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Soros
Says Central Banks Should Bailout Brazil
In the wake of the current economic crisis in Brazil,
George Soros has said that leading central banks should
open their discount windows and refinance the holders
of Brazilian debt. Indeed, he expressed surprise that
central banks had not already spoken out on this issue
publicly. He said the bailout should involve an appropriate
haircut taking account of the cost of the risk, with
central banks lending against paper at around 80% of
its market value. His remarks came on Thursday at a
talk on the current state of the global economy at the
London Business School.
Soros also
conveyed serious concern about the falling value of
the dollar. While the collapse of Enron and WorldCom
is a logical consequence of the last boom, the decline
of the dollar is not, and this comes as a surprise to
him. A lower value of the dollar could be healthy if
there was a countervailing domestic stimulus in the
rest of the world. Unfortunately the world is suffering
from what he termed the "Bush bear market" which he
described as a loss of confidence in the management
of the financial system. He talked of a general pursuit
of national self-interest in the US, and that it was
not living up to the responsibility of being the dominant
global financial power.
Soros believes
that the "motor for the global economy is off," and
that we need to "replace the motor". This would involve
stimulating domestic-led growth, he said, but unfortunately
this is constrained by the IMF economic orthodoxy, which
Soros believes needs readjusting.
One problem
he sees is that while the institutions in place in developed
countries work well, the world as a whole lacks effective
global institutions, and this means that the countries
on the periphery of the global financial system lose
out. Soros warned of the "inherent disparity between
the centre and the periphery," explaining that capital
flows freely enough to the centre of the system, but
it does not flow freely back out again to the periphery.
This is partly
because there is no effective international lender of
last resort now that the IMF's resources are inadequate
given the sheer size of the global market. He said that
the issue of Special Drawing Rights would allow reserves
to increase, which would go a long way to solving the
problems of the global economy.
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Blejer
: "I've Had Enough"
At last Mario Blejer has thrown in the towel. And who
can blame him? Being governor of a central bank in a
country in the grip of economic turmoil with hyperinflation
looming large, and where your repeated efforts to resolve
matters are nullified by cantankerous politicians must
be exasperating, to say the least. He said: "I've had
enough. I cannot walk freely in the street. I'm tired
of all these lies and operations to intimidate me."
Blejer handed in his resignation last Friday much to
the dismay of many Argentines who now more than ever
fear that their country will never succeed in hauling
itself out of the ditch.
On Blejer's
recommendation, President Duhalde has appointed Aldo
Pignanelli as the new governor, previously vice-president
of the central bank, in defiance of economy minister
Roberto Lavagna's schemes to nominate his own candidate,
Alberto Camarasa. Instead Camarasa has been appointed
to the board of directors, and with a few more appointments
in its favour the economy ministry also purportedly
now has the press office sitting comfortably in its
pocket. The principal reason for Blejer's resignation
was his rocky relationship with Lavagna: he complained
in his resignation letter of growing encroachments on
central bank independence by the economy ministry. In
Washington this week he reiterated that "It is vital
to fend off the advances of other powers over the central
bank." He said that "independence has been repeatedly
weakened in recent times," and that "it has been difficult
to fight against this."
It is widely
feared that under Pignanelli the bank will be even more
vulnerable to political turpitude, and many fear that
independence will soon be little more than a fading
memory. But will Pignanelli be around for long enough
for this to matter? Blejer is the third central bank
chief to leave in a year - and let's not forget that
Argentina has also seen six economy ministers and three
presidents in roughly the same period. Look back to
Argentina's last financial crisis in the late 1980s,
and we will see that in 1989 the central bank governor
changed no less than four times, while in 1990 the governor
was changed a further three times. How long can we give
Pignanelli before he too tires of the job?
