9 June 2003

NEWSMAKERS

 

Iraq Shadow Over The BIS?
Some European central bankers are said to be unhappy with the recent appointment of Roger Ferguson as head of the Financial Stability Forum. It is not that Ferguson is thought to lack qualifications for the job - quite the contrary, there is much respect for his legal prowess. If few remember now his smooth chairmanship of the G10s Y2K taskforce, it underlines what a good job he did. Y2K preparations and rehearsals turned out to be crucial during the 9/11 terrorist attacks, and it was again Ferguson whose terse statement that the Fed's discount window was "open and operating" helped calm markets.

But the appointment has refuelled concerns of excessive American influence inside the BIS. Do some "old" Europeans still feel instinctively that it should still be the cosy European club that it was for the first fifty years of its existence? Or is frustration about the Iraq conflict casting a shadow even over central bankers' get-togethers?

Three of the five top people on the BIS staff are from North America, though only one is from the US. Malcolm Knight, general manager, and William White, chief economists, are both from Canada (which opposed US policy on Iraq) and only Bob Sleeper, head of the banking department, is from the United States. That leaves Andre Icard, deputy general manager (from the Banque de France) and the Swiss-German Mario Giovanoli as the only Europeans.

Shift At The FSF
But so far as the FSF goes, there is more to the criticism than sheer old European bloody-mindedness. The appointment does signal a shift. The FSF was conceived by Hans Tietmeyer as a way of making sure finance ministers, regulators and central bankers kept up a running dialogue about threats to the financial system. Crockett, who has stepped down as BIS general manager, was not only a much-praised chairman, but also a neutral one.

Ferguson, as a national central banker, cannot be above the fray to the same extent. Transatlantic divisions over Iraq have clearly strained the G8 meetings. Can the more collegial atmosphere of this central banker's club survive?

As an American, Ferguson will have to exercise that bit more diplomacy when setting the group's agenda. Not least when dealing with topics like combating terrorist financing which already figures prominently on the group's "to do" list.

Basel Bunkum
No one understands the new Basel accord. Grown men are reduced to tears when they try. There are simply too many details for any one person to digest. But it is troubling indeed to learn that people don't even seem to understand how it was arrived at in the first place. Top US regulator Jerry Hawke, who is Comptroller of the Currency, recently gasped: "I have been sitting on the Basel Committee for four years, and I still do not understand how decisions are made." One assumes he is an intelligent man and would be able to understand this if it were possible. As it seems not to be, it is not impertinent to ask: why isn't it?

Trichet Brings SDRM Down To Earth
The IMF's much-vaunted Sovereign Debt Restructuring Mechanism is the latest casualty in a string of apparently wasted efforts in attempting to find some way to save the world from the terrors of sovereign default. But a few months ago Banque de France governor Jean-Claude Trichet came up with a more practical solution. The Banque de France proposed a "Code of Good Conduct" for sovereign debt restructuring, which avoids making pie-in-the-sky assumptions that blanket laws across the world would be easy to introduce. The BdF's code seems to make more sense than most suggestions so far.

Certainly, sentiments in emerging markets are favourable towards the French proposal. Chief economist of the Brazilian central bank Ilan Goldfajn expressed optimism to Newsmakers over the new plans, cautioning that forcing creditors into things is no way to go about business. Moreover, following the a recent meeting in Berlin this week, the BdF initiative is now being taken forward by Jacques de Larosiere, an old comrade-in-arms of Trichet's.

Duisenberg Soldiers On
No central bank takes kindly to politicians tampering with their business, and the ECB is no exception. In advance of its long-awaited rate cut this week, the ECB was told by Belgian finance minister Didier Reynders to be more active: "It is about time for the ECB to do something." If ECB board members read the newspapers, and Newsmakers expects it does, they hardly need Reynders (who has been rumoured to have designs on Duisenberg's job himself, but stands no chance) to tell them this.

The IMF has got in on the act, saying that "we see considerable scope for monetary easing". Wow, what an insight! Perhaps the ECB took this into account when it cut rates, but the ECB obviously doesn't follow IMF recommendations chapter and verse. Duisenberg said that in their forecasts "we are slightly less pessimistic apparently than the IMF". Furthermore, he admitted to being "almost astonished" at the IMF's decision to publish a paper on inflation differentials and deflation in the euro area. He derisively continued: "I have never seen the IMF publish a paper on inflation differentials between California and New Hampshire or between Texas and Ohio... if I may quote myself, I said, 'within a monetary union...deflation is not a meaningful concept when applied to individual regions', like New Hampshire or Germany."

