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Welcome to the Central Bank Insider Archives. We are pleased to be able to provide you with this intimate look at central banking events, policies, and staff. Commentary is updated as available (generally bi-weekly) and archived monthly. The source commentary "Newsmakers" is reprinted at USAGOLD with permission and by courtesy of Central Banking Publications Ltd.
25 May 2000
**************************************
NEWS THIS WEEK
** Central bank tightens capital
controls following the coup
** IMF to use reserves as indicator of financial vulnerability
** Bundesbank supports stock exchange merger
** Gerashchenko against weakening currency
** Allsopp given hard time by politicians
** Hungarian central bank chief comes under fire from government
** Russia criticises bank asset freezing
** Inflation target should be changed, says union official
** Currency union: Brash on sidelines
** Australia may not match US interest rate rises
** Fight continues over use of Bank of Thailand profits
** Salameh defends banking secrecy
** Bank Indonesia raises rates to lift rupiah
** Malaysian growth at four-year high
** IMF backs Korean economy
** IMF says no lending to Ukraine until July
** Central bank website attack
** No more francs
** Business cycle forecasting and regime shifting
** Euro coins
** BoE annual report
** de Nederlandsche annual report
**************************************
BIRTHDAYS
Mohamed El Beji Hamda, governor of the Central Bank of Tunisia since 1990, is 66 on May 26.
Pierre Paul Schweitzer, managing director of the IMF from 1963-73, is 88 on May 29.
Jurgen Stark, vice president
of the Bundesbank, is 52 on May 31.
**************************************
CONFERENCES
** Financial services meet e-commerce: What the future holds **
Technology has dramatically transformed the financial services industry, and this transformation will only accelerate. What does this mean for the "traditional" financial services providers? What does it mean for customers? What does it mean for the current statutory and regulatory framework? Will Gramm-Leach-Bliley help or harm providers as they try to harness technology in delivering products and services?
This is a one day banking conference to be held in Boston, Massachusetts, USA, on Friday, June 16, with a reception at the Federal Reserve Bank of Boston on the evening of June 15. Session planned are (1) Modernizing the Financial Services Regulatory Structure -- The Next Big Job, (2) Gramm-Leach-Bliley and the Brave New World of Industry Convergence (3) E-Commerce: The Future of Banking and Financial Services, (4) Bankruptcy - Give or Take a Dollar in the Next Millennium!
For more information on the
programme, email: BERT@ELY-CO.COM
**************************************
NEWS THIS WEEK
Central bank tightens capital
controls following the coup
May 22
The Central
Bank of Fiji has strengthened its capital controls after the political
crisis in the country caused panic among local businesses. The
Bank said it was tightening the flow of money out of the country
but declined to give further details. Businesses in the country
have reportedly been scrambling to transfer funds into foreign
accounts. A Bank spokesman said strong measures were needed to
ensure that reserves are maintained during this current crisis.
**************************************
IMF to use reserves as indicator of financial vulnerability
The IMF has come up with a variety of measures of debt and reserve which measure a country's financial vulnerability. With regard to reserve-related measures, most directors supported the view that the ratio of reserves to short-term debt could be a particularly useful indicator of reserve adequacy, especially for countries with significant, but not fully certain, access to international capital markets. The models used by major rating agencies give a weighting of about 10% to the indicator of reserve adequacy.
But directors stressed that reserve adequacy had to be looked at in the context of individual country factors. Among such factors, directors stressed the importance of the choice of exchange rate regime and the flexibility of domestic interest rates; the regulatory regime and incentive structure within which the private sector operates, including with regard to bank supervision and corporate governance; as well as the extent to which debt is denominated in local currency, hedged, or offset by additional private sector external assets and foreign currency cash flows.
For more information see http://www.imf.org/external/np/sec/pn/2000/PN0037.htm
http://www.imf.org/external/np/pdr/debtres/index.htm
**************************************
Bundesbank supports stock exchange merger
May 19
A merger between the London
Stock Exchange and Deutsche Borse seems increasingly likely. The
Deutsche Bundesbank, whose board members heard a closed-door presentation
by Mr. Seifert on Thursday, seemed cautiously supportive of the
merger. At a news conference Friday, a Bundesbank board member,
Hans Reckers, warned that Frankfurt had to keep control of trading
in small growth stocks but that this should not be a deal-breaking
issue and that the merger was fundamentally ''positive.''
**************************************
Gerashchenko against weakening currency
May 23
Russian Central Bank Chairman Viktor Gerashchenko said on Tuesday the ruble should not be artificially weakened to help the government meet budget obligations but should fluctuate smoothly. Gerashchenko was responding to a statement last week by Prime Minister Mikhail Kasyanov that a further strengthening of the ruble was not in the best interests of the economy. Kasyanov's statement had jolted Russia's foreign exchange market, forcing the central bank to intervene heavily to prevent sharp losses against the dollar.
There are rumours that Russian
President Vladimir Putin may want to replace Gerashchenko in the
next six months. The most likely candidate is said to be Andrei
Bugrov, Russia's representative at the World Bank in Washington.
**************************************
Allsopp given hard time by politicians
May 23
Chris Allsopp, who joins the
Bank of England's monetary policy committee on June 1 replacing
Charles Goodhart, was given a tough grilling by UK MPs at a Treasury
Select Committee meeting. Although the committee has no power
to stop the appointment going ahead, they raised doubts about
the wisdom of the appointment saying it would weaken the MPC policymaking
ability. Some observers have expressed surprise at the politicians'
views, saying that Allsopp is a top rate academic who has tremendous
clarity of thought on macroeconomic issues and will be an excellent
addition to the MPC team.
**************************************
Hungarian central bank chief comes under fire from government
May 19
Hungarian Prime Minister Viktor
Orban attacked the head of Hungary's National Bank Gyoergy Suranyi,
for bad management of an HNB subsidiary, Central Wechsel- und
Creditbank, which had accumulated losses of 26 million dollars
last year. Suranyi, who has been criticized several times by the
government over the past few months, has rejected the finance
minister's charge as unfounded. Orban refused to state clearly
whether he would now accept Suranyi's resignation, after he turned
down such an offer in April saying Suranyi should stay until his
term expires in March 2001. In April, the London-based Central
European economic monthly newspaper elected Suranyi as central
bank governor of the year, crediting him with the "robust"
development of Hungary's economy.
**************************************
Russia criticises bank asset freezing
May 23
Russian officials have sharply
criticised a decision by a French court to freeze the assets of
the Russian Central Bank held in France. The assets were frozen
last week, after a Swiss company sought to recover millions of
dollars which it said the Russian government owed. A senior central
bank official described the ruling as a serious blow, which allowed
a claim against the government to be transferred to the central
bank retroactively.
**************************************
Inflation target should be changed, says union official
May 22
Labour's biggest trade union
affiliate has called for the Bank of England's 2.5% inflation
target to be changed to help the UK's ailing manufacturing sector.
The Transport & General Workers Union (TGWU) said it believed
the target should be widened to a band of 2% to 3% to allow flexibility
and help manufacturing firms which are being hit by the strength
of the pound.
**************************************
Currency union: Brash on sidelines
May 22
The Reserve Bank has stood aside
from the Australasian currency union debate, with the governor,
Don Brash, simply outlining evenly-balanced pros and cons, and
leaving any decision to politicians. "Entering a currency
union is a major foreign policy decision, and thus a matter for
elected politicians," Dr Brash said in Auckland, in response
to a recent study commissioned by the Australia-New Zealand Business
Council.
