NEWSMAKERS

11 June 2004
 

ALL CHANGE
After months of speculation leading figures in European finance are taking their positions.

As Rodrigo Rato settles into his role at the top of the IMF, his predecessor, Horst Koelher, has secured the post he was ear-marked for - the German presidency. He replaces Johannes Rau, who chose not to stand for re-election, in the mainly ceremonial role.

Eugenio Domingo Solans, has stepped down from his position on the ECB executive board, making way for fellow Spaniard Jose Manuel Gonzalez-Paramo to take up another highly contested post vacated this year.

Gonzalez-Paramo will join Axel Weber, the new Bundesbank chief, and Erki Liikanen, the new Finnish governor, as one of the three new ECB council members who will have joined by the end of July.

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THE ELEPHANT IN THE ECB'S ROOM
You know the story about the elephant in the room? It was a very large elephant, so you could hardly miss it, but because people didn't want to talk about it, they pretended it wasn't there.

This week thousands of copies of an estimable and long-awaited book by the ECB have thudded onto the desks of central banks around the world. "Risk Management for Central Bank Foreign Reserves" is jam-packed with excellent articles. Just to pick out a few of the best. There is Pierre Cardon and Joachim Coche, of the BIS and ECB respectively, on strategic asset allocation; Roberts Grava of the Latvian central bank on corporate bonds; Mark Dwyer and John Nugee (DST International and State Street Global Advisors) on risk systems; and interesting case studies by central bankers from the Czech republic, Hong Kong, Slovakia, Brazil, Venezuela and Israel. There are contributions from investment bankers from JP Morgan Fleming and others. All this plus a thoughtful introduction by Carlos Bernadell of the ECB and colleagues.

This book can even stand comparison with the volume produced by Central Banking Publications called "How Countries Manage Reserve Assets".

Yet there is one big thing missing. Something nobody wants to talk about. It's a four letter word. G-o-l-d. Now, don't all groan!

At the last count gold valued at current prices accounted for $166 billion (44%) of the euro area's massive external reserves of some $376 billion; it was 59% of France's reserves, 53% of Italy's, 52% of the Netherlands and so on. It is part of the ECB's pooled reserves. Movements in the gold price can have big effects on the balance sheets, reserves and profits of central banks. Historically, gold has always been the quintessential official reserve.

Yet there is not a single article on gold reserves in this book. Can there really be nothing to say about it? Or nothing the ECB wants said? It is mentioned casually, en passant, in three of the articles but the only discussion of any depth that "Newsmakers" can find from a quick read is in the article by Bert Boertje and Han van der Hoorn of the Netherlands Bank, who say that "gold can be seen as the ultimate war chest". The result of their interesting "balance sheet" approach is to predict a move away from gold and other so-called "high risk" assets towards domestic assets, which is in fact happening.

One can't help thinking that the editors took one look at this elephant and decided to talk about something else - anything else. I wonder why?

This is how the poem goes for those who don't know it (the author is unknown):

There's an elephant in the room. It is large and squatting, so it is hard to get around it. Yet we squeeze by with, "How are you?" and "I'm fine," and a thousand other forms of trivial chatter. We talk about the weather. We talk about work. We talk about everything else, except the elephant in the room.

  
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ECO-WARRIOR AT THE G8
George Bush is an unlikely champion of the environment. However, he is evidently using the high profile G8 summit, held in Sea Island this week, 80 miles south of Savannah, to show that he is not all the oil-drilling, gas-guzzling Texan he is made out to be.

World leaders attending the summit are met with electric cars. Yes, the world's leading statesman are being delivered to meetings in glorified golf-buggies otherwise known as Global Electric Motorcars (GEM cars). Each leader has had two of these cars custom built, which bear designs using the country's colours.

The 3000lb table commissioned for the event, is also a tribute to Bush the eco-warrior. It is made of heart-pine lumber salvaged from a disused textile mill. Dr Carl Dohn, creator of the 15-foot diameter table, used the opportunity however, to hark back to Bush's true roots by carving the legs in the shape of cowboy boots.

