In IMF Bonds, A Possible Rival For The U.S. Dollar The U.S. dollar has long been the world's reserve currency — a haven in times of economic trouble. Countries like China and Russia would like to change that. They may have found a way in new bonds from the International Monetary Fund.
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In IMF Bonds, A Possible Rival For The U.S. Dollar

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In IMF Bonds, A Possible Rival For The U.S. Dollar

In IMF Bonds, A Possible Rival For The U.S. Dollar

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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Some stories are basic on the surface and pretty complicated when you look more closely. Here's how one story begins: the International Monetary Fund has found a way to raise an additional $70 billion to help deal with the financial crisis. You'll get the money the way big companies commonly do by issuing bonds. Well, that's just the simple version.

NPR's David Kestenbaum of our Planet Money team explains.

DAVID KESTENBAUM: Here's that short story. The new bonds, just a way for the International Monetary Fund to get more money. The economies of the planet are in crisis. The IMF's job is to loan money, and it's been running out.

Craig Beaumont is division chief in the Finance Department of the IMF.

Mr. CRAIG BEAUMONT (Division Chief, Finance Department, International Monetary Fund): We have made quite a large number of commitments of our resources in the last year, about $150 billion worth, which has depleted our regular resources down to about $50 billion.

KESTENBAUM: This is the first time the IMF has issued bonds, it's historic, good news for everyone, end of story.

David Kestenbaum, NPR News, Washington.

Okay, the more complex version: that seemingly boring bond thing touches on a much more profound topic. What should the reserve currency of the world be, the anchor currency, that safe thing everyone reaches for in times of crisis?

Right now, that is the U.S. dollar. And next year, it will be the U.S. dollar. But long-term, China and Russia have said they wouldn't mind that changing. And those IMF bonds, they are not denominated in dollars. They will be issued in a kind of hybrid called SDRs. SDRs are a mixture of the dollar, the British pound, the Euro and the yen.

SDRs are used internally at the IMF. But a few months ago, the head of China's central bank suggested maybe SDRs could be the basis for a new kind of global currency.

Eswar Prasad is a professor at Cornell. He used to be the head of the China division at the IMF. We reached him on the phone in China.

Professor ESWAR PRASAD (Trade Policy, Cornell University): The emerging markets are hoping - China in particular is hoping - that this will start the debate and also start some real progress towards challenging the U.S. dollar's dominance in international financial markets. The Chinese would dearly like to break free of the embrace that they have with the U.S. dollar. They're locked into this embrace because they really have no alternative, and they desperately would like to have an alternative.

KESTENBAUM: Now, the idea of a new global currency is a touchy topic. For the record, the IMF's Craig Beaumont says SDRs are not a currency. Not a currency.

Mr. BEAUMONT: When we issue SDRs or we allocate them, it's just a book entry. No one ever carries an SDR in their pocket.

KESTENBAUM: The problem for China is that it has more money coming in than it knows what to do with. It sells tons of stuff to the United States. It gets billions of dollars in return. And then, well, where do you put it?

Often, China buys U.S. Treasury bonds, since they're the safest things around. The IMF bonds, though, will also be really safe since they're backed by basically the entire world. China has pledged to buy $50 billion worth of the new bonds. Russia has pledged to buy up to 10 billion, so has Brazil.

Eswar Prasad says these amounts are all pretty small in the scheme of things. But if countries decide they don't trust Treasury bonds so much anymore and begin to move lots of money elsewhere to, say, IMF bonds, that could be a big deal.

Prof. PRASAD: If China and other emerging markets take the diversification move, it could spook markets and it could have price of the U.S. Treasury bonds falling sharply just because the sentiment in the U.S. bond and currency markets is very fragile right now.

KESTENBAUM: There are a lot of reasons to think that China, for all its trash-talking about the dollar, really doesn't want to knock it too much.

Brad Setser is an economist at the Council on Foreign Relations.

Dr. BRAD SETSER (Economist, Council on Foreign Relations): I don't think this is a step towards a new currency that's going to rival the dollar.

KESTENBAUM: If China takes a swing at the dollar, he says, it's going to hit itself. Because who holds over $700 billion in U.S. Treasury bonds? That would be China, and it's still buying them.

David Kestenbaum, NPR News.

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