**************************************
Australia may not match US interest rate rises
May 22
Financial markets have downgraded
the likelihood of a June hike in Australian interest rates, after
Reserve Bank Governor Mr Ian Macfarlane indicated Australian rates
would not necessarily match future US rate rises. Mr Macfarlane
told a parliamentary committee he was less concerned about the
Australian dollar's recent fall, and indicated that inflation
should stay within its 2 to 3 per cent target range. He said there
was "no mechanical relationship" between moves in the
currency and changes to monetary policy. Earlier in the week,
Prime Minister John Howard had questioned whether Australia had
to slavishly follow US interest rates up.
**************************************
Fight continues over use of Bank of Thailand profits
May 25
The campaign against the proposed
use of profits from the Bank of Thailand's reserve accounts to
repay debts that crashed the economy continued yesterday with
Luangta
Maha Bua insisting the treasury reserve must not be touched. The
central bank has made it clear cash and gold donations worth more
than one billion baht would not be affected by the consolidation
of accounts of its banking and note issue departments. According
to the bank, the 1,487kg donated gold has been under its care
while the cash donations totalling US$4.27 million have been deposited
with the US Federal Reserve Bank in New York.
**************************************
Salameh defends banking secrecy
May 20
Lebanon's central bank governor,
Riad Salameh, tried to reassure investors over the weekend that
no money laundering was taking place in Lebanon. Addressing participants
on the last day of the Arab Investment and Capital Markets Conference,
Salameh said that the Lebanese market was too small to absorb
the millions of dollars associated with money laundering. The
governor also added his voice to opposition to the removal of
banking-secrecy laws. "Banking secrecy has distinguished
us among other states. We see no reason to change this policy,"
Salameh said.
**************************************
Bank Indonesia raises rates to lift rupiah
May 25
Bank Indonesia may have to revise
its key macroeconomic forecasts downwards if the rupiah remains
weak, central bank Governor Sjahril Sabirin said yesterday. Sabirin has said also
on Friday that the central bank had no plans to further intervene
to support the rupiahs.
In attempts
to support the currency the previous week had cost the central
bank about 1% of its foreign exchange reserves.
**************************************
Malaysian growth at four-year high
May 25
Malaysia's economy expanded
at its fastest rate in four years during the first quarter, as
manufacturers stepped up production to meet rising global demand
for semiconductors and electronic goods. The economy expanded
11.7 per cent in the first quarter against last year, said Bank
Negara Malaysia. Full-year growth will be "higher" than
the government's 5.8 per cent target, said Dr Zeti Akhtar Aziz,
the central bank governor, who did not give a new forecast.
**************************************
IMF backs Korean economy
May 24
David Coe, International
Monetary Fund representative in Seoul, said Korea's economic recovery
is "real" and circulating fears about its shrinking
current account surplus may be exaggerated. Bank of Korea Governor Chon Chol-hwan said he
expected gross domestic product growth of between seven and eight
percent for 2000.
**************************************
IMF says no lending to Ukraine
until July
May 22
The International Monetary Fund said on May 22 it might resume lending to Ukraine in the second half of this year, dashing the government's hopes of receiving the funds earlier. The IMF's representative office in Kyiv circulated a press release on May 22, saying the fund hoped that disbursements under the $2.6 billion extended fund facility program to Ukraine could be resumed after "mid-year." The statement represented the IMF's first hints of a time frame for the fund to resume financial assistance to Ukraine after the release of a preliminary audit by PricewaterhouseCoopers that showed that the National Bank of Ukraine had overstated its foreign exchange reserves between 1996 and 1998 to qualify for the fund's aid.
**************************************
Central bank website attack
May 23
Central Bank of Columbia website
broken into on Tuesday and the homepage was defaced with the message
"F*** your government". The web administrator quickly
rectified the situation but it highlights the problems of security
on central bank websites.
**************************************
CURRENCY CORNER
No more francs
French money
presses churned out their last franc-denominated note last week
and from now on will print only euro notes, the Banque de France
announced. There are enough franc notes to last until the European
single currency goes into circulation Jan. 1, 2002, the bank said
on Saturday.
**************************************
PAPERS OF THE WEEK
Business cycle forecasting
and regime shifting
By Thorarinn G. Petursson, Division Chief, Economics Department,
Central Bank of Iceland
Abstract: This paper applies Hamilton's (1989) Markov switching model of business cycle dynamics to real GDP in Iceland for the period 1945 to 1998. The resulting model gives a reasonable description of the data generating process for real GDP and produces business cycles that correspond quite well to conventional wisdom concerning the Icelandic business cycle. Although the model cannot be distinguished from a simple, linear time series model, it offers some improvements in terms of mean absolute forecast errors and in forecasting business cycle turning points to the official forecasts made by the National Economic Institute.
For more information, email
the author at THORAR@CENTBK.IS
**************************************
Euro coins: From Design to Circulation
By the European Commission
A new paper by the European
Commission takes you on a whistle stop tour of the short history
of the euro coin. Starting with how its name was chosen, the paper
describes the problems over its metal composition, what design
it is to have in different countries and how they are to be introduced.
It also goes into great detail on the angles used in the design
of the euro symbol.
**************************************
Bank of England annual report
Bank of England sees the "tantalising possibility of new developments" that may help to improve the UK economy's performance in the years ahead. The annual report released this week highlights evidence of more intense retail competition that could put downward pressure on the price level and that the future spread of e-commerce could have a similar effect.
But the report acknowledges
that the Bank still faces significant practical policy challenges.
The imbalances between the domestically orientated sectors of
the economy and those exposed to international competition is
"sadly familiar and has, if anything, become more difficult
to resolve."
**************************************
De Nederlandsche annual report
Nout Wellink , de Nederlandsche
Bank governor, said in presenting the annual report last week:
"To put it plainly, leaving economic jargon aside: the government
should not spend any windfalls." The Dutch economy is in
serious danger of overheating. Wellink urged that the country's
next budget, due in September, should at least provide no further
stimulus for consumer spending. Dutch house prices are now rising
at an annual rate of 20%.
**************************************
18 May 2000
**************************************
NEWS THIS WEEK
** Reserve manager's death "linked to bank probe" **
** Ecuador bank chief resigns **
** US loses patience with new economy **
** Bank of Canada follows suit despite falling growth **
** The heat is on in NZ and Australia **
** Wahid persuades central bank to intervene **
** Surging
capital inflows pose dilemma for BOK
**
** Taiwan's
banking system in fragile condition
**
** Revaluation
boosts Swiss gold reserves despite sales **
** Deputy governor speaks out on television **
** Monetary Authority of Singapore cooperates with US SEC **
** Salameh rejects rate cut **
** Banco do Mexico tightens monetary policy **
** Irish inflation at 15-year high **
** Currency corner - Jam jars, bottles of beer and football **
PAPERS OF THE WEEK
** Quo Vadis Euro? - The Cost of Muddling Through **
** Monetary policy independence in the ERM: Was there any? **
** An Anzac Dollar? Currency Union and Business Development **
********************************
** HAPPY BIRTHDAY!! **
********************************
Edgar Meister, member of the Bundesbank directorate, is 60 on
May 21.
Professor Stephen F. Frowen, former Bundesbank Professor of Monetary Economics in the Free University of Berlin, will be 77 on 22 May.
Urban Backstrom, the governor of the Sveriges Riksbank, is 46 on May 25.
