• July round-up
• Quaden safe
• Time to head for Frankfurt
• Mishkin - not a Bernanke clone
• Saccomanni to return to Banca d’Italia
• Last minute appointments criticised
• Osborne attacks Brown
• Besley and Sentence for UK’s MPC
• More leave the Fed
• Kohn confirmed
• Weak German team in Brussels
• Issing for the CFS….
• …and Pohl still euro-sceptic
• SWIFT gives financial data to US
• SPEED launch
• Europe’s clearing needs better governance
• Iraq keeps stability despite bombings
• …and so does Lebanon
• New governor for Spain -
• …for Sao Tome
• …for Sri Lanka
• …for Australia
• …for Mozambique
• … and for Iceland…
• Philippe Taqla dies
• US rules out gold to shore up Fund
• ..and European gold sales fall short

July round-up
- As expected, the ECB left rates on hold on 6 July. But it will take the highly unusually step of meeting in person on 3 August, rather than conduct the scheduled conference call. The ECB rate setters will still meet on the last day of August, when a regular governing council meeting is scheduled.

- The Bank of Japan raised interest rates for the first time since March 2001 at its monetary policy meeting on 14 July. The decision to end the zero interest rate policy (ZIRP) with a 25 basis point hike in the overnight rate was unanimous one. The central bank’s monthly report, released after the hike was announced, upgraded the assessment of the Japanese economy from “recovering” to “gradually expanding”. While that would indicate that the economic growth is accelerating, the monetary policy statement indicated that “very low interest rates will probably be maintained for some time”.

- The governor of the Bank of France, Christian Noyer, said on 18 July that the European Commission is “playing a very dangerous game” in attempting to break open the European credit card market. Noyer’s comments come at a time when the patience of European competition commissioner, Neelie Kroes, is running out with what she has termed “artificially high” interbank charges for credit card payments on the continent. “The commission’s draft law absolutely must be modified if we are to avoid this additional risk for Europe’s card payment systems,” Noyer warned.

- In delivering the Fed’s semi-annual monetary policy to Congress, Fed chairman, Ben Bernanke, adopted a “risk management” approach very much in keeping with his predecessor, Alan Greenspan. “We must consider not only what appears to be the most likely outcome but also the risks to that outlook and the costs that would be incurred should any of those risks be realised,” Bernanke explained. “At the same time, because economic forecasting is far from a precise science, we have no choice but to regard all our forecasts as provisional and subject to revision as the facts demand.”

- The Bank of England unveiled a revamped Financial Stability Report on 12 July. Starting with the title of publication (formerly the Financial Stability Review), the Bank has taken a new approach to both the presentation of report and its content. The changes are an effort to focus the report and make its findings more applicable.

- The Report identifies the “six main sources of vulnerability” to the UK financial system. They are: low risk-premia, global imbalances, rapid global corporate releveraging, high levels of indebtedness amongst UK households, the rise of large complex financial institutions, and overdependence on a small number of payments and settlement infrastructure providers.

- According to IMF data on reserve holdings released in July, pound sterling has surpassed the yen as the third most popular reserve currency. The pound’s share of global reserve holdings has risen from $103 bn at the end of 2005 to $115 bn at the end of the first quarter of 2006. Over the same period, the yen’s share fell slightly to $97 bn. The pound now accounts for just under 4% of total allocated reserves.

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Quaden safe

National Bank of Belgium governor Guy Quaden and his family had to be evacuated from Lebanon to escape Israeli’s bombing. Quaden had been in Lebanon for 10 days and had been joined for the holiday by his wife and two sons. Quaden, 60, had been on a business trip and stayed on for a family holiday. However, he was back in Brussels in good time to pop down to Frankfurt for the ECB board meeting…

Mishkin - not a Bernanke clone

Fred Mishkin, an economist at Columbia University in New York, who has been nominated to replace Roger Ferguson, has been described as a high-profile advocate of inflation targeting. Certainly, Mishkin’s arrival will strengthen Bernanke’s attempts to introduce a more transparent, rule-based approach to the Fed’s monetary policymaking as distinct from the Delphic utterances that characterised the old Greenspan era. The Fed could do with increased transparency, and a move to explicit inflation targeting seems more likely (Ferguson publicly expressed his reservations about an inflation-targetting mandate at the Fed).

