Breakfast (and climate change megabucks) with George Soros

December 16, 2009

     By Duncan Green     

Last week George Soros was passing through London and invited a bunch of NGO types for breakfast at his very nice house in South Kensington. (In case you’re interested we all got sticky pastries, but George made do with grapefruit and muesli). He was en route to Copenhagen to launch his big new idea – using the IMF to pump prime global funding for climate change. How does it work? Here’s the excellent summary put out by his team:

‘Rich countries could double available funding to combat climate change by donating recently George Sorosissued Special Drawing Rights to a new green fund. This fund would jumpstart investment in low carbon energy sources, reforestation efforts, rain forest protection, land use reform, and adaptation programs.

Unlike other proposed solutions, this plan could be implemented within already existing financial structures. SDRs, issued by the International Monetary Fund, amount to additional foreign exchange. In response to the global financial crisis in September 2009, the IMF issued $283 billion in SDRs, with more than $150 billion going to the 15 largest developed economies. This sits largely untouched in their reserve accounts, leaving a surplus that could be donated to the fund.

The IMF currently has 100 million ounces of gold, at current prices worth more than $100 billion at book value. The IMF has decided that the surplus value of its gold be used to benefit the least developed countries. Under this plan, the IMF would use its gold reserves to cover the interest incurred by the developed countries that donated their SDRs.

Paying the interest in this way would mean that developed countries would not be saddled with interest payments. In addition, the gold can also be used to guarantee the repayment of loans for the climate projects if the carbon market fails to develop as envisioned.

“This approach gives developed countries an additional incentive to create effective carbon markets,” said Soros. “If they fail, they will have to use the IMF gold reserves to cover the loan principal. This forces countries to put their money where their mouth is.”

A rapid independent analysis by the European Climate Foundation  (not up on the web yet, sorry) concluded:

‘Our analysis shows that $100 billion of SDRs allocated to a climate fund or funds could provide about $7 billion1 per year in grants, loan and equity financing to developing countries on an annual basis for the next 30-40 years. The SDR source would meet the tests of predictable funding flows, strong performance incentives, and limited short-term budgetary impact on developed country finances. This use of SDRs, particularly for adaptation, could potentially be justified under the mandate of the IMF given the adverse impacts of climate change will negatively impact the balance of payments and currency reserves of vulnerable countries.’

Time to open the vault?

Time to open the vault?

The interesting precedent here is using the huge amount of gold lying around in the IMF to turn SDRs into free, potentially indefinite loans for poor countries. He’s gone for the existing SDR issue because that could be rapidly turned into cash for climate change adaptation, but the IMF’s idle gold mountain could cover the interest payments on a new and much larger SDR issue, potentially generating trillions of dollars for climate change and development. Soros describes it as, if not a free, then a ‘cheap lunch’. It looks to me like a kind of global, climate-focussed form of quantitative easing.

If it’s so easy, why hasn’t it happened already? Soros sees the main obstacles as political, not technical. Mainly, they consist of opposition in the US Congress and to a lesser extent, Germany, based on fears of inflation and the impact on the dollar/euro’s positions as international reserve currencies (China’s Central Bank governor recently argued that SDRs could provide the basis of a viable global currency). Congress would need to approve a change in the IMF’s articles of agreement before they could issue new SDRs and that is highly unlikely, unless massive public pressure builds to make it happen (as it did previously with debt relief). That’s why he’s stuck to the already issued SDRs in this proposal.

Soros sees the SDR proposal as a complement to other ways to raise additional funds for climate change and development, such as the Financial Transactions Tax.  Put them in the pot along with bunker fuel taxes, airline taxes etc, and you have the makings of a grand bargain that could fund the kinds of vast technological and economic shifts required to avoid climate catastrophe and achieve lasting development. Soros contrasts this with what he calls ‘the usual $10 billion’ likely to be agreed at Copenhagen, as at other summits, much of it merely recycling existing spending commitments.

So has Mr Soros found $100bn down the back of the sofa? This kind of funny money discussion makes my head spin, but when it comes to financial alchemy, Soros knows what he’s talking about  He famously turned a $1bn profit by ‘breaking the pound’ in 1992. He’s given away $6bn in his philanthropic work, but is still the 29th richest person in the world, worth about $11bn (enough on its own to end world poverty for at least a couple of weeks). His over-riding message at breakfast was that the money is there, if politicians are willing to harness it. They must not be allowed to hide behind technicalities. And he will back the idea with philanthropic cash if it gets enough momentum, as he has done previously with the Publish What You Pay campaign. What do people think?

December 16, 2009
Duncan Green