********************************
** FORTHCOMING CONFERENCES **
********************************
The Future of London as an International Financial Centre
Governor of the Bank of England, Eddie George and FSA chairman Howard Davies are both to speak at a conference on 13 of June 2000 to examine the competitiveness of the City of London as a leading global financial centre. The new Mayor of London, Ken Livingstone and the new chairman of the London Stock Exchange, Don Cruickshank, have also been invited to speak. In addition the London Chamber of Commerce will release to delegates the results of its latest foreign banking study: a valuable survey into the attitudes and perception of foreign banks based in the capital. Delegates will receive a free copy of the executive summary
For more information contact
Antonia Calvert at The Waterfront Conference Company Ltd, 9 Grosvenor
Gardens, London SW1W OBD, (T)+44 20 7233 7600 (F) +44 20 7233
7611 (e) CONFERENCE@THEWATERFRONT.CO.UK
********************************
Yorkshire International Business Convention
Hanna Gronkiewicz-Waltz, the
president of the National Bank of Poland, is giving a presentation
at the Yorkshire International Business Convention on Friday 9th
June.
She will join an elite band of past speakers: Henry Kissinger,
Lech Walesa, Robert Kennedy Jnr, Albert Reynolds, FW de Klerk
and Neil Armstrong. The other speakers on the day can be found
at
http://www.yibc.co.uk/appol/appol.htm Further details on the conference
can be found at http://www.yibc.co.uk or email Justin McKeown
on JUSTINM@SINCLAIRMASON.COM
********************************
** THIS WEEK'S NEWS **
********************************
Reserve manager's death "linked to bank probe'
May 16
The word buzzing around Beijing
is that the death of the People's Bank of China's head of reserve
management Li Fuxiang, 47, last week is linked to investigations
into the financial dealings of Mr Zhu Xiaohua, former head of
the China Everbright Group. Mr Zhu, 51, who was seen as a protege
of Chinese Premier Zhu Rongji, is said to be under investigation
for losses on investments approved by him while he was also a
top official of the central bank. The probe is said to be focused
on the period from 1993 to 1995, when Mr Zhu headed the State
Administration of Foreign Exchange (the central bank's reserve
management department), the position that Mr Li held before his
death. He died after a fall from the seventh floor of a hospital
window. There is no evidence that Mr Li had been acting fraudulently
for personal benefit. However, some commentators have looked at
Li's close connections with hedge fund managers who he had got
to know in New York, and wondered whether he struck a deal with
them that went sour.
********************************
Ecuador bank chief resigns
May 11
The head of Ecuador's Central
Bank, Modesto Correa, has resigned, four months after taking office.
Pablo Better, the former governor, had resigned because he did
not agree with the government's decision to official dollarise
the economy, but Mr Correa said he was stepping down for personal
reasons. He denied his departure was linked to an investigation
into salary rises given to bank staff at the height of the economic
crisis earlier this year. Mr Correa is expected to be replaced
by his deputy, Mauricio Pareja.
********************************
US loses patience with new economy
May 16
Alan Greenspan,
the Federal Reserve chairman, has lost patience with the new economy,
deciding to lift America's interest rate by 0.5 per cent in a
shift from gradualism to aggression. Last time the Fed raised
rates by half a point was in the mid 1990s. He has become dissatisfied
with the belief that the technology revolution has changed the
way in which the US economy behaves.
********************************
Bank of Canada follows suit despite falling growth
May 17
The Bank of Canada raised its
bank rate by one-half of a percentage point Wednesday, to six
per cent, following the half point rise in US rates the previous
day. Wednesday's increase, aimed at keeping a lid on inflation,
is the fourth rate hike since last autumn. It represents the biggest
single jump in the bank rate since August 1998, when the bank
boosted rates by a full percentage point.
********************************
The heats on in NZ and Australia
May 17
The New Zealand Reserve Bank
also put up rates by half a point to 6.5%, because "inflationary
pressures are beginning to build," said Don Brash. The Reserve
Bank of Australia is also under further pressure for a fifth interest
rate rise. The Australian dollar has sunk to a new 20-month low,
after US rates were raised to 6.5 per cent. That opens up a gap
of 1.5 per cent between US and Australian rates.
********************************
Wahid persuades central bank to intervene
May 17
Indonesia's President Abdurrahman
Wahid, facing a growing crisis of confidence in his handling of
the economy, told officials to help rescue the country's sickly
currency. He urged prompt action by the central bank to boost
the rupiah on Tuesday after it hit its lowest level in more than
seven months last Friday. Bank Indonesia The following day, Governor
Sjahril Sabirin said that the central bank has sold less than
$300 million to boost the rupiah in the currency market this week.
"We have spent less than 1% of our foreign exchange reserves
to help boost the rupiah," he told reporters before the signing
of a letter of intent between Indonesia and the International
Monetary Fund. He didn't offer further details.
********************************
Surging capital inflows pose dilemma for BOK
May 11
Into the second
year of an economic boom, Korea is once again on the road to disaster,
Lombard Street Research, a British think tank, has warned. Here's
the problem: capital inflows are surging, bringing a subsequent
appreciation of the won which in turn is causing a fall in the
current account surplus. In short, the same chain of events that
brought about the crisis in 1997.
********************************
Bank of Korea says Internet banks should merge resources
May 14
The Bank of Korea has urged
domestic banks to integrate their Internet banking systems, pointing
out that they are making duplicate investments. "To step
up Internet banking services, 11 domestic banks are planning to
invest a total of 1.2 trillion won in information technology (IT),"
the central bank said in a report. "But their investment
strategies are either inappropriate or run the risk of excessive
investments when they fail to achieve restructuring," the
report said.
********************************
Taiwan's banking system in fragile condition
May 17
Hundreds of
panicked customers jammed branches of Taiwan Development &
Trust Corp all this week, on fears that the mid-sized trust firm
would collapse. Local media
estimated about NT$3.4 billion (S$189 million) had been withdrawn
since the Commercial Times reported last Friday that the company
faced a NT$500 million shortage in operating funds that day. The
panic is continuing even though the finance ministry has ordered
its Central Deposit Insurance to seize control of the firm for
six months to offer assurance to depositors and supervise the
bank. The central bank has so far provided NT$4 billion in cash
yesterday to help the company meet withdrawals.
********************************
Revaluation boosts Swiss gold reserves despite sales
May 12
The worth of
Swiss gold reserves swelled in early May as the central bank revalued
its large holdings of the metal at market prices, masking the
impact of bullion sales it had launched on May 1. The Swiss National
Bank (SNB) gave no information about just how much gold it had
sold in the first 10 days of the month as part of its plan gradually
to divest 1,300 tons of excess gold - around half of its 2,590
tons of reserves.
********************************
Deputy governor speaks out on television
May 15
The Bank of England's monetary
policy committee's decision to put interest rates on hold has
been strongly defended by the Bank's deputy governor, Mervyn King.
Speaking on GMTV - a Sunday morning television news programme
- Mr. King defended the committee's decision and denied allegations
that the Bank and the government were trying to talk the pound
down. The senior central banker seemed very at home in the television
studio. Commentators have said the bank is becoming increasingly
media-friendly in an attempt to increase awareness in the general
public of what it does. It also shows that King is good at handling
the media, a very important skill if he aspires to be governor.
********************************
Sir Brian Moffatt and Bridget Blow join Court of Bank of England
May 18
Sir Brian Moffatt, chairman
of the steel company Corus, and Bridget Blow, chief executive
officer of tech company IT net, fill the gaps in the Bank of England's
Court of Directors. They will replace Graham Hawker, who did not
want to renew him term, and Chris Allsopp, who joined the BOE
monetary policy committee. They will serve for two and three years
respectively.
