• Will Chirac and Schroder go to Canossa?
• Trichet the diplomat at Scheveningen!
• ECB urges single payment area
• Weber on a roll
• Narrowing options for gold sales?
• Argentina buys gold
• Bundesbank gets ethics
• Cast off those coppers
• Duisenberg ventures into Asia
• Liikanen takes on uphill task
• “I'm not a difficult person", says Mboweni
• Sarb cuts rates
• Marcus takes up new post
• Sarb announces changes to its MPC
• Economists need not apply
• Bank of Brazil in a spot of bother
• Raise those anti-imf placards
• Fund made Mistakes, but nobody's at fault
• BoE streamling continues
• Greenspan at the hole
• Private Greenspan
  

WILL CHIRAC AND SCHRODER GO TO CANOSSA?
Jean-Claude Trichet, president of the ECB, returned from his summer holidays
with a fight on his hands.  The EC of course wants to change the stability
pact to make it easier for politicians to run wopping budget deficits. The
high priests of monetary stability in the Eurozone want to stop any such
move dead in its tracks.
 
Joaquin Almunia, European Monetary Affairs Commissioner, had the cheek to
claim that he did not expect any resistance from the central bankers to a
convenient watering down of the Europact:

“Jean-Claude Trichet knows that the objectives of the pact remain the same
as they have been since the beginning and that the rules which we could
change are going to be based on a wide consensus.”
 
For the central bankers, Axel Weber for the Bundesbank immediately claimed
that the pact would as a result be weakened: “The incentive for members of
the currency union to achieve a solid budgetary policy would decrease and,
at the same time, the wrong messages would be sent to the countries that
have not yet introduced the euro.”
 
Germany finance minister Eichel then threw a punch at his friend Weber (whom
he had lauded to the skies when appointing him to the Bundesbank’s top job
only four months ago) and the ECB followed up with a strongly worded
statement, insisting that  the pact remained “ an appropriate framework for
dealing with countries' fiscal developments on a level playing field.”
 
This conflict is shaping up as the twenty-first century’s “Kulturkampf”.  If
only central banks, like the popes of old, could excommunicate any
politician who dares to oppose them. They could then make the sinful
presidents Chirac and Schroder kneel in snow in front of the Eurotower in
Frankfurt, as Emperor Henry IV felt impelled to do at Canossa in 1077 as he
bowed to the will of  Pope Gregory. This event still haunted Bismark in his
struggle with the Church in Germany 800 years later – the so-called
Kulturkampf. The original fight between the Pope and the Emperor was over
the issue of whether the state could appoint the clergy and, by pleading for
the forgiveness of Pope Gregory VII, the Emperor gave in to the superior
power of the Church -  acknowledging that  the emperor’s power  had been
fatally weakened by his excommunication.

page top^

TRICHET THE DIPLOMAT AT SCHEVENINGEN!
The politicians are not kneeling in the snow yet – after all, it’s only
September – but they have lost the first stand-off, which took place last
Saturday when the finance ministers met at  this seaside town in the
Netherlands.
         
Trichet diplomatically acknowledged (as well he might!) that there was a
need to improve the workings of EU budgetary rules.  Some of the EC’s ideas
for greater flexibility could even be cautiously welcomed. But, he said
sternly, the national central banks were “united” that the basic accord
should not be touched.

"Let's improve implementation, let's not change the wording of the
regulation," Trichet said at a news conference concluding two days of
meetings among EU finance ministers and central bankers at this seaside resort.
Radical changes to the 1997 Stability Pact, designed to get governments to
balance their budgets and restrain inflationary pressures, would eventually
affect monetary policy decisions, intoned ECB Governing Council member Nout
Wellink.

EU finance ministers had laid out principles for how to reform the fiscal
rules, which half of the 12 eurozone countries already have broken or are
heading that way. Their deputies are to report back in November. Under this
framework, ministers agreed that the 3% budget deficit and 60% debt-to-GDP
limits would not be changed. Moreover, ministers said that any changes to
regulations on how the pact is applied "should be minimised, if necessary at
all."