Central bankers have taken a back seat in preparations for the summit this year. G7 finance minister met in New York in May to put together their recommendations for their leaders at G8, but were this time not accompanied by central bankers.

Countries participating in the G8 summit are the US, France, Russia, the UK, Italy, Germany, Japan, Canada and the EU.

The expectation is that China will be invited to join the next G8 meeting. One day some countries will be disinvited. I wonder who they will be? Otherwise we just end up with another case of inflation destroying value..

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SARKOZY CALLS FOR PRESIDENT OF EUROGROUP

Sarkozy, French finance minister, has some ideas about how to reduce numbers at these get-togethers.

"The European Central Bank speaks with a single voice, the European Commission speaks with a single voice but in the Eurogroup, one speaks with 12 voices," said Nicholas Sarkozy in his call for a president to speak for the group comprising the 12 finance ministers in the eurosystem.

This came as part of his announcement at a "eurogroup" meeting in Luxembourg, that the EU ministers were considering applying greater governance, something of a moral buzzword these days, to the euro area. The president would chair the monthly eurogroup finance meeting and would hold office for two and a half years. The proposals also included a committee of national experts to provide complementary economic analysis on which monetary decisions would be based.

Joaquin Almunia, who replaced Pedro Solbes as EU economic commissioner earlier this year, confirmed that he supported the idea of a stable presidency, however he disregarded the idea of an independent advisory committee, believing that the commission was well placed to undertake these tasks.

Charlie McCreevy, the council president and Irish finance minister, was altogether more wary of Sarkozy's grand conjectures saying: "Ministers agreed in November to postpone any decisions on reforms until later this year or early 2005 and that remains the case," and he added that individual ministers should be careful about what they disclose to journalists.

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IRISH CHIEF FACES QUESTIONING

John Hurley, governor of the Central Bank and Financial Services Authority of Ireland, is to face questioning by the Dail, the Irish house of representatives, over the supervisory role of the central bank in the aftermath of a string of banking scandals that have unfurled at the Allied Irish Bank (AIB).

AIB executives were first caught up in the scandal of Faldor Ltd, a tax dodging account in the British Virgin Islands. Latterly the bank is facing charges that it overcharged customers buying foreign exchange. This has apparently been going on since 1996 and has racked up a substantial €20m sum for the bank. The scandal broke this year.

Hurley is amongst those hauled up to answer familiar questions of "what went wrong?" Confronted with questions such as "how it (the central bank) did not have a system of supervision in place that would have signaled the existence of operations like Faldor and the forex overcharging," Hurley claimed he was that the recent revelations about AIB were "very serious and deeply disappointing".

Hurley said that although the events raised "serious reputational risk", overall financial stability would not be affected.

The central bank ceded supervisory responsibility to the Irish Financial Services Authority (IFSRA) last year. The IFSRA is now conducting a thorough investigation of the affair and putting in place processes to help prevent future scandals of this sort.

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THE BOTTOM LINE FOR SODBUSINESSBANK
A group of protestors in Moscow took an alternative tack in their fight to reclaim the cash of depositors who have fallen victim to the closure of Sodbusinessbank.

IAs thousands of anxious depositors queued outside overnight to apply for the return of their funds demonstrators shed their trousers, saying they wanted to draw attention to the plight of the depositors.

Oleg Nazarov, an entertainer, led the demonstration, claiming he was fighting for his mother-in-law who had savings in the bank. His rationale? "Central bankers wanted to strip us of our possessions - well, here we are stripped bare."

Nazarov, who one can't help thinking of as an exhibitionist who has found a cause, has perhaps jumped the gun however. The bank's temporary management say on their website that they will accept all applications from deposit holders. They will then add up the claims and see if they have the cash to pay out. So there may be hope yet.