********************************
MAS and CFTC and SEC sign MoU
May 16
Recently introduced legislation
allowing the Monetary Authority of Singapore to cooperate with
foreign securities and futures authorities has been bolstered
by a memorandum of understanding sighed on Monday between the
MAS, the US Securities and Exchange Commission and the Commodity
Futures Trading Commission. The MoU establishes a framework for
information sharing, thereby facilitating cooperation in cross-border
investigations of potential violations of securities and futures
laws.
********************************
Salameh rejects rate cut
May 11
Lebanon's central bank governor,
Riad Salameh, said last Thursday at a business conference that
the bank could not reduce interest rates without privatization,
effective administrative reforms and a drop in the public deficit.
Asked why the central bank was not maintaining the same low interest
rates as Belgium and other countries, Salameh said Lebanon could
not be compared with industrial countries. "Lebanon doesn't
have a strong economy with vast markets to allow a reduction in
interest rates," he said, pointing to the example of Mexico,
which had faced considerable problems when it cut the primary
rates hastily. The current rate in Lebanon is about 14 percent
on the pound and 7 percent on the dollar. Salameh expressed his
confidence that Lebanon's situation would improve once Israeli
forces pulled out from the south.
********************************
Banco do Mexico tightens monetary policy
May 16
On Tuesday, Mexico's central
bank tightened monetary policy by raising the amount it withholds
from money markets every trading day to 200 million pesos from
180 million pesos. The move was seen as a measure to control inflation
in light of recent robust economic growth.
********************************
Irish inflation at 15-year high
The inflation rate of Ireland,
one of the small peripheral members of the euro-zone, has hit
a 15-year high. There are fears that the Irish economy is overheating.
Other commentators have said that Ireland should enjoy its new
prosperity and shouldn't worry about fears of "boom and bust",
because if it did "bust" it would get a bailed out by
EU grants.
********************************
CURRENCY CORNER
********************************
Don't put coins in jam jars, says Central Bank of Ireland
The Central Bank of Ireland
is seriously short of coins, especially 5p, 2p and 1p coins, which
is affecting retail activity. The central bank, which has already
increased coin production by 30% last year, has recently been
urging the public not to store the coins in jam jars at home.
********************************
Chatham Island dollars are only as good as seashells, say Murray
Sherwin
Murray Sherwin, the deputy governor
of the Reserve Bank of New Zealand, reminded those marketing Chatham
Islands dollars that they are not legal tender. "These so-called Chatham Island
dollars are harmless as a promotional gimmick. If people want
to use them to undertake transactions, that is fine, just as one
can pay for a service with monopoly play money, seashells, or
bottles of beer, if the seller is happy to receive them."
********************************
Dickens to make way for Darwin on tenners
The Bank of England has announced
that Charles Darwin will replace Charles Dickens on the new ten-pound
note.
********************************
Football coins issues from Belgium and the Netherlands
A joint issue of commemorative
coins from both Belgium and the Netherlands have been released
in their respective countries marking the European football championships
to be held in the two host countries from the 10th June to the
2nd July 2000.
For more coin news, see http://www.lbmrc.co.uk
********************************
PAPER OF THE WEEK
********************************
Quo Vadis Euro? - The Cost of Muddling Through
In a report for the Centre for
European Policy Studies, a group of leading economists, led by
Daniel Gros of the CEPS and including Thomas Mayer of Goldman
Sachs and Niels Thygesen of the University of Copenhagen, argue
that long-term interest rates may be higher in Europe partly because
the markets do not understand the ECB's strategy and behaviour.
For more information see: http://www.ceps.be/Pubs/Gros/MPG.htm
********************************
Monetary policy independence in the ERM: Was there any?
By Hali Edison & Ronald MacDonald
Recently proposals for introducing
greater exchange rate fixity into the behaviour of key exchange
rates have become fashionable. This paper examines the extent
of monetary independence conferred by a target zone using data
from the recent ERM experience. It finds that countries which
had a credible commitment to the target zone had more independence
in the operation of their monetary policies than countries with
a lesser commitment. Therefore it seems, under certain conditions,
central bankers can have their cake and eat it, and not need to
worry about the famous "inconsistent quartet"?
Email R.R.MACDONALD@STRATH.AC.UK Email HALI.EDISION@FRB.GOV
********************************
Australia and NZ currency union
Following the publication of
a new paper by the Wellington Institute of Policy Studies, Alexander
Downer, Australia's
foreign minister, said that the government would in principle
be interested in a currency union with New Zealand. The issue is a perennial one for New
Zealand, which the smallest industrialised country in the world
to run an independent monetary policy.
An Anzac Dollar? Currency Union and Business Development. By Arthur
Grimes and Frank Holmes with Roger Bowden. Published by the Institute
of Policy Studies, Wellington. NZ$29.
********************************
JOB VACANCIES
********************************
Experienced financial experts - African Development Bank
Job Description: Experience
MBA graduates from leading business schools. Project management
skills, providing advice for senior managers, debt management
and corporate strategy.
Requirements: Well-developed communication skills and ability
to meet deadlines. French and English preferred.
EMAIL: RECRUIT@AFDB.ORG
********************************
Portfolio management expert - European Central Bank
See ECB's website http://www.ecb.int/job/ecb00204.htm
********************************
Head of Supervision, Isle of Man
Job description: To lead the
division which licenses and supervises bank, mortgage companies
etc. Unique opportunity to contribute to the growth of the Isle
of Man's financial services Requirements: Senior position in a
regulatory body or financial services company. Strong leadership
and communication skills/
EMAIL: LONDON@HOWGATE-SABLE.COM
********************************
Information Officer at the Bank for International Settlements
Job description: handle press
enquiries, coordinate interviews and edit press releases, manage
the BIS website, monitor external press coverage. Requirements:
Degree and 3-5 years experience in the media, knowledge of international
economics, excellent written and spoken English and German
EMAIL: ROSEMARIE.ZIPSEL@BIS.ORG
**************************************
11 May 2000
**************************************
** Allan Meltzer joins advisory
board of Central Banking **
** Job vacancies **
** Birthdays this week **
** Padoa-Schioppa heads BIS on payment systems
** Banque de Canada governor announces retirement **
** Greenspanner in the works **
** Trichet supported by French finance minister **
** Some currency respite for BOE **
** Allsopp joins Bank of England **
** CFA central banker backs W African single currency **
** IMF praises Thailand **
** Bank
Indonesia will intervene!
**
** PWC report on NBU **
** RBA may be on hold **
** Bank
run in Romania **
** Changing how monetary policy is made at RBNZ **
** Rand fallen by 11% this year - Mboweni unshaken **
** Currency problems force meeting of RPP
** Currency corner - Stalin ressurrected!! **
** Annual reports from Fiji and Germany **
** Book of the week - Jan Kakes, de Nederlandsche Bank **
**************************************
Allan Meltzer joins advisory board of Central Banking
Allan Meltzer, who wrote a damning report for the US Congress
on the reform of the IMF and World Bank, has joined the advisory
board of Central Banking journal. Meltzer is a professor of economics
at Carnegie Mellon University. For information, see:
http://www.gsia.cmu.edu/afs/andrew/gsia/meltzer/
**************************************
JOB VACANCIES
**************************************
** Senior Economist at the Bank For International Settlements
**
Job Description: Monitor in-depth the macroeconomic and financial
market developments in the major countries, write papers prepared
for meetings of senior central bankers, represent the BIS at meetings,
assist in the organisation of seminars and develop contacts with
central banks. Job Requirements: PhD in Economics, several years
experience in a central bank, IFI or commercial bank, fluent English
and preferably other languages. CV and covering letter to "Human
Resources" at BIS.