WEBER ON A ROLL

Until he was hauled over the coals by Eichel on the stability pact issue,
Axel Weber had been enjoying himself – and enjoying a good press.  He has
set himself an ambitious goal – to make the workings of the ECB better
understood by the public. Even in Germany, host country to its head office,
the ECB is little known.
 
To command a hearing he knew he first had to restore respect for the
Bundesbank itself, which had sunk to an all-time low. That once-proud
institution, which led the way towards independence for central banks
throughout Europe through its brilliant public relations in the 1970s and
1980s, had been dragged through the mud.  Staff morale had collapsed.
 
In his first four months as president, Weber has re-energised the staff
through a hectic work schedule. He has amazed them through his willingness
to enter into detailed discussions of arcane central bank matters.
 
He has also shown interest in the organisational side of his job – which
many observers thought might be his weakness, as he had no previous
experience of running a large organisation (and by central bank standards
the Bundesbank is an overdeveloped, muscle-bound monster).
 
Even before the row with Eichel, it was not entirely plain sailing. At one
point, Weber seemed to downgrade the importance of money in ECB
policy-making: “important, but not central”, he said. Woops! Economists all
over Europe looked to the Eurotower in Frankfurt, home of the leading
central bank monetarist, Professor Dr Otmar Issing, follower of the Helmut
Schlesinger of “Black Wednesday” fame. Of course Weber was right in terms of
operating policy – the ECB does not target a monetary aggregate. But Weber
seemed to be challenging the famous “two pillar” strategy, under which money
supply trends are used to “double-check” the results from a broader economic
analysis of the outlook for inflation.
However, later, journalists were reassured that there was not one scintilla
of difference between the ECB’s views of how monetary policy is formulated
and those of Weber. It’s just that Weber is, well, more “pragmatic”…One
wonders if the two German economics professors had had a little chat.

page top^

NARROWING OPTIONS FOR GOLD SALES?

One thing Weber seems disinterested in is the subject of possible German
gold sales. In fact, he went on record in an interview with Die Zeit as
saying that gold holdings “are a natural hedge against dollar fluctuations”.
This warmed the hearts of the gold bugs. And the ECB has banned the use of
gold sales proceeds to fund the research and educational establishment that
the former president Welteke was so keen on. 
 
Some observers like UBS feel that Germany may be cooling on gold sales. In
that case would France step up to fill the gap in the famous central bank
agreement to sell up to 2,500 tonnes in the five years from September? Or
Italy? The trouble is, governments everywhere are interested in selling gold
only if they can get their hands on the loot. And that is exactly what the
ECB is determined to prevent. Why?  You guessed it – it would break the
rules of the stability pact if not of the Maastricht treaty itself. All this
has made UBS and other analysts suspect that maybe there won’t be as big a
volume of central disposals to the markets as everybody had been
expecting…But then, the central bankers might just disappoint them, again.

page top^

ARGENTINA BUYS GOLD
Yes and some countries are still buying gold for their reserves. This
includes Argentina. At a time when it owes untold billions to investors,
seems to have no intention of returning their money to them, and says it
doesn’t want to do business with the IMF, it is using some money to buy
gold. There’s a gesture of  defiance if ever there was one!

page top^

BUNDESBANK GETS ETHICS
Back to the Bundesbank, during the summer it adopted a new code of conduct
for the eight members of its executive board, obliging them to hold office
in a way that is “independent and avoids bias and personal gain.”  The code
replaces the set of rules adopted by the Bundesbank in April after Welteke’s
fall from grace when it was discovered he had accepted hospitality from two
banks regulated by the Bundesbank.
 
Axel Weber realises full well that such rulebooks are no substitute for
personal integrity, but he also knows he had to be seen to be setting new
standards for himself, his board members and employees.
 
The rules ban the kind of behaviour that brought Welteke down. They state
that board members must not be paid for delivering speeches and are
prohibited from accepting gifts worth more than €150 without the approval of
the board.  Travel expenses, including hotel bills and costs incurred by
spouses or partners are to be paid by the Bundesbank unless the organisers
do so to “an appropriate extent”.

page top^

CAST OFF THOSE COPPERS
One and two cent coins, jamming the wallets of consumers around Europe, and
handed over the counter to the dismay of shop owners, may soon be a thing of
the past for residents of Belgium and the Netherlands.  These countries are
now set to follow Finland in scrapping the smallest denominations of the
euro, leaving consumers to round bills to the nearest five cents and thus
avoiding those awkward (but often, for the consumer at least, uniquely
satisfying) transactions consisting of carefully counted coppers.
 
