Very much agree with Adam Tooze. The efforts to date of the US and the EU to match China's belt and road initiative fall way short ... fundamentally because they simply have been underfinanced with real dollars/ euros/ or (drumroll) SDRs ...
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ft.com
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ft.com
The easiest way to match the Belt and Road isn't to set up a US development bank that matches the scale of the CDB. Rather it is to expand the MDBs. The World Bank lends about $250b right now on standard terms -- with another $200b or so in concessional loans (IDA)
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Matching China in impact (if not in dollars) would require doubling that lending over the next 5-10 years ...
And happily, that is doable ...
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And happily, that is doable ...
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The paid in capital (see the Bank's financial statement) of the IBRD (the World Bank's main lending arm) is only $20 billion. $20 billion -- that is nothing. Over 70 years! (additional capital comes from retained earnings; the total is around $50b)
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A much bigger Bank is thus possible -- it just takes adding a bit of capital and expanding the scope of non-concessional lending (all Bank lending is much cheaper than market borrowing) for green investments and the like ...
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The easiest way to expand the Bank's capital base is probably with hybrid capital -- it avoids the need to discuss "chairs and shares" (i.e. China's voice and vote).
Hybrid capital doesn't come with voting rights
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Hybrid capital doesn't come with voting rights
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And there is a simple way (innovative i would say, not radical!) to strength the Bank's capital --
Rethink the Bank's funding model and open up a funding channel that relies entirely on trapped official funds ... SDRs that is
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cfr.org
Rethink the Bank's funding model and open up a funding channel that relies entirely on trapped official funds ... SDRs that is
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cfr.org
an SDR bond necessarily has to be placed directly with the bank's shareholders (SDRs cannot be held privately). But it would have big advantages for the bank --
rather than funding with 5y and 7y notes, it could raise low cost funds for 20 or 30ys
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rather than funding with 5y and 7y notes, it could raise low cost funds for 20 or 30ys
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The increased support (through senior bonds as well as hybrid capital) from shareholders would help with the rating agencies -- as would the substantial lengthening of the liability structure of the bank.
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The net effect -- I think (and finance professionals should tell me if I am wrong) that a window funded with 20 and 30y floating rate notes (at the SDR rate) could be levered 5 or 6 to 1 -- not the current 4 to 1.
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Add in a few more innovations and the Bank would be in position to double its lending over the kind of time frame (a decade) where China scaled up its Belt and Road ... it would not be vapor ware.
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And there are ways to use an SDR bond together with a bit of grant financing to generate concessional loans without full equity backing (so at a lower budget costs).
the IMF's PRGT offers the basic financial model.
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cfr.org
the IMF's PRGT offers the basic financial model.
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cfr.org
So Tooze is right -- the US and the EU are lagging.
But there are actually feasible, carefully thought out proposals (for hybrid capital, for SDR bonds, for guarantees) that would make enable the Bank (and indeed the other MDBs) to step up their lending on a Chinese scale!
But there are actually feasible, carefully thought out proposals (for hybrid capital, for SDR bonds, for guarantees) that would make enable the Bank (and indeed the other MDBs) to step up their lending on a Chinese scale!
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