** Economic Policy Expert in
the Central Bank of Oman **
Job Description: Analyse macroeconomics and microeconomic trends,
study economic policy requirements. Job Requirements: PhD Economics,
proven research capability, basic econometric knowledge, strong
publication record
EMAIL: MARKAZI@OMANTEL.NET.OM
**************************************
BIRTHDAYS
We wish a very happy birthday to:
James Koroma, governor of the Bank of Sierra Leone, is 54 years old on 15 May.
Jens Thomsen, member of the Board of Governors of Danmarks National Bank since 1995, is 58 on 15 May
Dr. Peter Zoellner, head of investment policy at the Oesterrieche Nationalbank, has his birthday on 16 May.
Ota Kaftan, head of banking supervision at the Czech National Bank, is 46 on 18 May.
Dr. Mohsen Nourbaksh, governor
of the Central Bank of Iran, is 52 on May 18.
**************************************
THIS WEEK'S NEWS
********************************
Banque de Canada governor announces retirement
May 4
The governor of the Banque de
Canada, Gordon Thiessen has announced that he will retire in January
2001 at the end of his 7-year term. Thiessen, 62, informed the
central bank's board of directors on Thursday that he would not
seek a second term, rebuffing pleas from Paul Martin, the finance
minister, to stay on. "Mr Thiessen indicated he was making
his plans known well in advance to faciltate planning for the
selection an appointment of a new governor," the bank said
in a statement. The leading candidate to replace him is the bank's
senior deputy governor Malcolm Knight, who joined the bank a year
ago from the IMF.
**************************************
Padoa-Schioppa heads BIS on payment systems
The governors of the central banks of the Group of Ten countries have appointed Tommaso Padoa-Schioppa, ECB's banking supervision supremo, as chairman of the Committee on Payment and Settlement Systems (CPSS) as from 15 June 2000. Padoa-Schioppa will succeed the Bundesbank's Wendelin Hartmann, who has chaired the committee since 1998 and has been a member of the CPSS since its establishment in 1990. Hartmann, you may remember, had his 63rd birthday on 7 May.
The G10 central bank governors also reaffirmed their support for private sector efforts to reduce foreign exchange settlement risk. For more information, see the BIS press release: http://www.bis.org/press/p000510a.htm
Or e-mail head of the CPSS secretariat
at GREGOR.HEINRICH@BIS.ORG
**************************************
Greenspanner in the works
May 5
Alan Greenspan, chairman of the Federal Reserve, warned nervous markets that they shouldn't count on a Fed bailout if recent financial turbulence intensifies. "We must be careful not to foster an expectation that policy makers will ultimately solve all serious potential problems and disruptions," Mr. Greenspan said in a speech at a Chicago banking conference. Greenspan supported the stock market in 1987 crash and organised the bailout of LTCM in 1998. Those actions, however, says the Fed, were in response to disruptions in the basic operations of the market -- not to price levels.
Bert Ely, a bank consultant
from Alexandia who attended the conference, did not think much
of Greenspan's comments: "Greenspan's assertion that large financial
institutions would be allowed to fail if they got into serious
trouble is intellectually dishonest." Ely has written extensively on the subject of
deposit insurance, see his informative website for details: http://www.ely-co.com/
**************************************
Trichet supported by French finance minister
Jean Claude Trichet, governor
of the Banque de France, who is accused of "publication of
false information to the markets" during the bailout of Credit
Lyonnais, was given a strong message of support from Laurent Fabius,
the French finance minister. "Mr Trichet has an outstanding
reputation and it is not in the interests of our country to put
this in question," Fabius said, which gives Trichet a strong
mandate to stay in office until his name is cleared.
**************************************
Soros advocates intervention on euro
George Soros,
who earned $1bn profit from betting on the exit of pound sterling
from the ERM on Black Wednesday in 1992, has advised the ECB to
intervene to support the euro. "I personally think the ECB
ought to intervene. They sit on incredible reserves of dollars,
so their intervention would be extremely credible."
**************************************
But some currency respite for BOE
Following publication of the
Bank of England's quarterly inflation report, the markets felt
that UK interest rates were near their peak and the pound fell
to 60p per euro, when it had been up to 57p. Bank deputy governor,
Mervyn King,
said that uncertainty over the future path of sterling would make
the 2.5% inflation target much more difficult in to meet in the
short term than it had been in the past.
**************************************
Allsopp joins Bank of England
May 4
Christopher Allsopp has been
appointed to the Bank of England's monetary policy committee (MPC).
He will take up his membership on 1 June. Mr Allsopp will replace
Professor Charles Goodhart whose three-year term as a member of
the MPC expires on 31 May. Mr Allsopp is currently a reader in
economic policy and fellow in economics at New College, Oxford.
He is currently a member of the Bank's Court of Directors - a
position he will have to give up on joining the Bank's staff.
**************************************
MPC member says govt should lighten regulatory burden
May 5
DeAnne Julius, external member
of the Bank of England's MPC, said last week that the UK cannot
copy the success of the US economy unless the government reduces
taxes on business and lightens the regulatory burden.
**************************************
CFA central banker backs W African single currency
May 4
Charles Konan
Banny, governor of the central bank of the West African States,
said on Thursday that he backed the idea of a single currency
throughout the region, as long as it was as solid as the CFA.
Six non-CFA states, including West Africa's biggest country, Nigeria,
agreed in April to work towards a single currency by 2003, which
could then be merged with the CFA franc in 2004.
**************************************
IMF praises Thailand
May 9
The IMF has completed its final
review of the Thai economy under the terms of the 1997 rescue
package, and deemed the progress made as impressive. The Fund's
deputy managing director, Stanley Fischer, said there was some
work to be done, although a strategy was now in place to facilitate
the restructuring of banks and corporate debt. He said the prospects
would be even greater if the central bank was more independent
and accountable. Thailand received about fourteen billion dollars
in credits under the IMF package.
**************************************
Bank Indonesia says bank loans growing slowly
May 10
Although banking conditions
in Indonesia are continuing to improve, loans are still growing
at a slow pace, said Djoko Sarwono, the director for research
and bank regulations at Bank Indonesia. He said the percentage of non-performing loans
on the banks' books still remained high (at 32.1% in March) because the corporate sector was still
in the process of debt workout. Indonesia's private debt is estimated
at $70 billion, the vast majority of which hasn't been restructured.
**************************************
Bank Indonesia will intervene
May 10
Bank Indonesia's
senior deputy governor, Anwar Nasution said on Wednesday that
the central bank would intervene in the market to support the
crumbling rupiah, which fell Wednesday to a seven-month low against
the dollar. "It's wrong
to assume that BI isn't doing anything" to support the rupiah,
he told reporters. "We will intervene." Bank Indonesia rarely
intervenes directly in the market, but does exchange dollars for
rupiah, which amounts to a form of intervention.