Germany is exercising characteristic caution over the matter, fearful that
the move may trigger further inflation similar to that seen at the
introduction of the Euro.  However, Belgium’s central bank, looking to
Finland as an example, expects that prices should rise by no more that 0.1%,
and even if shopkeepers round all bills up to the nearest five (prices will
remain labeled the same), the inflation is estimated to be no more than 0.4%.
 
The coins will remain legal tender throughout the eurozone, but countries
rounding bills wish to reduce the volume in circulation.  Not only are the
coins expensive to mint, Dutch retailers estimate that counting the coins
alone costs them €30m a year.

page top^

DUISENBERG VENTURES INTO ASIA
In his first public talk since stepping down from the ECB,  Wim Duisenberg
is currently visiting Kuala Lumpur to deliver a talk on "The Euro and Asia".
It is hosted by ABN AMRO Bank Bhd, the Malaysian Dutch Business Council
(MDBC) and the Royal Netherlands Embassy, according to Bernama news agency. 
 Duisenberg's visit is part of The Netherlands Embassy's celebrations to
mark Holland's turn to take charge of the European Union (EU) presidency. 
The first full EU presidency of 25 EU countries is led by Holland (from July
1 until December 2004).
 
It is scarcely credible, but this will also be Duisenberg's first ever visit
to an Asian nation. This surprises Newsmakers.  A man who has been at the
summit of his very international profession for longer than anybody cares to
remember – as head of the Dutch central bank, head of the BIS, head of the
ECB – on his first visit to Asia?  Newsmakers has always assumed that
fledgling central bankers cut their teeth attending international meetings
around the world before they are even considered for jobs in international
finance.

page top^

LIIKANEN TAKES ON UPHILL TASK
Erkki Liikanen took up the post of the Bank of Finland's new governor on
Monday 12 July. His term of office is seven years, and he may be reappointed
for one more term after that. Liikanen will hold his first press conference
as governor in September when he will present the Bank of Finland's economic
forecast and report on the current economic outlook. Following the
retirement of the former governor Matti Vanhala on 1 April 2004, Matti
Louekoski, deputy governor, has held the position of acting governor. He
relinquished the post to the incoming governor on 11 July 2004. Like other
governors of the eurozone’s central banks, Liikanen faces an uphill task in
restoring morale.

page top^

page top^

SARB CUTS RATES
However, if Tito wanted to make monetary policy boring during his second
term, he’s going about it in an odd way.  In August the SARB surprised
markets by cutting  base rate from 8% to 7.5% just when most people were
expecting no change. The strong rand has been criticized by the powerful
finance minister Trevor Manuel and the National Union of Mineworkers. But
maybe it is a good thing to surprise markets every now and then just to make
sure they are paying attention.

page top^

MARCUS TAKES UP NEW POST
Meanwhile, Ms Gill Marcus, who left her job as a deputy governor of the SARB
at the end of June, citing  differences of opinion, took up a position as a
professor at the  Gordon Institute of Business Science (GIBS) in August. A
statement from GIBS Professor Nick Binedell, a director at the institute,
said that Marcus’s personal leadership skills, insights into key policy
debates, her relationships with institutions and individuals across all
aspects of SA business community would be a great asset to the school.
As part of her brief, Marcus will be focusing and developing GIBS activities
in the area of policy, leadership and gender as well as developing new and
shaping the existing programmes that are engaged in the broader policy
debates and dialogues. But this news has not scotched the suspicion that she
is waiting her time before being appointed head of the mooted new financial
super-regulator.
 