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President
Trichet
If we couldn't already, we can now safely say that Jean-Claude
Trichet will be the man to replace Wim Duisenberg. After
a series of closed-door meetings in Seville, where the
EU leaders gathered for their last set to, the leaders
of Germany, France and Italy unofficially agreed that
Trichet should be the next president of the ECB. Despite
hang-ups about France's ability to balance its budget
on time, a German financial official said that "Trichet
is the best-qualified person to take over from Duisenberg,
so we have no trouble endorsing him." The Luxembourg central
bank governor Yves Mersch thinks Trichet "has enormous
merits for the promotion of the idea of stability" in
the Eurozone, but when asked to comment on the subject
of his succeeding Duisenberg, he said that while "I am
very loyal in my friendships", the decision is one for
EU leaders. "They have discussed it. Most of them will
remember what has been said. It is up to them to live
up to their memories or to hand over their memories to
their successors," he said. The remaining 12 member states
of the EU will ratify the unofficial decision made in
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Greenback's
Retirement
Farewell, sweet Greenback. Hail the coming of the new
Multicolouredback. It doesn't have quite the same ring,
but financial journalists will soon have to dream up some
other fitting synonym for the dollar if they wish to jazz
up their prose. The new versions of the $20, $50 and $100
notes are to be redesigned, and each will be different
- although quite understandably the Bureau of Engraving
and Printing will not say exactly how. After all it will
be quite a leap - the first time, in fact, that another
colour has been used since 1862, when the first $1 and
$2 notes were issued. But why the need to rebrand this
most characteristic of notes? Although there has been
mention of the fact that it might be a deterrent to counterfeiters,
Newsmakers can reveal that it is really because some tourists
find the notes muddling. And of course you can see why:
all the different notes are not only the same size but
also the same colour. Some may point out that there are
numbers to allow you to distinguish one denomination from
the other, but frankly, I think that may be assuming rather
too much of the user. |
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Wrinkly
Euros
For all the braggadocio over the unmitigated success
of the introduction of the euro notes and coins, there
are some who would beg to differ. As a sequel to the
recent brouhaha with the fading five-pound note, it
seems that the euro is suffering from a similar allergy.
Or so say the Finns.
They have
been complaining that the cotton-fibre paper of the
euro notes simply doesn't compare with the good old
markka notes, which were of a far sturdier cast. Apparently
the euro suffers from premature ageing and becomes wrinkly
distressingly quickly, in particular the 5 and 20 denominations.
This has meant that only half of used 20 euro notes
can be reused in ATMs, while the low value of the 5
euro notes means they get battered around mercilessly
leaving them all haggard and drawn. However, the Bank
of Finland claims that there have been no more returns
of worn notes than under the old currency - but as they
are new and there are fewer of them in circulation since
transactions are increasingly carried out with plastic,
this may be misleading. Anyway, the ECB says that the
average life expectancy of a euro note is approximately
one year, so we will just have to wait and see.
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Free Speech
For Central Bankers!
Once again wrangles between politicians and central
bankers have had unfortunate consequences as Raymond
Garneau, who sits on the board of directors at the Bank
of Canada, publicly called for prime minister Jean Chrétien
to resign. This outburst was not entirely appreciated:
his recalcitrance resulted in his not being reappointed
to the board. A former Quebec Liberal finance minister,
Garneau told a local paper that, now that finance minister
Paul Martin has been ousted, Chrétien's resignation
would allow the Liberal party to revivify.
A government
official explained that Garneau's comments were a factor
in the decision not to reappoint him, although he had
already served two three-year terms: "We don't usually
appoint people to a third term, and if you are going
to go through the hoops for a third term, you'd better
have a pretty special reason. Taking a run at the prime
minister is not a special reason." But Garneau showed
contempt for the notion that his role at the bank meant
he was effectively gagged when it came to speaking out
on politics, and instead extolled the virtues of free
speech: "If we have a society where we can't express
our views, then I don't like it."
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Broadside
Assault From Cullen
In the past it has been claimed that there is no tension
between New Zealand's finance ministry and the Reserve
Bank, but recent events belie this assertion. It could
be put down to point-scoring for the forthcoming elections,
but finance minister Michael Cullen revealed a more
pugnacious side when he criticised the central bank's
management of monetary policy, accusing it of failing
to interpret correctly the bank's Policy Target Agreement
with the government. He went as far as to suggest that
it might need to be rewritten when the new governor
is appointed later this year.
Cullen is
worried that the bank is being too hawkish on interest
rates and thus "the economy is condemned to a sentence
of sub-par growth in which monetary policymakers assume
little responsibility for the underemployment of resources."
