Why rechanneling Special Drawing Rights (SDRs) to Multilateral Development Banks is not always and everywhere monetary financing.
By Stephen Paduano, London School of Economics
Eurozone countries are financially and politically pivotal to the SDR rechannelling agenda. Collectively, they hold $200bn in SDRs (just over 20% of all SDRs), and the Eurozone countries which are G-20 members hold $120bn in SDRs (just under 20% of the G-20’s SDRs). These countries are also the most ambitious and proactive members of the SDR system, with France being the first advocate of SDR rechanneling and Spain being the first to rechannel (to the IMF Resilience and Sustainability Trust - RST). However, the Eurozone’s capacity to lead on and participate in SDR rechanneling has been complicated by the European Central Bank (ECB). President Lagarde has expressed that SDR rechanneling to Multilateral Development Banks (MDBs) may not preserve the reserve asset characteristic of the SDR and may violate the prohibition on monetary financing.
Building on Paduano and Maret (2023), this paper demonstrates that certain forms of SDR rechanneling can clearly satisfy the ECB’s concerns — and, more importantly, that the rechanneling of reserve assets to multilateral development banks already occurs. The paper makes the following four core arguments:
- SDRs fall under the “Agreement of Net Financial Assets” (ANFA holdings) of eurosystem National Central Banks (NCBs), which affords the NCBs greater sovereignty over how they use their SDRs. This means that the ECB’s jurisdiction over SDRs is limited to enforcing the prohibition on monetary financing — so long as the prohibition on monetary financing is not violated, eurosystem NCBs can use SDRs at their discretion.
- The prohibition on monetary financing is not violated by the purchase of SDR bonds given the rulings of the Court of Justice of the European Union and the ECB underlying the ECB’s Public Sector Purchase Programme (part of the Asset Purchase Programmes). The Public Sector Purchase Programme explicitly included the purchase of supranational bonds, including those of multilateral development banks, and eurosystem NCBs now hold EUR 288bn in supranational bonds. By extension, the Court of Justice of the European Union and the ECB have already ruled affirmatively on the purchase of an SDR bond.
- The European Investment Bank (EIB)’s access to the ECB’s repo facility and its EUR 13bn in borrowings from eurosystem NCBs further demonstrate that the ECB and eurosystem NCBs already rechannel reserve assets to MDBs. This funding arrangement can be altered with respect to denomination, tenor, and collateralization structure without legal complication, thereby serving as precedent for future forms of SDR rechanneling.
- The primary regulation of concern to the ECB — EC3603/93, Article 7 — does not limit the rechanneling of reserve assets to the International Monetary Fund (IMF). Instead, it highlights the IMF as one entity onto which public obligations may fall. This is demonstrated both by reference to existing forms of reserve asset rechanneling to entities other than the IMF (the public sector purchase programme and the EIB’s repo access), and by evaluating past ECB rulings on SDR rechanneling arrangements. Past rulings make clear that the ECB rules not on the basis of which entity receives financing, but whether that financing preserves the reserve asset characteristic of the SDR and honours the prohibition on monetary financing.