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From Wikipedia, the free encyclopedia

Special Drawing Rights (SDRs) are potential claims on the freely usable currencies of International Monetary Fund members. SDRs have the ISO 4217 currency code XDR.

Contents 1 Definition 2 Purpose 2.1 Other uses 2.2 Banking and finance system support 3 Value 4 Potential pitfalls as a reserve currency 5 See also 6 References 7 External links

[edit] Definition

SDRs are defined in terms of a basket of major currencies used in international trade and finance. At present, the currencies in the basket are, by weight, the United States dollar, the euro, the Japanese yen, and the pound sterling. Before the introduction of the euro in 1999, the Deutsche Mark and the French franc were included in the basket. The amounts of each currency making up one SDR are chosen in accordance with the relative importance of the currency in international trade and finance. The determination of the currencies in the SDR basket and their amounts is made by the IMF Executive Board every five years.

The exact amounts of each currency in the basket, and their approximate relative contributions to the value of an SDR, in the past were and currently are:^[1]

Composition of basket (value of 1 XDR)

Period	USD	DEM	FRF	JPY	GBP
1981–1985	0.540 (42%)	0.460 (19%)	0.740 (13%)	34.0 (13%)	0.0710 (13%)
1986–1990	0.452 (42%)	0.527 (19%)	1.020 (12%)	33.4 (15%)	0.0893 (12%)
1991–1995	0.572 (40%)	0.453 (21%)	0.800 (11%)	31.8 (17%)	0.0812 (11%)
1996–1998	0.582 (39%)	0.446 (21%)	0.813 (11%)	27.2 (18%)	0.1050 (11%)
Period	USD	EUR		JPY	GBP
1999–2000	0.5820 (39%)	0.3519 (32%)		27.2 (18%)	0.1050 (11%)
2001–2005	0.5770 (45%)	0.4260 (29%)		21.0 (15%)	0.0984 (11%)
2006–2010	0.6320 (44%)	0.4100 (34%)		18.4 (11%)	0.0903 (11%)

[edit] Purpose

SDRs are used as a unit of account by the IMF and several other international organizations. A few countries peg their currencies against SDRs, and it is also used to denominate some private international financial instruments. For example, the Warsaw convention, which regulates liability for international carriage of persons, luggage or goods by air uses SDRs to value the maximum liability of the carrier.

In Europe, the Euro is displacing the SDR as a basis to set values of various currencies, including Latvian lats. This is a result of the ERM II convergence criteria which now apply to states entering the European Union.

SDRs were originally created to replace Gold and Silver in large international transactions. Being that under a strict (international) gold standard, the quantity of gold worldwide is relatively fixed, and the economies of all participating IMF members as an aggregate are growing, a perceived need arose to increase the supply of the basic unit or standard proportionately. Thus SDRs, or "paper gold", are credits that nations with balance of trade surpluses can 'draw' upon nations with balance of trade deficits.

So-called "paper gold" is little more than an accounting transaction within a ledger of accounts, which eliminates the logistical and security problems of shipping gold back and forth across borders to settle national accounts.

It has also been suggested that having holders of US dollars convert those dollars into SDRs would allow diversification away from the dollar without accelerating the decline of the value of the dollar.^[2][3]

[edit] Other uses

SDRs are the basis for the international fees of the Universal Postal Union, responsible for the world-wide postal system.

As a spinoff from the International Postal Union value transfer rules that use the SDR (but via the International Telecommunications Union as sister UN agency) the SDRs unit of value is used to transfer roaming charge files between international mobile telecoms operators and charges for some radio communications.^{[citation needed]}

• However, within the European Union (and Norway, Iceland and Liechtenstein), prices for roaming have been regulated with regulated prices specified in Euros instead of SDR. Both the fees paid by the customers to the phone companies, and the fees paid between the companies, are regulated with amounts given in EUR.

SDRs limit carrier liability on international flights (see Montreal Convention, Warsaw Convention), as well as ship owner liability for cargo damages and oil pollution.

[edit] Banking and finance system support

SDR-denominated accounts are, in general, not available from commercial banks.

The African Development Bank's own "currency", the Units of Amount (UA) equal the SDR currency basket.

In late March 2009 Zhou Xiaochuan, governor of the People's Bank of China proposed using the SDR as a worldwide reserve currency in place of the dollar as a way to cope with the multitude of problems associated with the US Dollar and the Euro being used as world reserve currencies.^{[4][5][6] [7]}

[edit] Value

The value of one SDR in terms of United States dollars is determined daily by the IMF, based on the exchange rates of the currencies making up the basket, as quoted at noon at the London market. (If the London market is closed, New York market rates are used; if both markets are closed, European Central Bank reference rates are used.)

The latest value of the SDR in terms of the US dollar is available from the IMF, updated daily.

[edit] Potential pitfalls as a reserve currency

There are potential pitfalls of using the SDR as a reserve currency.

• The current SDR is a relatively small basket of currencies, this is both a strong point and weak point of the SDR.
• The US Dollar, Euro and UK Pound are contained in the SDR -- these currencies have been losing value against a larger basket of secondary reserve currencies since the late 2000s recession started in 2007.
• The SDR does not contain the Renminbi (sometimes referred to as Chinese Yuan), Indian Rupee, Australian Dollar or Canadian Dollar, which are important benchmark or secondary global reserve currencies.
• The lack of global banking support for consumers (that is to say private persons and businesses) for the SDR.

Other important externalities that are being citied by economists^{[citation needed]}

• China's (Gold/Silver/Platinum/Palladium) Reserves are not equivalent in size to the US's.
• India's (Gold/Silver/Platinum/Palladium) Reserves are not equivalent in size to the US's.
• The Gulf States, that is to say the Petrodollar states, have (Gold/Silver/Platinum/Palladium) Reserves that are potentially undersized for the current recessionary conditions.
• Many other nations that could move over to the SDR have (Gold/Silver/Platinum/Palladium) Reserves that are too small for the size and importance of their economies.

Recent discussions about SDR in the mass media

• http://www.youtube.com/watch?v=X192rTX0zgI Part 1
• http://www.youtube.com/watch?v=Si2vXUJyATE Part 2

[edit] See also

• Digital gold currency
• World Currency Unit

[edit] References

[edit] External links

• IMF-Finances Site including SDR-rates
• FAQ: What is an SDR?
• The U.S. dollar-value of the SDR is posted here daily.
• Special Drawing Rights fact sheet