NEWSMAKERS
7 March 2005
 

Wolfowitz for world bank, or Wolfensohn's son?

Paul Wolfowitz, US deputy secretary of defence, was seen as a leading candidate to replace James Wolfensohn as the president of the World Bank – for about a day.
The move seems unlikely following comments by Wolfensohn on Thursday 3 March.

"Mr. Wolfowitz is no longer part, I think, of the exercise, so I don't think there is any need to comment," Wolfensohn told reporters after meeting European Commission President Jose Manuel Barroso in Brussels on Thursday.

He said pointedly that his successor should be someone who was passionate about fighting poverty and promoting human development, not just a good manager.

Asked whether Wolfowitz met the criteria, he joked: "I submitted the name of my son and I think they got it mixed up."

"Carly" Carleton Fiorina, the chief executive recently ousted from the top spot at Hewlett-Packard Co, emerged as another strong candidate this week, based on reported comments from a Bush administration official.

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Spotlight on Seung Park

Korea and its independent-minded governor, Seung Park, have been much in the news.

On February 21 it was reported that, as foreign reserves increased, the Bank of Korea planned to diversify into a greater variety of currencies and assets. There was nothing new in this; it had already been following such a strategy for some time. This did not involve actual sales of dollars but reducing exposure to the dollar partly by placing a smaller proportion of reserve growth into dollars.

But because the markets had already been sensitised to the possibility of further moves by Asian central banks, all hell broke loose. On Tuesday, February 22, the dollar recorded its largest one-day fall since October and bond and stock markets fell worldwide while the price of gold soared.

The fact that the Bank of Korea should have inadvertently triggered such a mini-crisis is ironic as the central bank’s senior officials have tried to be extremely sensitive to the risk of setting off undesirable market movements by incautious statements. They have been well aware that last year off-the-cuff remarks by officials in China and in Japan sparked market turbulence. The Korean central bank has been trying its best to avoid that.

In an effort to remedy the situation, the central bank governor, Seung Park, hastened to clarify policy. In a parliamentary finance committee session, Park said a central bank plan to diversify its investment targets did not mean the bank would sell the dollar reserves it holds in favour of another currency. He said the issue had been overplayed.

The central bank should simultaneously seek safety, liquidity and profitability in managing the country's foreign reserves, Park said.

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Why bank of Korea is influential

Until recently few commentators paid special attention to Korea as its $200 billion in reserves is dwarfed by those of Japan ($800 billion) and China ($600 billion). But there are signs this is changing, and good reasons too.

First, it makes sense for Korea (like Switzerland – see below) to aim to achieve effective diversification, whereas the reserves of China and Japan are just so massive it would be highly disruptive for them to change the currency composition on a sufficient scale to achieve real benefits of diversification.

Second, and crucially, the Bank of Korea really does control South Korea’s external reserves whereas Japan’s reserves policy is set by the ministry of finance, not the central bank and China’s strategic policy is also ultimately determined at a political level.

Third, the central bank not only controls Korea’s reserves but actively manages them. Again by contrast, Japan’s reserve management is totally unsophisticated (except for the small part delegated to the Bank of Japan) and passive. Basically they invest their billions in US treasury bonds and simply buy and hold them till maturity. The entire operation of billions and trillions, with vast implications for the working of the world economy and financial system, is administered by a handful of civil servants from the finance ministry’s offices in Kasumigaseki.

Korea’s reserve management is among the best in Asia, to be compared with the likes of Singapore and HKMA and not the untutored approach of the Japanese.

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The Swiss case

The Swiss National Bank is (at least in some respects) in a similar position and has implemented a sophisticated diversification strategy.

By the way Alan Greenspan’s remark the other day that central banks have not actually been selling dollars is not true for all central banks. Some definitely have been selling – the sensible ones, like the Swiss.

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Bernanke says Fed on track


Governor Bernanke of the Federal Reserve has said that with US inflation controlled, the Fed can continue with its policy of gradual interest rate increases. Speaking to reporters after giving a speech to a business forum at the University of Arkansas at Little Rock, Bernanke expressed confidence the six quarter-percentage- point rate hikes the US Federal Reserve has made since last June had set a safe course.
"Personally, I currently think inflation remains well controlled, therefore I'm comfortable with our policy of removing accommodation at a measured pace," Bernanke said.
"If circumstances were to change in either direction, we would have to respond to that."
The word "measured" has come to be associated with smaller, quarter percentage point increases but analysts have been watching closely for any indication the Fed might either pause in its current series of hikes or make larger ones.