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BONUSES IN BRUSSELS
Happy days in Brussels where the National Bank of Belgium's full-time staff each received an average bonus of €5,591 for 2003. The share of the central bank's profits paid to the 1,819 staff tripled to just over €10m, compared with €3m in 2002. The central bank is required by its statute to distribute 8% of its profits to the staff. The dramatic increase was partly due to the 20% increase in profits, but also because the central bank did not make an allocation to the extraordinary reserves - in 2002 the central bank squirreled away €68m. The average bonus was 85 times the size of the dividend on one of the central bank's 400,000 shares, half of which are in private hands. The total salary bill for the year was €179m, a reduction of €4.5m compared to 2002, making an average salary of €75,178 per worker.

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ATTENTION DEFICIT DAWSON
Dear oh dear, will any journalists actually turn up at fount of Fund knowledge Tom Dawson's regular economic round ups. Announcing last week that his press conferences are going to be broadcast on the web, TD didn't sound optimistic about audiences - virtual or live:

"We will see whether anyone is watching, or whether they are just sleeping in. But if you are watching, welcome. And if no one comes to future briefings we will have the External Relations staff asking the questions."

So next time you're in town do drop in on the press conferences otherwise Tom will be talking to himself.

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KRUGMAN: THE REBELLION OF THE VICE-PRESIDENTS
The embodiment of the American dream, those picket-fenced middle classes, are being penalised, according to leading US economist Paul Krugman in his speech to an audience at the London School of Economics.

For some reason the Bush administration has been able to introduce regressive tax cuts that do not just favour the rich, but the very, very rich. In fact the tax cuts introduced since 2001 have seen the top 1% of families gain 6% in income, while the middle classes gain on average 2.3% (and those at the bottom of the heap even less). But a gain is still a gain - that is unless it is a loss in disguise, and to finance these tax cuts it is spending on social programmes that will have to be cut. Programmes that hit the heart of middle America.

So why has this been allowed to happen? Krugman cites the evidence of mounting right-wing power in the government, in think-tanks and even the media, but the essential point seems to be, while a small economic elite are getting a bigger and bigger slice of the pie, the masses have not yet twigged. He notes that the first tax cut was passed when people did not really understand the figures - believing a non-existent budget surplus would cover them. The second cut was rushed through at the height of Bush's popularity, after the fall of Saddam Hussein in 2003.

So when will it all end. According to Krugman when the upper middle classes realise that they are losing out to the upper upper classes. A phenomenon he aptly calls "the march of the vice-presidents".

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PETER PANG ON HIS WAY UP AT HKMA
The Hong Kong Monetary Authority, home of the world highest paid central banker, Joseph Yam, has announced the appointment of Peter Pang as its joint number two. Pang will take up his position as deputy chief executive on July 1 2004.

Pang, currently chief executive officer of the Hong Kong Mortgage Corporation, fills the position left vacant since January 2003 and will be responsible for monetary management, financial infrastructure and research. Climbing the ranks of the HKMA is a lucrative path. With a top prize of over $1m within sight, Pang will do well to play his cards right.

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VIRTUAL GOVERNING IN THE NETHERLANDS
For those mere mortals who have ever felt they could do the job of a central bank governor, the perfect interactive quiz game is coming soon. Visitors to the Netherlands central bank will be able to answer questions and perform the duties of the governor, after which a computer will calculate whether you would be flying high or floundering as a governor in the real world.

Nout Wellink, governor of the Netherlands Bank, may find his job in jeopardy - for if the computer knows all the right answers, why not let it run the central bank in the first place?

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RBA'S MCKIBBIN BARRED FROM PROVIDING ADVICE
The governor of the Reserve Bank of Australia, Ian Macfarlane, blocked board member Warwick McKibbin from advising a residential home equity fund, the "Sydney Morning Herald" reported this week.

Professor McKibbin had intended to provide advice to Rismark, an "equity finance" company, for one hour per week, the report said. His backdown last week narrowly saved the treasurer, Peter Costello, from having to adjudicate a stand-off in the nation's most important board room.

The report noted uncertainty as to when outside interests improperly conflict with central banking responsibilities. Neither Macfarlane nor Costello has given guidance, it said.