But he remains tight-lipped on how long he will have to put up with their kind, or field questions from tiresome reporters: "I beg you to believe me that I have no idea how long I will be here." He was however happy to put a last-ditch good word in for those despairing pro-euro lobbyists in the UK, explaining that he thought "it would be advantageous for the development of the United Kingdom and for the euro area if we joined forces again." Take heart, British europhiles.
More Dynamic BOJ Sees Off Media Critics
Senior BOJ staff professes themselves pleased with the public relations impact of the more active communications strategy followed since Toshihiko Fukui took over from Hayami-san as governor in March. "Even Yomiuri Shimbun has stopped criticizing us," they say. Fukui's immediate action in calling a meeting of the monetary policy board only a few days after coming to office was followed up by TV coverage of a dinner attended by the Governor where he took part in a live debate on Public TV. This was the first time in the history of the Bank of Japan that a governor has been so bold as to appear live on TV in an open forum for a panel discussion.

There is even a feeling that the central bank's view on the futility of setting an inflation target for Japan is getting across. The simple reason for their strongly-held view is that there is no credible instrument to attain the target. There has to be a link between monetary policy and the target, but this doesn't exist, they say. "The monetary base, which is all we can control, has risen by 50% over the past two years; prices have declined. The increased supply has simply been absorbed by increased demand for reserves. This is because reserves cost the banks nothing."

There is only one influential newspaper that causes them furrowed brows and deep sighs: "Why is the Financial Times so violent in its attacks on us?" they ask plaintively.
New China Governor Starts Well
Elsewhere in Asia, the new governor of the People's Bank of China has also got off to a good start. Dr Zhou, who took over at the beginning of the year, is said to be quite different from his predecessor Dai Xianglong. Zhou speaks English well, can hold his own in any economic discussion, and has bags of practical experience both in the private and public sectors. He presides over a currency that is assuming a growing regional role, despite the maintenance of exchange controls, and is pegged to the US dollar at an exchange rate that probably undervalues the renminbi by at least 30%. The currency already circulates outside China, with holders confident it will keep its value. The central bank participates in the Asean-based network of inter-central bank swap arrangements, set up to limit speculative movements of funds at times of crisis. Although it is unlikely ever to be activated for China's benefit - China has the world's second largest currency reserves at $300 billion - central bankers see this as symbolically important. "Agreeing to this credit gives us a right to know what is going on in China and to ask questions," says one.
Gold Market Looks For A Lead
Will the central bank agreement of 1999 - comprising all the big European gold holders - be renewed when it expires in September 2004? Opinions differ on whether it should be renewed: gold producers and gold investors are for it, as it has reduced fear of huge central bank sales, but bullion banks and traders are generally against it. Real market folk don't care what happens to the price so long as they can play with the gold.

But who is going to push for renewal from within the central banking community? The lead has to be taken at governor level - and nobody seems desperately anxious to pick up such a hot potato.

Last time, the issue was raised by Jean-Claude Trichet and Hans Tietmeyer, who told the other governors in 1999 that something had to be done at a time when the price was sinking and the market simply did not believe the central banks' reassurances that they would sell "only a little bit" of gold. The last straw was UK Chancellor Gordon Brown's decision to sell half UK's gold stock. The agreement itself was actually cobbled together largely by Andrew Crockett, then general manager of the BIS.

But who is going to take the baton this time? Tietmeyer has retired, and his successor at the Bundesbank, Ernst Welteke, has got his wires crossed with his own Finance Ministry over his proposal last year that Germany should sell some of its gold under a new agreement (a proposal he later half-retracted). Meanwhile, Malcolm Knight, Crockett's successor at the BIS, is busy being briefed by his staff on all the other aspects of his job. Somehow, one feels he is unlikely to give gold much thought.

So perhaps it will be up to Trichet again, assuming he is cleared by the court in June, and takes his due place in Frankfurt. Gold holders will be hoping he makes it.
Tsumba Ducks Out After Cash Crisis In Zimbabwe
Central banking in Zimbabwe doesn't seem to be too much fun at the moment. In fact, it's apparently so unbearable that the governor, Leonard Tsumba, who has managed to stick out almost ten years in the job, has now decided he simply can't last the course: he is "on leave pending retirement at the end of his term of office" at the end of July. In other words, he has ducked out - but what prompted him to crack?

The central bank has been under fire recently because the country has been suffering from a disastrous shortage of banknotes, presumably because of the runaway inflation (currently speeding at an annual rate of 269%) that President Mugabe's cranky economic policies are causing - he himself attributes Zimbabwe's economic woes to a "Western plot" to topple his regime. Nevertheless, the country is awash with queues of frustrated locals outside banks who aren't able to access cash as withdrawals have had to be strictly limited.

The government has been cajoling the central bank to be more flexible in its response to inflation, and to intensify efforts to make notes available for use "in cash transactions that have grown in size and in volume". Tsumba had this week been exhorting the public not to panic, assuring them that extra printing paper had arrived in Harare and that it would be used immediately. The firm that prints Zimbabwe's banknotes has been firing on all cylinders to ease the cash shortage; Tsumba also announced that a new 1,000 Zimbabwe dollar note was on its way in November.