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Rising star gets ECB's "ItaIy" job

The nomination of the rising star Lorenzo Bini Smaghi, 48, the head of the Italian Finance Ministry's international department, to succeed Tomasso Padoa-Schioppa on the ECB’s executive board, reinforces the political grip held by the big countries on the key jobs at the ECB.

The prospect now, however unfair it may be, is for the ECB to be viewed as highly competent but as politically compromised. Smaghi himself is a splendid fellow – charming, competent, totally in command of his brief, like other top Italian public servants before him. The betting is he will end up as MD of the IMF or with another top job before long.

But the perception that the big countries can appoint anybody they like to the jobs they control, whatever their candidates’ competence or lack of it, could over time undermine the credibility of Europe’s central bank, which is, if not an infant, still a tender young creature.

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Stinging criticism from academics

Professors Francesco Giavazzi and Charles Wyplosz have voiced the views of many others in their trenchant criticism of the selection process for ECB executive board members. Every spring, they point out, one of the six members of the ECB’s executive board must be replaced. The board's job is to run the ECB and, importantly, to formulate the interest rate proposal submitted twice a month to the ECB council.

In order to guarantee their independence, board members are not elected but appointed by heads of state and governments. This is how it should be.

“What is not right, however, is the appointment process”.

According to the professors, it was simply not true that candidates are carefully chosen after a wide search for the most qualified persons. The four large countries (France, Germany, Italy and Spain) in effect have permanent seats. They can choose whoever they like to hold the seat.


“This year, it is Italy's turn"

The original purpose was that members of the board serve in their own capacity and should be chosen solely on their own merits. Delegating this process to one country four times out of six unduly restricts the search and makes it dependent on national politics.

Giavazzi and Wyplosz argue it is high time that these appointments be carried out in the open, that the pool of candidates be widened and that diversity of background and opinion be valued more than they are. At present everybody is taken from national bureaucracies and central banks.

Francesco Giavazzi is a professor of economics at Bocconi University. Charles Wyplosz is a professor of economics at the Graduate Institute of International Economics in Geneva.

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Gloomy Padoa-Schioppa

Meanwhile, Tommaso Padoa-Schioppa is leaving his post with mixed views on global prospects. He expects the eventual correction of the US payment deficit to prove costly in terms of US and global growth. This is because he doubts whether the coordinated action needed to avoid the gloomy scenario is feasible.

“My own view is that the correction will come about with a reduction in American growth and in global growth, because I don’t see other regions in the world that could replace, one for one, a reduced speed of the American motor”.

Other observers feel that a big part of the problem is the ECB itself, which could spur demand in Europe, but obstinately says it can’t do anything until Europe’s governments implement structural reforms.

Will the Gaymard affair derail the European constitution vote?

With Hervé Gaymard having lost his job, his successor Thierry Breton, who has been running France Telecom, becomes the fourth French finance minister in 12 months – and the eighth since Jacques Chirac became president in 1995.

Revelations that the French government had been paying €14,000 a month for a luxury apartment for Gaymard, his wife and eight children, shocked the country and come at a time when unemployment has just reached 10%. The feeling is that the country is looking for a way to “punish” the government for its arrogant and elitist attitude and could just find the right weapon in the forthcoming referendum on the EU constitution (a date for the vote will be set this week).

A large minority of Socialists as well as the Greens, and some trade unions oppose the text, which they think does not take sufficient account of social concerns.

The most recent survey showed 58% of voters favoured the treaty, down from 63% in January and 65% in December. The 1992 Maastricht treaty was passed with only a razor-thin majority in a referendum, despite polls showing most voters backed the text.

The other French finance ministers since 1995 have been Alain Madelin, Jean Arthuis, Dominique Strauss-Kahn, Christian Sautter, Laurent Fabius, Francis Mer and Nicolas Sarkozy.

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Hungary's central bank clashes with politicians


Hungary’s president Ferenc Madl has appointed the new members of the monetary council over the resistance of the central bank. Judit Nemenyi, Tamas Banfi, Peter Bihari and Csaba Csaky will become members of the council from 1 March.

The central bank has posted the following on its website:

“The Governor of the Magyar Nemzeti Bank maintains his view that there is no need to expand the current number of Council members from nine to 13. The council continues to function in compliance with the provisions of law. The increase in the number of council members is unreasonably high, and it may jeopardise the council’s smooth functioning”.