"It is a matter for judgement in individual cases," Costello's spokeswoman said, according to the report.

Recent remarks by Costello suggest he would apply conflict of interest principles lightly, the article said.

"You know if you took the conflict of interest to extreme lengths nobody could serve on the Reserve Bank, not even the governor, who presumably has a mortgage himself," he said.

He was expected to outline his views at a Senate committee appearance on Friday.

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T&T CENTRAL BANK CRITICISED OVER DISCRIMINATION
The Secretary General of the Sanatan Dharma Maha Sabha, a nonprofit charitable organization that caters for the educational, cultural, social and religious needs of the population in general and for Hindus in particular. The organisation, has apparently criticised the Central Bank of Trinidad and Tobago, citing it as an example of cultural discrimination in the state, according to a report by the Trinidad and Tobago Express.

"The central bank symbolises everything wrong in Trinidad and Tobago. As soon as you walk in you know that it is not a bank of Trinidad and Tobago since the country's diversity is not displayed," he said, according to the report.

Maharaj was quoted as saying that the organisation would continue to fight against such injustices, but strictly on a legal level.

"The (Sanatan Dharma) Maha Sabha does not believe that we should get justice through the barrel of a gun," he said.

 

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ISRAEL'S KLEIN IN FAVOUR OF HIRING ARAB EMPLOYEES
The Bank of Israel is in favour of recruiting Arab employees, but has yet to find suitable candidates for available positions, according to a letter sent by the central bank governor, David Klein, to Hadash party MP Ahmed Tibi, Haaretz reported this week.

According to the report Klein had written in the letter that the bank has employed Arab staffers in the past.

The governor's letter came in response to a letter of protest sent earlier in the month by Tibi, who, according to the article, complained that the Bank of Israel does not have a single Arab on its staff.

Klein was reported to have written in his letter that the bank recruits employees into its service "in keeping with the requirements of the position and job it wishes to fill, and in accordance with the skills of the candidates involved in the tender, irrespective of gender, nationality, race and the like."

"The Bank of Israel imposes no particular restriction whatsoever on the employment of Arab workers as opposed to Jewish workers, and in the past, the bank has employed a number of Arab staffers," Klein wrote to Tibi.

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GREENSPAN NOMINATION HEARING WILL BE JUNE 15
Federal Reserve Chairman Alan Greenspan will testify next Tuesday, June 15, before the Senate Banking Committee as it considers his nomination for a fifth term at the central bank's helm, the panel said on Thursday June 3.

Bush nominated the 78-year-old Greenspan for a fresh four-year term as chairman of the US central bank on 18 May.

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FELDSTEIN - THE NEXT GREENSPAN?
As one of George W. Bush's key advisors on economic policy, Harvard professor Martin Feldstein helped design the President's tax cuts. He's working on a plan to overhaul social security. Could he be the next Greenspan, this article asks?

Click on the link below to read the article "Feldstein - The Next Greenspan?" on the Fortune.com website:

http://www.fortune.com/fortune/investing/articles/0,15114,643839,00.html

Feldstein was interviewed in Central Banking last August and criticised Greenspan indirectly, saying that the Fed "may have encouraged markets to believe that the stock market would continue to rise and that the Fed would be there for investors when they wanted to get out".

Is Feldstein really saying he would encourage investors to believe the Fed will NOT be there when investors want to bail out?

Somehow, I don't quite think so.

If Bush gets turfed out in November, his Democrat successor would get to nominate the next Fed chairman, and that would be unlikely to be the Martin Feldstein. Unless, that is, President Kerry was by then really desperate for credibility, which might very well be the case. After all, it was President Carter who appointed John the Baptist (otherwise known as Paul Volcker) back in 1979.

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QUOTE OF THE WEEK
Kishori Udeshi, RBI

"All in all, the life of a central banker is one of anonymity, staid and boring. It is only in moments when the going is tough that central bankers emerge from isolation and lean against the wind to battle splenetic insurmountable odds."

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