Soros on How to Bridge Financing Gap

Last week George Soros was in Copenhagen at the United Nations Climate Change Conference where he proposed that rich countries donate their recently allocated Special Drawing Rights, or SDRs, to a new green fund that would be established to help less developed countries deal with challenges presented by climate change.  Below is the full text of his proposal.

SDRs and Climate Change

It is now generally agreed that the developed countries will have to make a substantial contribution to enable the developing world to deal with climate change. There is no similar agreement on where the money will come from.

The developed countries are reluctant to make additional financial commitments. They have just experienced a significant jump in their national debts and they still need to stimulate their domestic economies. This colors their attitudes. It looks like they will be able to cobble together a "fast-start" fund of $10 billion a year for the next few years but more does not fit into their national budgets.

This is unlikely to satisfy the developing countries.

I believe this amount could be at least doubled and assured for over a longer time span.

Developed countries' governments are laboring under the misapprehension that funding has to come from their national budgets but that is not the case. They have it already. It is lying idle in their reserves accounts and in the vaults of the International Monetary Fund (IMF), available without adding to the national deficits of any one country.  All they need to do is to tap into it.

In September 2009, the IMF distributed to its members $283 billion worth of SDRs, or Special Drawing Rights. SDRs are an arcane financial instrument but essentially they constitute additional foreign exchange. They can be used only by converting them into one of four currencies, at which point they begin to carry interest at the combined treasury bill rate of those currencies. At present the interest rate is less than one half of one percent. Of the $283 billion, more than $150 billion went to the 15 largest developed economies. These SDRs will sit largely untouched in the reserve accounts of these countries, which don't really need any additional reserves. 

  

I propose that the developed countries--in addition to establishing a fast start fund of $10 billion a year--should band together and lend $100 billion dollars worth of these SDRs for 25 years to a special green fund serving the developing world. The fund would jump-start forestry, land-use, and agricultural projects. These are the areas that offer the greatest scope for reducing carbon emissions and could produce substantial returns from carbon markets. The returns such projects can generate go beyond reducing carbon; there will be non-carbon related returns from land use projects, the potential to create more sustainable rural livelihoods, enable higher and more resilient agriculture yields and create rural employment.

This is a simple and practical idea. There is a precedent for it. The United Kingdom and France each recently lent $2 billion worth of SDRs to a special fund at the IMF to support concessionary lending to the poorest countries.  At that point the IMF assumed responsibility for the principal and interest on the SDRs. The same could be done in this case.

I further propose that member countries agree to use the IMF's gold reserves to guarantee the payment of the interest and the repayment of the principal. The IMF owns a lot of gold, more than a hundred million ounces, and it is on the books at historical cost. At current market prices it is worth more than $100 billion over its book value. It has already been designated to be used for the benefit of the least developed countries. The proposed green fund would meet this requirement.

This means that the developed countries that lend the SDRs would incur no interest expense and no responsibility for repayment.  There are some serious technical problems involved in offsetting the interest income against the interest expense, particularly in the United States, but the net effect would be a wash. These technical difficulties stood in the way of previous attempts to put the SDRs to practical use but they do not apply to the the proposed green fund.

There are three powerful arguments in favor of this proposal:

First: the green fund could be self financing or even profitable. Potentially none or very little of the IMF gold would be actually used.  Second: the projects will earn a return only if developed countries cooperate in setting up the right type of carbon markets. Setting up a green fund would be an implicit pledge to do so by putting the gold reserves of the IMF at risk.  Third, this money would be available now, jump-starting carbon saving projects.  For all these reasons, the developing countries ought to embrace my proposal.

The key point I want to make is that it is possible to substantially increase the amount available to fight global warming in the developing world by using the existing allocations of SDR--and the gold reserves of the IMF are more than sufficient to pay the interest on them. All that is lacking is the political will.  The mere fact that it requires Congressional approval in the United States ensures that nothing will happen unless there is public pressure and pressure from the developing countries to make it happen. Yet it could make the difference between success and failure in Copenhagen.