Marcus, an ANC stalwart and a former deputy finance minister under Nelson
Mandela, was appointed a deputy governor of the Reserve Bank in 1999.

page top^

SARB ANNOUNCES CHANGES TO ITS MPC
The composition of the South African Reserve Bank’s Monetary Policy
Committee has been changed to allow for
two senior staff members of the SARB to become members. A.D. Mminele, Head
of Financial Markets and Dr M. Mnyande, Head of Research and Senior Deputy
Chief Economist are to join the MPC.
Click the links below for details of the changes on the SARB’s web site:
Press release: Monetary Policy Committee Restructured
Resumé Dr Monde Mnyande
Resumé Daniel Mminele.

page top^

ECONOMISTS NEED not APPLY
At a time when economists are infiltrating every corner of central banking,
Thailand is bucking the trend. The Nation reports that as the Bank of
Thailand has started a three-year programme to downsize its workforce, it is
looking for financial engineers rather than economists. It wants experts
“who can deal with the growing complexities of the global market and the
challenges involved in managing the baht float”.
 
“We will not recruit new staff except those who can handle risk management,”
Duangmanee Vongpradhip, senior director of the human resource group, was
quoted as saying.
 
The central bank no longer seeks economists or accountants. It is offering
fellowships for study in financial engineering at the master’s and doctorate
levels. More financial engineers are considered crucial to the central
bank’s policy of strengthening its risk-management control, reported the
newspaper.
 
A voluntary programme of early retirement attracted 436 employees who will
receive up to 30 months – or the remaining months before their mandatory
retirement – of salary as severance pay.
 
The downsizing scheme is  scheduled to continue until December 2006, when
total Bank of Thailand headcount will be reduced to 3,800.

page top^

BANK OF BRAZIL IN A SPOT OF BOTHER
Henrique Meirelles, president of Brazil’s central bank, under attack for 
allegations that he evaded taxes and used black market money-changers to
transfer personal funds, fought back in August,  saying that he had the
support of President Lula da Silva and would not step down.  Both da Silva
and Antonio Palocci, finance minister, have issued strong endorsements of
Meirelles.  The head of a congressional committee investigating money
laundering and a member of the opposition party, Senator Antero Paes de
Barros, also called the magazine report “inaccurate” and said his committee
would not be investigating the allegations.
 
Meirelles previously lived in the United States where he heading global
banking for FleetBoston Financial.  In his defence Meirelles said “I am one
of the few Brazilians to make a success of myself overseas, I gave all that
up to come back home to help Brazil.”  
 
However, Brazil’s opposition party challenged the special ministerial status
awarded to the central bank governor through a provisional measure announced
by Palocci.  The status is widely perceived as a way to protect Meirelles
from the scandal that has blown up around him. As a minister, Meirelles
would be subject to prosecution only in the supreme court,  if any action
were to be taken against him.  The opposition party has declared that such a
measure is unconstitutional and that they would submit a challenge to it in
the Supreme Court.

page top^

RAISE THOSE ANTI-IMF PLACARDS
A new board game called “Eternal Debt” has swept Argentina.  The winner is
the last person to have to declare bankruptcy by accumulating the least debt
and therefore beating the IMF.  It is structured similarly to Monopoly, only
rather than accumulating wealth – the aim is to accumulate the least debt. 
The board is divided into ‘southern’ and ‘northern’ zones, intended to
represent Latin America and North America respectively. In the southern
zone, the board is filled with squares which represent commodities such as
oil, sugar, or cotton interspersed with squares that represent capital
flight, currency devaluation, or coups d’état ú the sorts of catastrophes
that would cause the player to lose money or assets. In the northern zone,
there are squares representing the industries which  consume the commodities
found in the southern zone. There are two other superimposed squares,
labeled IMF and Tariff Barriers.
 
On passing what in monopoly would be labeled “Go” but here is called “IMF”,
payments must be made.  If you don’t have enough money you must borrow. 
 