**************************************
PWC report on NBU
Price Waterhouse Coopers, the accountants, have finished their report on the National Bank of Ukraine. The report confirms that, by giving a misleading impression of the size of Ukraine's reserves, the NBU's reserve management practices may have allowed Ukraine to receive as many as three disbursements under the stand-by arrangement in effect at that time that it might not otherwise have been able to obtain. See: http://www.imf.org/external/np/sec/nb/2000/nb0026.htm
However, Ukraine's prime minister
and former central bank governor, Viktor Yushchenko, said that
the misreporting of central bank reserves by up to 713 million
dollars was an accounting error, and that the IMF should take
this into account if it decided to demand repayment of all or
part of a 200 million dollar loan. Kiev is anxious that the Fund
resume lending and has the support of the US in this. Yushchenko
has made progress recently but still faces powerful domestic obstacles
to reform.
**************************************
RBA may be on hold
May 5
The Reserve Bank of Australia
said in its twice yearly statement on monetary policy that the
four rate increases since last November should keep inflation
within its targeted range during the coming year to 18 months.
That would tend to suggest that official rates are on hold for
the time being. But the Reserve Bank is assuming there will be
no second round effects on inflation from the GST, and it is worried
about an increasing push to include GST-based renegotiation clauses
in wage agreements. The weak Australian dollar is another area
of uncertainty, with the inflation rate also depending on how
long the lower exchange rate is sustained.
**************************************
Bank run in Romania
Romania's Banca
International Religiilor has been placed under a special settlement
regime by the country's central bank after thousands of depositors
besieged branches trying to withdraw money. Management had to
call in bodyguards to protect tellers and put a notice in the
headquarters in Bucharest urging depositors to have faith in the
bank, who shareholder include Romania's major churches. BIR has announced that a British investment
group, Jacquila, has acquired a majority stake to 500 bn lei from
300 bn lei. The central bank must approved the increase.
**************************************
Changing how monetary policy is made at RBNZ
May 8
We mentioned in Central Banking journal (Vol. X Number 3) that most central banks take monetary policy decision via a committee and that only four central banks still let the governor decide interest rates alone (although obviously with consultation with his senior colleagues). The New Zealand Reserve Bank was one of those four. However, the bank is hiring an international expert at a fee of up to $500,000 to undertake a sweeping review of the way it handles monetary policy - and one of the areas this expert may look at is the bank's decision-making structure. The review is part of the election pledges by both parties in the ruling coalition of Labour and Alliance.
The terms of reference of the review exclude the cornerstones of the bank's legislation - the bank's independence and the rules defining the maintenance of low inflation as its primary function. In March Don Brash said in an interview with Central Banking (Vol X.4): "They might say the Board should have a bigger role to play, or that there should be a voting monetary policy committee in the formal sense."
For the press release, see "latest
news" http://www.centralbanking.co.uk
**************************************
Rand fallen by 11% this year
The South African
rand has fallen by 11% this year but the Reserve Bank remains
set against intervention.
The SARB's reserve position has improved in the last year; net
open forward positions of central bank have been reduced and the
bank's aim is to bring them to zero as soon as possible. When
governor Tito Mboweni is abroad, the acting governor can do anything
he likes except intervene in the FX markets to hold the rand.
The SARB
emphasises that it has an inflation target, not an exchange rate
target.
**************************************
Currency problems for meeting of RPP
May 8
The National Bank of Poland's monetary policy council held an unscheduled meeting following a sharp 5% fall in the zloty on Friday. Since it was floated on April 12, the currency has lost more than 12% of its value against the dollar and more than 5% against the euro. The National Bank said it was going to take a non-interventionalist policy toward the currency when it was originally floated.
At the meeting, the monetary
policy council said the recent zloty plunge was a result of poor
fundamentals but it saw no justification for further strong depreciation
of the unit and it left interest rates flat.
**************************************
CURRENCY CORNER
The Central Bank of Russia has minted a controversial coin commemorating the 55th anniversary of end of the second world war that shows the face of the discredited Soviet-era leader Joseph Stalin.
The Bank of Uganda have issued
a 20,000 shilling banknote. The reverse of the note features an
illustration of the Bank of Uganda. Security measures include
a security thread, microlettering and latent imaging. This note
issue coincides with the release of new 50, 100, 200 & 500
shilling coins, which replace these banknotes of the same value.
http://www.lbmrc.co.uk
**************************************
ANNUAL REPORTS
Deutsche Bundesbank
The recently released 1999 report began with its customary sombre note. As is traditional the first page list the names of Bundesbank employees who have died in the previous year, in particular the outspoken President of the North Rhine-Westphalia Land Central Bank, Prof Reimut Jochimsen who died on November 25,1999. The report otherwise strikes cautiously upbeat note with Ernst Welteke's foreword referring to "some quite auspicious economic omens". He goes on to call for further deregulation of the German economy, involving " the public sector relinquishing those tasks which can be performed just as well by the private sector". One candidate for such a roll-back of state functions must be the Bundesbank itself, which still employs over 15,000 staff and maintains 135 branch offices (10 have recently closed). In July 1999 the Bundesbank proposed two alternate organisational structures for its post-euro working, but as Welteke observes "now it is up to Parliament to decide on the reorganisation. For the annual report, click on: http://www.bundesbank.de/en/monatsbericht/1periodika.htm
Reserve Bank of Fiji
In the 1999 annual report, governor, J.Y. Kubuabola, praises the work of the Reserve Management Department:
"A major challenge for
the bank in 1999 was the management of foreign exchange reserves.
Global bond markets performed badly in 1999 and it was a challenge
to maintain an adequate return in this environment while still
meeting the safety and liquidity requirements that are the cornerstone
of the bank's foreign exchange reserve management. I am pleased
to say that, despite the difficult trading conditions, with careful
management of the foreign exchange reserves, the bank was still
able to generate a profit in 1999."
**************************************
BOOK OF THE WEEK
Monetary transmission in Europe - the role of financial markets and credit
Jan Kakes, Monetary and Economic Policy Department, De Nederlandsche Bank, The Netherlands
"This book focusing on
different aspects of the monetary policy process is of topical
value, not only because of its contribution to the existing literature
but also because of its practical relevance for monetary policy
making. The investigation includes not only small but also larger
economies. As both types are part of Emu the empirical results
seem also highly useful for evaluating the process of monetary
policy transmission in a European perspective which still remains
one of the most crucial fields for research especially with regard
to the design and conduct of the ECB's monetary policy."
-- Wim F. V. Vanthoor, De Nederlandsche Bank, The Netherlands
**************************************
4 May 2000
__________________________________
** HAPPY BIRTHDAY **
** JOB VACANCIES **
** CHRISTIAN NOYER **
** Euro falls below 90 cents **
** Recker down on Greek entry **
** Lohmus as Central Bank of Estonia governor **
** CNB financial reports rejected by parliament **
** Allegations
of corruption at Bank of Ghana
**
** SA rand fall "nothing unusual" **
** RBZ advice rejected **
** RBA raises rates and the A$ recovers **
** BOE dove turns into interest rate bear **
** Canada's longest expansion falters **
** Chief economist leaves RBNZ **
** Zloty plunge temporary **
** Kiwis and Aussies: United we stand **
** Thailand's regulations eased for creditors **
** RBI in supervision shift **
** Currency corner **
** Central Bank of Iran annual report **
** PAPERS OF THE WEEK **
** Central Banks and Sovereign Immunity **
** What's Wrong with the Euro **
__________________________________
** HAPPY BIRTHDAYS **
__________________________________
Abdelouahab Keramane, governor of the Bank of Algeria, is 56-years-old on May 5th.
Shkelqim Cani, governor of the Bank of Albania, is 44 on May 6th.
Luis Angel Rojo, governor of the Banco de Espana, is 66 on May 6th.