“Under the central bank act, as amended by the parliament in December 2004, the prime minister of the republic may initiate to increase the number of council members by four persons. However, it could have been more appropriate if the prime minister had used this opportunity gradually and with greater care. After members of parliament turned to the court of constitution, requesting it to repeal the act, it could have been more reasonable to wait until the court passed a ruling, in order to prevent a situation in which new members could be faced with unmanageable circumstances. the views of the president of the European Central Bank and the president of the Republic of Hungary, namely that the expansion of the council should not take place in one step but in certain intervals, should have been taken into account, ensuring that the appointment of members was not affected by political cycles. Including the new appointments, four of the monetary council members were appointed by the Orbán government and nine have been appointed by the government currently in office since 2002.”

The central bank points out that the appointments fail to comply with that provision of the central bank legislation under which the prime minister is required to seek the opinion of the central bank governor on such new appointments.

“The fact that the Prime Minister, while ignoring the opinion of the governor of the MNB, notifies him of the names of the appointees one hour prior to their public announcement cannot be considered as inviting opinions.”

This is the first time since the end of the communist system that a prime minister initiated the appointment of people of whom the governor did not approve.

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Mankiw clears way for Bernanke?

Gregory Mankiw has resigned as chairman of President Bush's Council of Economic Advisers. Ben Bernanke, a Federal Reserve governor, is said to be a possible successor.

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Is Papademos talking in code?
Lucas Papademos, ECB vice-president, has repeated that whenever possible, central banks should try to prevent the evolution of asset price bubbles. “In principle, prevention is better than cure.” Who could quarrel with that?

Nobody, except that this will be interpreted as code for saying the Fed got it wrong. Many European central bankers – like many economists in the US also – have long been critical of the Greenspan Fed for stoking up the bubble in US asset markets in the 1990s. They would not dream of uttering such criticisms in public of course. But central bankers use code instead.

This is one of those debates that will run and run…. Right now the balance of opinion seems to be shifting in favour of those who say that central bankers should be more pro-active.

But soon, with the great man’s retirement, it will be open season for any Tom, Dick or Harry to stick the knife into Alan Greenspan. That will all be a bit sad when it happens. When he was at the height of his power none dared breathe a critical word, except in code.

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The“Club of 45” speak French

Asked in a recent interview if he prefers the language of Shakespeare to that of Molière, Jean-Claude Trichet, president of the English-speaking ECB, felt moved to protest that “everybody knows my passion for the French language.” He mentioned that over ten years ago he had founded a “club” of French-speaking central bankers whose members represent 59 countries and 45 central banks.

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Bank of Italy's "Day of Action"

A strike organised by Bank of Italy trade unions on February 17 saw over 77% of workers taking part, according to AGI. Another “day of action” (or rather its day inaction?) was staged on February 24. Question: is the staff of the Bank of Italy more “active” when on strike or when at work?

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Duisenberg mediates

Wim Duisenberg, the European Central Bank's former president, has been appointed to mediate in a long-running dispute between Franco-Belgian bank Dexia, and Dutch investors who are suing it for allegedly mis-selling investment products. Wim is expected to meditate for a long time on this knotty problem.

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Sherlock Holmes on Central Banking

Receiving an honorary degree in Edinburgh on February 7, Alan Greenspan admitted that he had long found inspiration in the wisdom of Sir Arthur Conan Doyle's famous creation Sherlock Holmes.

"As an economic detective of sorts, I find kinship in the words written by this university's world-renowned alumnus, Sir Arthur Conan Doyle, whose Sherlock Holmes – while speaking of the art of detection – unknowingly unlocked the well kept secrets of monetary policy making."

Greenspan said that Conan Doyle's famous character spoke of "balancing probabilities" and the "scientific use of the imagination."

"He sounds like a stock portfolio manager of one of Edinburgh's premium investment houses. What is true for detectives and financial risk managers is true for monetary policymakers, and is, I am certain, also true for the young minds taking shape here on these grounds."

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Eddie George's "low point"

Letters released by the UK Treasury confirmed that Gordon Brown’s decision to remove responsibility for banking supervision from the Bank of England without consultation with the Bank almost prompted Eddie George (now Lord George), the Bank's governor, to resign.

In papers released under the Freedom of Information Act, Gordon Brown wrote to Eddie shortly after the election of the Labour government in 1997 promising consultation on this issue:

"It was the government's intention to consider transferring part of the Bank of England's responsibility for banking supervision to another statutory body. I am pleased that you agreed that consultation will now start on this basis."

Yes, well. Just two weeks later, Brown curtly informed him, without any consultation, that the Securities and Investments Board, a precursor body to the Financial Services Authority, would take over the whole of banking supervision "at the earliest opportunity".

Brown brazenly asked for Eddie’s full co-operation. Wow!