In the last paragraph of the game’s instructions, under the heading ‘End of
the Game’, it warns that players may suffer financial collapse during the
course of the game. The IMF then embargoes all of their property and
everybody loses:
 
“ In this case, placards with anti-IMF slogans will be raised and a new game
will begin.”

page top^

FUND MADE  MISTAKES, BUT NOBODY’S AT FAULT
The IMF’s independent evaluation office has strongly criticized the Fund for
supporting Argentina for too long after it became clear in the late 1990s
that the political ability to deliver the necessary structural reforms and
fiscal discipline was lacking. Indeed, whatever the deal eventually struck
with Argentina, it is clear that the costs of this episode have been huge,
that massive mistakes were made – and that nobody at the Fund will be
penalized or disciplined in any way. Indeed, the guy who was in charge at
the time, Horst Koehler, is no longer around to shoulder responsibility. He
has left to become president of Germany.  Yes, well…
For the IMF’s management response, click here
 Management Response (66 KB pdf file).

page top^

BoE STREAMLINING CONTINUES
The Bank of England is set to put an end to one of its age-old services. 
The Old Lady has announced plans to withdraw from providing retail banking
and clearing services to its commercial customers such as government
departments, building societies and other companies. 
 
Mervyn King, governor, has been streamlining the Bank since his appointment 
over a year ago.  He gave a hint of impending changes at the Bank in this
year’s annual report, in which he announced his intention to “concentrate
its core purposes of maintaining monetary and financial stability.”
 
The Bank wishes to remain on good terms with all its customers and hopes to
cut the service, which will affect 500 customers, within two years time, to
give them time to find suitable alternatives.  However there is one customer
that may be allowed to continue banking on Threadneedle Street.  Huntingdon
Life Science, an animal testing company, was forced to turn to the Bank
after high street banks it used were targeted by animal rights extremists. 
The Bank says “There would be no question of us switching HLS’s banking
unless they had a private sector banker, but ideally we would like to
withdraw from retail banking.”
 
The personal bank accounts of several thousand current and former members of
staff will also be unaffected for the time being. The Bank is delaying a
review of personal banking until it has made progress with the other
changes. It will assess the impact of the other changes on the future
viability of personal banking.
 
In case overseas central bankers are worrying lest these changes might
affect the services the Bank of England provides to them, it is emphasized
that such services are not affected by the planned cutbacks.

page top^

GREENSPAN AT THE HOLE
The Oracle has spoken.  As American election-fever reaches boiling point,
Alan Greenspan has entered the fray to comment on that all-important but
all-too-often ignored issue – no, not Iraq, but  the balancing of the United
States budget. As everybody knows, US fiscal policy is out of control.
 
Greenspan did not quite put it like that. But at the central banker’s annual
conference in Jackson Hole, Wyoming, Greenspan he did allow himself to air
his concerns that the country owes more to retirees than the economy will
ever have the ability to deliver. Or put it another way, it will only be
able to delver on these commitments by raising taxes hugely -  reducing the
real incomes gains of current workers.  He called for a recalibration of
public programs, warning “If we delay, the adjustments could be abrupt and
painful”.
 
As baby boomers retire in the coming decade, and most of them go on to live
for donkeys years afterwards, social security tax receipts will not cover
the cost of outlays as of 2018, says the Social Securities Trustee’s 2004
report.
 
As tensions rise on every issue in this election year, Greenspan has
endorsed neither the stance of President Bush nor his rival, John Kerry on
the matter. Like other less august central bank governors, he is reduced to
using the “bully pulpit” and appeal to public opinion.  He thinks it still
matters what the public thinks. Whoever said Greenspan isn’t an optimist?

page top^

PRIVATE GREENSPAN
In his book about the Federal Reserve Lawrence Meyer writes that the Fed is
a “pretty formal place” in which the chairman “is not very visible.” 
Greenspan doesn't make a habit of dropping in on Board members for casual
conversations.
 
On the other hand, whenever Meyer sought Greenspan out, he always greeted
him warmly: “I always came away from our conversations admiring his insight
and judgment. Still, something about the chairman made me very efficient in
the amount of his time that I expended.”
 
“I wouldn't call the chairman a chatty person. He is a private person,
someone who seems uncomfortable in a large group,” Meyer writes. “The irony
is that Alan Greenspan is a very interesting person and a warm, wonderful
conversationalist - - who simply doesn't seem to like to have conversations”.
 
“Once I realized this, I didn't take his manner as arrogance or an absence
of appreciation for others. It was simply his way.”

page top^