Wendilin Hartmann, member of the Board of the Bundesbank, is 63 on May 7th.
Jan Hendrick Brouwer, executive director of de Nederlandsche Bank, is 54 on May 8th
Sirrka Hamalainen, ECB executive board member, is 61 on May 8th
Marko Skreb, governor of the Croatian National Bank, is 43 on May 8th
Dr. Muhammad Yaqub, the former
governor of the State Bank of Pakistan, is 63 on May 10th.
__________________________________
JOB VACANCIES
__________________________________
** Payment Systems Policy Expert at the European Central Bank
**
Job description: Address a broad range of payment systems policy issues, and in particular contribute to the analysis of TARGET policy issues and to the oversight of other large value payment systems. http://www.ecb.int
__________________________________
** Foreign exchange dealer at the Bank for International Settlements **
Job description: Deal foreign exchange with commercial and central bank counterparties worldwide. Market BIS services to central banks, assist the gold desk in its daily activities. http://www.bis.org
__________________________________
CHRISTIAN NOYER INTERVIEW
See our website for an interview with Christian Noyer, ECB vice president. http://www.centralbanking.co.uk/newsf.htm __________________________________
THIS WEEK'S NEWS
Euro falls below 90 cents
May 2
The euro fell below 90 cents
against the dollar. This was despite a repo rate rise by 25 basis
points to 3.75 per cent. The currency's fall coincided with a
decision to accept Greece as the 12th member of the euro-zone
on January 1 2001 and revelations that Jean-Claude Trichet, the
next ECB president, was being investigated for his role in the
bailout of Credit Lyonnais. Trichet, who oversaw the bailout when
he was at the French Treasury, is accused of deliberately underestimating
the bank's losses to avoid undermining a referendum on the euro.
__________________________________
Recker down on Greek entry
April 27
Before Greece had been accepted,
Hans Recker, a senior Bundesbank official, had said that Greece's
entry should be delayed by at least a year because he said it
did not yet qualify to join. He said any special concessions granted
to Greece would set a dangerous precedent for the future of Emu
accession candidates from Central and Eastern Europe. The concerns
focus on Greece's debt levels.
__________________________________
Lohmus as Central Bank of Estonia governor
April 28
Vice president Peter Lõhmus is the new president of the Bank of Estonia, following the departure of former governor Vahur Kraft. On April 25 Professor Vello Vensel, who had been elected to take over from Mr.Kraft, submitted an application to the Board of the Bank of Estonia in which he declared that due to the condition of his health he was unable to take the job.
Peter Lõhmus will temporarily
take over the duties of the president. For his career history,
(he has been a lecturer, a political adviser as well as a central
banker) click on: http://www.ee/epbe/en/cv_pl.html
__________________________________
CNB financial reports rejected by parliament
April 26
A serious disagreement has developed
between the Croatian National Bank and the Croatian parliament.
The parliament has refused to endorse central bank's reports for
1998 and the first half of 1999, as well as financial plans for
1999 and 2000. By doing this, the parliament has actually withheld
its support to the highest body of the central bank, which had
previously approved these documents. At its meeting held on Wednesday
April 26, members of the Council of the Croatian National Bank
decided to place their mandates at the disposal of the Croatian
Parliament.
__________________________________
Allegations of corruption at Bank of Ghana
28 April
It has been
alleged that five top officials at the Bank of Ghana are guilty
of massive fraud. The Bank
would not comment on the allegations but said that an internal
investigation had already begun and would be resolved within two
weeks.
__________________________________
SA rand fall "nothing unusual"
April 28
Reserve Bank governor Tito Mboweni
said yesterday the rand's fall was due to the strength of the
dollar and strong US growth prospects. He said the Bank's monetary
policy committee would discuss the implications for policy when
it met on May 18. Mboweni said the committee was concerned about
the inflationary consequences. Concerns about Zimbabwe were playing
a minor role in the rand's weakness. He said nothing was unusual
about the rand's fall in the face of these global currency developments
as other currencies with strong
__________________________________
RBZ advice rejected
May 2
Last week Zimbabwe's
cabinet reportedly rejected the advice of the Reserve Bank of
Zimbabwe to devalue the national currency from Z$28 to the US
dollar Z$45. The Z$28 rate has held fast since mid January 1999.
__________________________________
RBA raises rates and the A$ recovers
May 3
The Reserve Bank of Australia
raised interest rates by 25 basis points to 6 per cent as a result
of rising inflation and falling A$ which had been languishing at 20 year
lows. Australia's inflation rate has jumped to its highest level
in almost four years. The
annual movement in the Consumer Price Index is now at the top
end of the Reserve Bank's targeted range (2.8 per cent). The dollar
recovered somewhat following the RBA rate announcement.
__________________________________
BOE dove turns into bear
April 27
DeAnne Julius, a member of the
Bank of England's MPC, who usually votes for lower interest rates
than the rest of the MPC, warned last week that strong pay growth
could re-ignite inflation. But the committee did not raise interest
rates at today's meeting and hasn't done since February. Interest
rates stay at 6%.
__________________________________
Canada's longest expansion falters
April 29
Canada's economy unexpected
stalled in February bringing to an end the country's longest economic
expansion on record and raising doubts about the Bank of Canada's
willingness to match US interest rate increases.
__________________________________
Chief economist leaves RBNZ
4 May
The Reserve Bank of New Zealand's
chief economist, Adrian Orr, has resigned from the Bank to join
WestpacTrust in mid July. Governor Don Brash said he would be
"greatly missed."
__________________________________
Zloty plunge temporary
Apr 30
Two members of the Polish Central
Bank's decision-making monetary policy council (RPP) said on Saturday
the weakness of the zloty is only temporary and is not worrying.
Poland's zloty plunged to all-time lows against the dollar on
Friday and also sank against the euro.
__________________________________
Swiss begins gold sale
May 2
Swiss National
Bank said on Tuesday that it had begun selling off excess gold
reserves on Monday May 1. In total the SNB will sell 1300 tons,
about half its gold reserves. The sale is being conducted through
the BIS.
__________________________________
Philippine peso
The peso was propped up by the
Phillipine's central bank in the face of a worsening peace and
order situation in the southern Mindanao region. The central bank
raised overnight rates by 25 basis points on May 2 - the first
time in 10 months - to make the peso more attractive.
__________________________________
Kiwis and Aussies: United we stand
May 1
Speaking after ground-breaking
research issued last week pointed to potential gains from currency
union with Australia or the United States, the New Zealand prime
minister, Helen Clark, said that she had never ruled out currency
union between New Zealand and Australia, but said she was sceptical
about adopting the United States dollar. Don Brash, New Zealand
Reserve Bank governor, said in his interview with Central Banking
that dollarisation was clearly a potential option. http://www.centralbanking.co.uk
__________________________________
Thailand's regulations eased for creditors
May 3
The Bank of Thailand will allow
financial institutions to waive loans extended to small and medium-sized
enterprises which are undergoing restructuring from being counted
as part of risk assets. The move will reduce the cost to banks
in lending to small and medium-sized firms, encouraging new loan
growth.
__________________________________
RBI in supervision shift
May 1
The Reserve Bank of India said
it would police banks on a risk-based system, reflecting the country's
more competitive banking environment. The RBI said it would hire
consultants to manage this transition, which would make allowances
for Indian banks' historically poor, but improving, credit risk
assessment.
__________________________________
CURRENCY CORNER
The Bank of Canada has confirmed that a new series of banknotes are currently being designed and their issue is being planned for early next year. There is unconfirmed speculation that the new notes will feature other prominent Canadians, replacing some of the current statesmen and bird figures on the reverse.