"It is vital that these changes are handled effectively and that while the transition to the new arrangements for banking supervision is under way, all those involved continue to carry out their duties with the commitment and professionalism that we have come to expect of them," he wrote.

Eddie George considered quitting. However, like other Bank of England governors before him, he thought better of it, and decided to see it merely as a "low point" in relations with the chancellor. One suspects that Brown has sized up Eddie and knew he wasn’t a quitter.

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Boe cancels governors' bash

The Bank of England has cancelled its 2005 governors' symposium – successor to the old British Empire and Commonwealth central banks and currency boards get-togethers. This was due to an overcrowded international schedule.

Mario Blejer, currently head of the Bank's Centre for Central Banking Studies, wrote to those central bank governors who thought they might be invited to London recently to tell them the news.


Boe's former chief cashier dies

John Page, who was the last person to hold the post of chief casher of the Bank of England when the position was downgraded at the end of the 1970s, has died aged 81.

Page is remembered as a forbidding figure who ran the day-to-day business of the Bank with commanding authority and expertise. When he was there, everybody knew who was in charge. The governors, Leslie O’Brien and Jasper Hollom, themselves old pros, floated above him but every bit of information about the markets and operations was filtered through him on its way up – and every instruction was filtered through him on its way down. That was how the Bank had always been run. The staff knew the rules.

This was intolerable to Gordon Richardson (now Lord Richardson), the hands-on autocrat who arrived at Threadneedle Street in 1973 from Schroders, a merchant bank. A gigantic struggle ensued – a tussle that at one stage seemed about to destroy the Bank. Richardson won a costly victory and called it “modernising the Bank”.

It was left to another “outsider”, the old-style but effective Robin Leigh-Pemberton (Lord Kingsdown), to start restoring morale.


Tucker votes to raise UK rates ahead of UK general election

Meanwhile, the minutes of the last UK monetary policy committee meeting revealed that Paul Tucker, the Bank’s executive director for markets, broke ranks with the rest of the monetary policy committee in voting to raise rates by 0.25% to 5%. The Bank’s inflation forecast suggests that inflation may rise above the 2% target in two year’s time and the markets now expect another rise in official rates. The MPC’s next meeting is on March 10.

Even though nobody even dreams of talking politics at MPC meetings, it will nevertheless take some guts for the MPC to raise rates just before the date ofthe UK next general election. But the Fed did raise rates last year ahead of the presidential election.

 Islamic central bankers' summit

The Islamic Financial Services Board (IFSB) is to hold its second summit in Doha, Qatar on May 24-25 2005, with the Central Bank of Qatar as the host. Bank Negara governor, Tan Sri Dr Zeti Akhtar Aziz ,and eight other central bank governors are among the 30 confirmed speakers at the summit, which is on the theme of The Rise & Effectiveness of Corporate Governance in the Islamic Financial Services Industry.
The governors will address topics such as rights of stakeholders in institutions offering Islamic financial services, transparency, market discipline and corporate governance issues in relation to conventional banks offering Shariah compliant financial services.
The IFSB summit held in London last year attracted a number of high profile delegates and created a high standard for the industry's events.
"We are very enthusiastic to repeat the success story this year," IFSB secretary-general Professor Rifaat Ahmed Abdel Karim said.

The incoming governor committed himself to continue the reforms started at the BSP in accordance with its mandate to ensure stable prices and a strong banking sector.

Interview with ex-RBI chief Bimal Jalan
In an interview published this week, former governor of the Reserve Bank of India Bimal Jalan said interest rates will be soft as the inflation situation is okay and the foreign exchange reserve position is also comfortable.

NEW GOVERNORS

Philippines - Tetangco becomes governor

Well-respected 52-year-old deputy governor Amando Tetangco is the new chief of the Philippines central bank. Tetangco joined the central bank in 1974. He is one of the principal architects of the far-reaching reforms the central bank is spearheading to foster the development of the domestic capital market, strengthen the banking sector, and amend the central bank’s charter to make it more responsive to the demands of a changing environment.

Tetangco said he was pleased that the president chose a career officer of the central bank as that was a vote of confidence that the central bank leadership was “on the right track”.


New central bank president for Venezuela

President Hugo Chavez has made Gaston Parra Luzardo the new president of the Central Bank of Venezuela (BCV). But many fear that under Parra’s administration, his political affiliation would give him carte blanche for the central bank to become an “unruly monetary system that serves to finance public deficit and for the inorganic emission of money ... or to produce artificial profit like the government has been trying to do lately” according to deputy Alfredo Ramos, as reported by Union Radio.

