Yellen's letter to G20 signals US support for SDR allocation

US Treasury Secretary Yellen's open letter to the G20 published today might be the inflection point in international policy coordination that the world has been looking for during the pandemic (and even before that). It is the point when the new US administration under President Biden seeks to retake leadership from a rudderless world, the G2 or G-zero of the Trump era.

Yellen writes, "This is a moment made for action and for multilateralism", words that presumably have not been chosen by accident and deliberately hark back to the unilateralism of the previous administration.

It follows a similar message Yellen gave to G7 finance leaders on 12 February ahead of the G7 Leaders' Summit. She repeats the same message she gave there: "If there was ever a time to go big, this is the moment". The G7 this year is chaired by the UK.

The G20 letter places a specific focus on low income countries (LICs), and, while acknowledging the support that international financial institutions (IFIs) have already provided, it says further international action is needed to avert a "dangerous and permanent divergence in the global economy". It calls for IFIs to explore ways to strengthen their toolkits and to continue to play a role in addressing debt vulnerabilities. The letter provides a tacit endorsement of the G20's Common Framework for Debt Treatments.

More importantly, she signals potential US support for a new SDR allocation, after the idea was rebuffed by the Trump administration last year, albeit acknowledging that more work needs to be done.

She also notes the US will work with the G20 on tackling climate change.

The letter is important not just in what it says, but that it has been published, providing some transparency over the international policy debate. The US is conferring legitimacy on the G20 to take leadership during the crisis, as it did during the global financial crisis a decade ago. On 1 December, Italy took over the Presidency of the G20 from Saudi Arabia. The Italian Presidency has already revealed that helping poor countries is among its priorities. It favours an extension of the debt service suspension initiative (DSSI) through to the end of the year and backs a new SDR allocation.

But words are easy. Action, coordination and implementation will be the crucial test.