Reserve Tranche
Categories: Banking
You go to Vegas with your buddies. You have a tendency to get carried away at the tables, so you take $500 to gamble, and give another $500 to your friend to hold onto for you. That way, if you blow through the first $500 in Hour One, you still have something left for the rest of the trip.
That second $500, the money you gave to your friend to hold for you, represents a kind of reverse tranche.
In real life, you would be a country that is part of the International Monetary Fund, and your buddy would be the IMF itself. The reverse tranche is a kind of reserve each IMF member country is required to provide the fund. If the nation reaches some financial emergency (like blowing all its money on its first five hands of blackjack), it can tap into the tranche without owing the IMF a service fee.
If it goes over the amount in the reverse tranche, it becomes a kind of loan (known as a credit tranche), and now the country has a time limit in which to pay it back, and will be hit with a service fee, as well as potential interest. Sorta like if you blow through that second $500 on Day Two in Vegas, and you need to borrow money from your buddy.
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Finance Allah Shmoop What is the International Monetary Fund or
the IMF or IMF If you're just thie goal of
the I M f is to stabilize the exchange of
trade among nations particularly you know the less politically stable
ones the smaller ones the emerging market ones the developing
ones the Third World or whatever other politically correct name
for economically weak countries comes to mind So what actually
is the fund Well it was started in nineteen Forty
for as two was coming to a close And the
aftermath of the Great Depression which financially infected the world
was still on everyone's minds Countries wanted there to exist
some stabilizing force in their exchange of promissory paper I
bonds as they bought goods and services from each other
The scars of the nineteen thirties currency devaluations all around
the world were still a thing and everyone still had
this image of it Taking a wheel barrel of German
marks the German currency at the time to buy a
loaf of bread had crazy inflation from a bunch of
paper was worth but well you know that loaf had
really awesome raisins in it but still was a loaf
of bread Okay well think of the IMF and the
same vein as you would a market maker in a
stock that is a given exchange allows an investor to
make a market in say Amazon stock where at this
moment she's a buyer at fifteen Oh two in the
cellar at fifteen fourteen and she makes twelve dollars spread
on each share sold her only basic requirement While she
has to continue to make a market in good times
or bad with volatile spikes and moves in the stock
under any conditions she has toehold in inventory lots and
lots of shares of a M CNE in order to
make that market like just make it be liquid Well
that's basically how the I M F works But with
the inventory being the currencies in the countries in which
it eases trade but may load up on rubles one
day is it reduces exposure that the Chinese currency or
RMB then may add euros on other days while it's
reducing Zimbabwean dollars Yeah the short idea here is to
simply make sure that exchange rates and international payment systems
run smoothly Liquid Lee So today almost two hundred countries
participate in the dance hoping to stimulate the interaction of
trade among all nations And this makes sense generally right
Like if everyone has somethingto lose well then they probably
have less interest in doing things like Oh you know
kill each other And that whole stabilising of trade makes
for more predictable commerce more trustworthy ability to plan and
build and liquidity or trust in a credit system so
that countries can take on modest amounts of leverage with
credit terms making sales happen more easily all around the
world Yeah it's a good idea And going through the
IMF or trading through their system The world then has
much better financial surveillance as to how well or poorly
a given country is doing economically or at least commercially
like how well they're selling bananas or coffee beans or
oil or whatever they sell a big spike in banana
sales from India Well that's probably good But what does
it mean to the countries competing against India in selling
those bananas well through the IMF trading system The numbers
are easy to check and it looks as if sales
are for falling through the floor For India's competitors Well
then the IMF can sometimes step in and buy a
bunch of bananas you know because they have appeal and
find another buyer for them elsewhere And this is a
problem at times because well the worst managed countries the
most corrupt ones tend to get the most attention right
Corrupt governments You thinking Somalia Mexico Rwanda Yeah we're looking
at you guys or it's all about ludicrously unfair tax
policy to favor the rich high Greece were looking at
you or to favor the poor a Venezuela How'd that
huge leverage bed on oil prices going up work out
for you there Yeah none of those countries have done
well and the disciplined group of relatively wealthy countries have
had to step in at times and bail them out
with huge loans to stave off either civil war or
mass starvation or well you know just to stave off
war Typically the IMF watches and advises those who seem
to have their acts together And it lends money to
those who don't The five largest stakeholders in the IMF
are the US Japan France Germany and the U K
Hey China where are you We need you in here
Well the fund itself was capitalized are funded by initial
capital contributions a gazillion years ago And there are more
coming as more and more countries teeter on the edge
of a well full bankruptcy Yeah You know more countries
they're going to be coming in Aachen for a western 00:04:26.804 --> [endTime] dough