as "fiat" as the US dollar. Euro has some gold backings, toward which Russia seems to be shifting more. On the other hand, IMF HAS GOLD. 3,217 metric tons of it.

When IMF actually issue its notes or bonds, what will be the collateral? Its gold (if it is indeed IMF who owns it, not the members)? US Treasury Department issues Treasury securities with the government's words that they will be repaid; in other words, they are mortgaging the future tax revenues from the productive citizens and businesses of the US. IMF does not have such productive citizens. So..?

I suppose IMF can issue debt based on the potential future cash flow from the countries who will borrow from IMF. (Wait, isn't that concept what got us into trouble - Mortgage-Backed Securities?? Hmmm.. I don't see this ending well.)

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