But perhaps the stress was all too much. Deputy governor Charles Chikaura is now in charge, although a local paper said the government would now be looking at ways of ensuring that the central bank "plays a development role and not the monetarist role it has performed under... Dr Tsumba". Quite what that means, Newsmakers will leave to readers to interpret.
 
ECB To Be Court Out?
The question of whether the European Central Bank counts as an "institution" of the EU, or rather a "supranational organisation" might seem, at first, to be one best left to constitutional lawyers with plenty of time on their hands. Newsmakers was therefore surprised to find an audience of hundreds, including the pick of Europe's monetary lawyers (from the ECB, BIS and Banque de France) sweltering in Amsterdam University's main Hall on Wednesday 4 June to hear the answer.

The occasion was the inaugural lecture of Amsterdam University's new professor of economic and monetary union, Dr René Smits (formerly the top lawyer at the Netherlands central bank, and now legal head of the Dutch competition authority). According to Smits, who braved the June heat in heavy academic robes more suited to a chilly February, nuanced decisions about the ECB's constitutional position have serious implications.

For instance, does the ECB's independent position prevent dawn raids by the EU's independent fraud-busters (who can interview employees and seize computers at will)? The ECB says yes, and is fighting in the European Court of Justice to keep them out. Summing up Smits argued: "The ECB's reticence in making clear whether it considers itself bound by rules on competition, state aid, the unity of the internal market, and public procurement, as well as its self-regulation in the area of accounting rules, may undermine its justified independent position as the EU's monetary authority rather than sustain it." For the full lecture, and Smits' recommendations on how the European Convention might resolve the issue, visit the Amsterdam University website here: http://www.uva.nl/actueel/object.cfm/object.cfm?objectid=0FF515E0-A67E-4009-BDABB551BA7921BE
 
  World Bank Gets Slap On The Wrists
Newsmakers is all in favour of a bit of institutional navel-gazing, not least in the large supranational organisations. This seems to be called for at the World Bank, which took a bit of a beating recently when an independent Princeton survey discovered that its organisational culture was considered to leave much to be desired. Its "slow and inefficient" bureaucracy and "perceived arrogance" was widely criticised; the survey also witheringly noted that it "is seen as doing a barely average job in helping developing countries reduce corruption." James Wolfensohn showed appropriate contrition, remarking that "we need to work harder" in certain areas of work. He admitted, "We take these results seriously and we aim to be transparent in sharing them widely with our staff and partners, and use them to improve the way we fight poverty."
 
  Are Central Banks Overrated?
Currency board enthusiast Kurt Schuler (senior economist of the Joint Economic Committee of US Congress) thinks central banks are overrated. Rashly or not, Schuler made a bet for $1,000 in 2001 (read the small print here: http://users.erols.com/kurrency/bet.htm) that a selection of currency boards would outperform central banks in countries with analogous economic situations, boldly stating: "I am willing to put my money where my mouth is about the superiority of currency boards compared to central banks." His team comprises Argentina, Bosnia, Bulgaria, Estonia, Hong Kong and Lithuania, while the challenger's (Wilhelm Salater, an economist at the National Bank of Romania) comprises Chile, Czech Republic, Hungary, Latvia, Singapore and Slovenia. A half time assessment might conclude that the central bank team has the upper hand - of course he wasn't to know that Argentina would come such a cropper. He admitted to Newsmakers that "Argentina's poor performance pretty much determines the result so far." One way he thinks that his team might be kept in the running would be for Argentina to dollarise: "Argentina's abandonment of the convertibility system in January 2002 could sink the 'currency board' side if it doesn't dollarise and recover." Wishful thinking possibly, but there is hope yet!

Newsmakers readers may be also be impressed by - and may even be able to contribute to - a monumental project that Schuler has undertaken, which is to compile a monetary history of the entire world. So far he has made striking inroads into Africa with a series of tables summarising features of the modern (ie, "since about the time paper money began to be used") monetary history of all African countries. See his website: www.dollarization.org
 
  Quote Of The Week
Allan Meltzer says: "If Alan Greenspan said the grass is pink, Wall Street economists would see pink grass. I like Alan Greenspan, but they all speak as if he's the Oracle of Delphi."
   
 
How to Subscribe/Unsubscribe

To Subscribe or Unsubscribe go to http://www.centralbanking.co.uk/list.htm
Or send an e-mail to listserver@centralbanking.co.uk with the words "SUBSCRIBE NEWSMAKERS" in the body of the text.

To Unsubscribe put "UNSUBSCRIBE NEWSMAKERS" in the body of the text. Alternatively, send an email to ncourtis@centralbanking.co.uk with your request.
Disclaimer of Warranty

Central Banking Publications assumes no responsibility for errors or omissions in these materials.

THESE MATERIALS ARE PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT.

Central Banking Publications further does not warrant the accuracy or completeness of the information, text, graphics,links or other items contained within these materials. Central Banking Publications shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation, lost revenues or lost profits, which may result from the use of these materials. The information on this server is subject to change without notice and does not represent a commitment on the part of Central Banking Publications in the future.