He said the government was trying to achieve flexible
inflation targeting consistent with a strong growth
strategy, and taking an indirect swipe at acting governor
Rod Carr, said "We must ensure the Policy Targets Agreement
is expressed in a way where the bank is clear about
that.
I thought
that was clear. It is apparent from recent comments
from the bank that that is not clear." For his part,
former governor Don Brash maintained he had followed
the PTA to the letter, and indeed had not received a
word of criticism from Cullen during his tenure: "I
do not accept that over the last decade on average monetary
policy has been too tight."
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A Tale
Of Two Central Banks
It is unusual for one nation to have two central banks,
but that seems to be the case in Madagascar. Following
disputed presidential elections in December 2001, there
are now in effect two administrations in place: that
of Marc Ravalomanana, whose supporters began a series
of strikes in support of their demands for a recount
of the election results, and that of the outgoing president,
Didier Ratsiraka, which was forced to relocate to Toamasina
on the east coast of the island.
In early
February, there were rumours that the Ratsiraka government
had removed funds from the central bank in Antananarivo,
and consequently pro-Ravalomanana supporters set up
a blockade of the bank. Although the law governing the
central bank states that it is based in Antananarivo,
Ratsiraka established a "central bank" of his own in
Toamasina, appointing as his governor the previous director
general of the official central bank, Ferdinand Velomita.
Marc Ravalomanana
reappointed former governor Gaston Ravelojaona in his
position. A further complication emerged when it transpired
that Ratsiraka's "central bank" had acquired a SWIFT
machine together with authorisation codes. In order
to prevent either side accessing Madagascar's reserves
held overseas, central banks in other countries froze
the central bank's accounts and they remain frozen until
now, as the political crisis has not been resolved.
Furthermore,
the Interbank Currency Market has not been operational
since January (apart from one day in February) and the
rate of exchange effective then remains in force, even
though it is believed that the Franc Malagasy would
have depreciated considerably given the extent and duration
of the political and economic crisis. It is feared that
when the central bank restarts foreign currency trading,
there will be a serious devaluation.
The suspension
of activities of the central bank has also led to a
halt in the sale and redemption of treasury bonds, which
has led to short term funding problems for the Antananarivo-based
government.
However
the US has this week recognised Ravalomanana as the
legitimate president, so this may contribute to the
resolution of the situation.
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False Alarm
At The Federal Reserve
Staff at the Fed headquarters in Washington received something
of a fright when they were cleared out of their offices
after "suspicious items" were spotted lurking in a rubbish
bin by security on a routine patrol. The worst was suspected:
to avoid macabre recriminations, it was declared a bomb
and the buildings - which house 1,300 employees - were
evacuated on 19 June. Indisposed to alarming the markets,
the Fed issued a statement saying that all services including
payment systems would continue just as usual, and calm
was restored when it was announced that it was a false
alarm. Since September 11 the Fed has stepped up security
measures and this is not the first scare. In May the Fed
thought it had found traces of Anthrax on its post, although
it was later found that this was not the case. But this
has obviously had repercussions on the efficiency of its
postal service, as certain parcels seem not to have been
getting through - various copies of Central Banking have
mysteriously gone missing, and we can only attribute this
to a rather overzealous post monitor. |
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Electioneering
Papua New Guinea's former central bank governor, Sir Mekere
Morauta, who since became prime minister in 1999, has
succeeded in keeping his seat in parliament in the wake
of an election tainted by deaths, violence, stolen ballot
boxes, multiple voting and incomplete electoral rolls.
The future of his government remains unsure, and as Morauta
admits, "This is my first hurdle, the next hurdle is to
form the government." Morauta, a reformist who has pursued
a programme of privatisation and cost-cutting, concedes
that much remains for him to do: "In the next five years
the important job for the nation, and which I face, is
to go ahead with the reforms I have begun." With support
from the IMF and the World Bank he has set his heart on
wiping out Papua New Guinea's endemic political corruption.
But voting remains to be completed, and should he succeed
he still faces the challenge of seeing out the full five-year
term which no government since independence in 1975 has
yet managed to do. |
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