The Bank Indonesia has issued
a new 100,000 rupiah banknote printed on polymer. The new note
is dated "1999" and features the portraits of Dr. Achmed
Soekarno, Indonesia's first President since gaining Independence
in 1945 until 1967 and Vice President Dr. Mohammed Hatta.
More info, see http://www.lbmrc.co.uk
__________________________________
Central Bank of Iran annual report
In the Central Bank of Iran's
1998/1999 annual report it said: "One of the outstanding
economic developments this year was the presentation of the "'Economic
Revitalisation Plan'. The ERP sets out short and long-term economic
reforms designed to create an improved business climate, reduce
job vacancies and provide financial resources for investment."
Iran's economy suffered badly from the fall in the oil price in
1998/99, the growth rate dropping to 1.6 per cent from 5.7 per
cent in 1996/97.
__________________________________
PAPERS OF THE WEEK
__________________________________
** Central Banks and sovereign immunity **
By Charles Proctor, Partner, Norton Rose law firm
This very interesting article
reviews recent legal cases which have involved central banks as
parties to litigation in England and considers the extent to which
the doctrine of sovereign immunity afford to such central banks
a special status in those proceedings. The legal cases discussed
in the article involve the Bank of Zambia, Banco Nacional de Angola,
and Banco Central de Cuba.
__________________________________
** Liquidity traps and how to avoid them **
By Willem Buiter and Nikolaos Panigirtzolgou, Bank of England
This paper develops a small
analytical model to show how an economy can get into a liquidity
trap, how it can avoid getting into one and how it can get out.
To reduce the risk of falling into a liquidity trap, the authors
say there are 2 options: First, raise the inflation target. Second,
pay negative on government "bearer bond" as advocated
by Gassell. Once in a liquidity trap, there are two means to escape,
the paper says. First, expansionary fiscal policy. Second, to
lower the zero nominal interest rate floor.
__________________________________
** What's Wrong with the Euro? **
By Stephen F. Frowen and Elias Karakitsos
At the beginning of 2000 the euro had its first birthday, but there was no cause for celebration. The euro fell to below parity with respect to the dollar and it has remained weak in spite of the rate hikes by the ECB, which amount to 125 basis points since the autumn of 1999, and the rhetoric by ECB and other officials to support it. The current malaise reflects generalised euro weakness, as it is weak not only against the dollar, but also with respect to the yen. What's wrong with the euro? Why has the ECB failed to reverse this trend?
Numerous explanations have been provided so far, but none of them passes the test of robustness, as it is only valid for a short period of time. For example, for quite some time the dollar strength was attributed to the total bond return (coupon and capital gains) differential. However, in the course of 1999 the US bond market suffered a terrible blow, as yields rose relentlessly. Yet the dollar became even stronger! The ad hoc explanation was that the dollar strength in 1999 reflected the attractiveness of the US equity market as the Dow Jones, in spite of its volatility, ended last year at a new record high at 11,700. However, in the first few months of 2000 the Dow fell, yet the dollar remained extremely strong. The new ad hoc explanation was that the Nasdaq replaced the Dow in keeping a strong dollar, as investors poured money into the US to buy the new economy stocks. But now the Nasdaq fell and the dollar reached new highs against the euro!
In a recent paper Frowen and Karakitsos provide a game theoretic framework that provides consistent explanations of the euro-dollar rate under all circumstances. In this framework there are two possible equilibria when, first, the policymakers of the US and Europe do not collude in influencing the currency and the markets are left on their own to decide on its value and, second when one of the players is stronger than the other. The two different equilibria are Stackelberg-leader and Stackelberg-follower. In the Stackelberg-leader equilibrium the leader chooses the policy that optimises his objectives by taking into account the policy response of the follower. In the Stackelberg-follower equilibrium the leader lets the follower take the lead (after you Alphonse). The strong player can choose the equilibrium that suits his objectives. Given that the US is mightier than Europe it can be considered as the leader, while Europe as the follower.
In this model the US would always choose the Stackelberg-leader equilibrium when the economy is overheated or inflation is rising and the Stackelberg-follower equilibrium when it is in recession or in recovery. In the former the dollar would be strong, while in the latter it would be weak. Indeed, the dollar was weak in the first half of the 1990s when the US economy was either in recession or in the recovery phase of its business cycle. However, since 1994 the US economy has been overheated and the dollar has been strong. Such equilibrium is optimal for Europe too, if the business cycles are desynchronised. This was indeed the case throughout the 1990s. In the first half of the 1990s a weak dollar (strong euro) was optimal for Europe too, as inflation was high. Since 1994, when the US became overheated and Europe entered its recovery phase, the dollar has been strong. Until the second half of 1999 this was optimal for both economies, as a strong dollar was helpful in containing inflationary pressures in the US, while a weak euro was helping Europe in its recovery.
However, from the second half of 1999 Europe has also become overheated and for the first time now both economies desire a strong currency to combat inflation. Unfortunately, the Stackelberg-leader equilibrium is beneficial for the US, but not for Europe, as the dollar would remain strong in spite of the rate hikes by the ECB. Such tightening is harmful for Europe because it does not prevent the euro weakness, while at the same time it may thwart the fall in unemployment. That is, it represents a deflationary equilibrium.
The dollar would remain strong until the US economy cools down and enjoys either a soft- or hard-landing (i.e. recession). This would probably happen at the earliest in the second half of the year or more likely in 2001.
The choice of equilibrium by the US is always self-enforceable. When the US prefers the Stackelberg-leader equilibrium, all it has to do is to compete with Europe over the currency. By raising its interest rates the Fed is forcing the ECB to choose the Stackelberg-leader equilibrium by entering into an interest rate race, as it happened in the first half of the 1980s when the dollar soared and as it has been happening since September 1999. When the US prefers the Stackelberg-follower equilibrium, all it has to do is not to compete with the ECB over the currency. By keeping rates unchanged the Fed is forcing the ECB to choose the Stackelberg-follower equilibrium, since the Fed is accepting a relatively strong dollar.
What makes the Stackelberg-leader equilibrium beneficial for the US and harmful for Europe? Europe differs from the US in three main respects. First, Europe is more susceptible to imported inflation than the US. Second, Europe is more vulnerable than the US to beggar-thy-neighbour policies (i.e. the effect of US monetary policy on Europe is more powerful than that of Europe on the US). Third, the ECB has an anti-inflation bias (i.e. it is tough), while the Fed is balanced in its pursuit of inflation and growth targets.
What are the choices of Europe in such an environment? EMU is improving Europe as it becomes less supply side open, as a number of countries, like the UK and Norway, are oil producing. The single market makes Europe less vulnerable to beggar-thy-neighbour policies.
However, the third reason that is responsible for the deflationary equilibrium of Europe is the anti-inflationary bias of the ECB compared with a more balanced Fed. If the ECB were to adopt a balanced priority between inflation and growth, like the Fed, then the US in its choice of tighter monetary policy to combat imported inflation would find it easier to appreciate the dollar. Europe would accept temporarily higher inflation, but would not find itself trapped in a deflationary equilibrium, as it happened in the first half of the 1980s.
For more info, email: Professor Stephen Frowen on SFFCAM@SFROWEN.U-NET.COM
© Copyright 2002 Central Banking Publications. All rights reserved. Reprinted at USAGOLD by permission.
Benedict
Mander
Email: bmander@centralbanking.co.uk
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