by Alessio Lidozzi

The IMF and Negative Interest Rates

Since the onset of the ‘Great Recession,’ central banks have

constantly made minor adjustments to combat its residual effects, causing investors from around the world to scramble to adjust their strategies

accordingly.

According to a report from GATA, the IMF is no different and is taking unprecedented

measures to protect itself. Making waves this week is the IMF’s adjust in its calculation of

the Special Drawing Rights (SDR) interest rate.

This is, in a way, a form of international currency, a placeholder for the IMF to claim currency from

participating nations. The SDR rate is paid to foreign nations for usage of their currency. It’s value is

determined based on a weighted currency ‘basket’ comprised of the Japanese yen, the U.S. dollar, the

British pound and the euro.

Record-low interest rates have become increasingly common since the Great Recession. While this might benefit those taking out loans, a problem arises when the rates for these foreign

currencies fall below 0% due to sustained easing. The latest rate (before the announcement of a new rate) of .03% reflected a euro rate of -.02% and a

yen rate of -.01%.

For this reason, the IMF will adjust its SDR interest rate at a floor of .05%. This a reflection of the IMF’s

lowest interest rates in nearly seventy years.

These negative interest rates would produce two big headaches for the

IMF: one in its burden sharing system and another in how the mathematics

would change lender roles, a prospect for which there is no

precedent in the IMF.

For burden sharing, the question is: !

“How can countries with negative rates contribute to make up for losses stemming from countries

that do not repay their IMF loans, when this contribution normally comes directly from their

accrued interest?”

For lender roles, the question is much simpler: “What incentive is there for a creditor to lend if he

has to pay to lend?” !

The answer, you might have guessed, is none.

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