- and for Nepal

After a protracted dispute among the ruling parties, a cabinet meeting on January 31 finally decided to appoint Bijaya Nath Bhattarai, a deputy governor, as the new governor of the Nepal Rastra Bank.
“There is a strong need to push ahead the financial sector reform programme more effectively,” he told reporters following his appointment to the post Monday.
“The major challenge facing NRB is to revive Nepal Bank Ltd and Rastriya Banijya Bank and we are determined to do so.”
Following his appointment as the 13th chief of the NRB, Bhattarai said the central bank would take stringent measures against “wilful defaulters” in course of recovery of bad loans. “More strong measures will be taken in addition to the existing blacklisting of wilful defaulters,” he said.

- and for Malawi

President Bingu wa Mutharika of Malawi has decided against renewing the contract of Elias Ngalande, the central bank governor, whose expires at the end of this month, a government official said on February 1. Reuters reported that no explanation was given for the decision. Ngalande is to be succeeded by Victor Mbewe, a former head of the Malawi operations for South Africa's Standard Bank, the report said.
"The president has decided to replace Dr Ngalande with Victor Mbewe and has not given any reason for doing so," Charles Matabwa, the chief secretary for the civil service, told state radio according to Reuters.

During Ngalande's four-year term at the bank, interest rates fell to 25% from 45% and inflation now stands at 13.7% from around 32% in 2000.

Armenian central bank chief re-appointed
The Armenian parliament has endorsed the re-appointment of Tigran Sargsyan as chairman of the Central Bank of Armenia, Mediamax news agency reported on Wednesday 2 March.


– but not for Thailand

Bank of Thailand governor M.R. Pridiyathorn Devakula said that he had not been affected by rumours of his possible ousting from the central bank:
“Such rumours have never shaken my determination. What I want now is to just perform the duty most candidly and to my best for the interest of the country. That’s all I need."
He shrugged off suggestions that the government wanted to get rid him due to the central bank’s recent inspection of the state-run Krung Thai Bank, KAZINFORM said.
The central bank chief also refuted allegations that his monthly salary was as high as Bt2 million. In fact, he said, he received Bt320,000, the sum received by several of his predecessors.

Interview with Bank of Canada’s Tiff Macklem
Bank of Canada Deputy Governor Tiff Macklem said Canada's economy may take two or three years to adjust to a currency that rose more than 20% since early 2003 and “there is probably some more adjustment to go.”


- and Tuma stays

The president of the Czech Republic, Václav Klaus, has confirmed that the reforming central bank leader, Zdenìk Tùma, will remain central bank governor for a further six-year term.

Sri Lanka's Sunil Mendis plans new strategy


In a speech given on January 29 (published 11 Feb) Sunil Mendis of the Central Bank of Sri Lanka said the strategic plan of a central bank should be formulated in such a way that it strategically links its goals, objectives and action plans to the primary tasks of conducting monetary policy and attaining financial stability.
“Like any other corporate entity, the central bank also has a mission of achieving a long term objective, that is, macro economic development through maintaining price stability and ensuring the financial system stability. In this context, strategic planning plays a very important role in assisting the central banks to effectively and efficiently utilise the limited resources at their disposal to achieve such objectives and accomplish the given tasks. However, the successful implementation of strategic plan will mainly depend on the legal framework governing a central bank, which provides for its independence, accountability and transparency.
“Indeed, in recent times, especially in the aftermath of Asian crisis in late 1990s, we have seen several countries amending the laws governing their central banks. Such amendments have given them greater independence in the conduct of monetary policy. The current world trends have required the central banks to be transparent and accountable. This would be attained by ensuring a greater disclosure policy on their decisions.”

Click here to read the speech “Central bank governance and how such governance is related to strategic planning in central banks” on the BIS website:
http://www.bis.org/review/r050211c.pdf


What is the Asian Bellagio group?

It is a new group comprising academics and public sector officials from Asian countries. It is being put together largely by Takatoshi Ito, former deputy vice minister for international affairs at the Japanese Ministry of Finance and a principal architect of the Asian bond market. Although Ito is the primary mover behind the Asian Bellagio Group, it will include senior officials and academics from other influential East and South-East Asian countries. The central banks will be deeply involved. It is modelled on the Bellagio Group that was so influential under Professor Fritz Machlup during the agonising breakdown of the Bretton Woods system of fixed exchange rates in the 1960s and early 1970s. This group then paved the way intellectually for the move to flexible exchange rates but failed to make real progress on constructing a new international monetary order.

A key figure in the subsequent history of the Bellagio group was Professor Peter Kenen, who was Machlup’s successor at Princeton and himself retired recently. The current chairman is Professor Barry Eichengreen.
 
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