Initial perceptions that their views were virtually identical may, however, be misplaced. It is true that in 1999 Bernanke and Mishkin co-authored (with Thomas Laubach and Adam Posen) a book called Inflation targeting: lessons from the international experience, which promoted the idea of a numeric inflation target in the US and outlined steps, such as a more transparent communication framework and a greater emphasis on forecasts, needed to make such a commitment credible. However Mishkin said in a letter released July 28 that he and Bernanke may have some differences on the issue:

"As my views, and I am sure (Bernanke's) have evolved since we wrote together on this topic, I would suspect that we would have our differences," Mishkin wrote in response to written questions from Senator Jim Bunning. Mishkin added that he hadn't spoken to Bernanke about inflation targeting since Bernanke became Fed Chairman in February.

Saccomanni to return to Banca d’Italia

Managing director of the Banca d’Italia, Vincenzo Desario, has retired early from his position, and is to be replaced by the highly respected and popular Fabrizio Saccomanni on October 2. Saccomanni is currently vice-chairman of the European Bank for Reconstruction and Development, and he is close to both prime minister Romano Prodi and finance minister Tommaso Padoa-Schioppa.

This is part of a general clearout of old wood. The other two members of the directorate left over from the time of the disgraced former governor Antonio Fazio's era, Pierluigi Ciocca and Antonio Finocchiario, will depart next February and in April 2009, when their respective mandates expire, unless they also are asked to step down early.

This is part of the changes taking place following the new banking law passed in Italy towards the end of last year. One of the new measures provides for the directorate increasing from four to five members: alongside the governor and managing director there will now be three, rather than two, deputy managing directors. It is hoped that this should allow decisions to be taken more quickly and in a more transparent manner.

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Last minute appointments criticised

Late in June, Bank of England governor Mervyn King strongly criticised the way members are appointed to the MPC by Chancellor of the Exchequer Gordon Brown.

King told a parliamentary select committee that his criticism centred on the "very much last minute" nature of appointments, adding that he would be prefer a process which is "slightly more systematic".

"It's the timeliness, it's not the people or how the process works in essence. It's trying to find a mechanism here for ensuring that decisions are taken in a timely way," said King.

This is not new. Newsmakers readers will be aware that Brown is well known for delaying appointments – he humiliated Eddie George by leaving it to the last minute to confirm his reappointment for a second term and he often holds up appointments to the MPC.

In fact, as any of the past four governors of the Bank will tell you, the UK Treasury has a long record of treating the Old Lady shabbily. It is all designed to show who is boss. Quite puerile, really.

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Besley and Sentence for UK’s MPC

However, Gordon Brown belatedly brought the MPC was back to full strength on 13 July when he appointed Timothy Besley and Andrew Sentence, although Besley will not start until 1 September and Sentance will join the MPC on 1 October.

Besley is a professor at the London School of Economics, and Sentence is British Airways chief economist. Two worthy appointments.

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More leave the Fed

The perception of a “Fed in flux” was strengthened by the departure of two more senior officials in June. First Mark Olson, who has served on the Fed’s board since December 2001, announced he would leave the central bank to chair the Public Company Accounting Oversight Board. Then, the president of the Federal Reserve Bank of Atlanta, Jack Guynn - a Fed veteran of 42 years - announced that he too will retire in October. The latest departures bring to seven the number of personnel changes among top Fed officials this year.

Kohn confirmed

Donald Kohn has been confirmed as vice chairman of the Board of Governors. Kohn is also to be Chairman of the Basel Committee on the Global Financial System (CGFS) for a term of three years starting on 1 July 2006. He succeeds Roger Ferguson, who relinquished the CGFS chairmanship after resigning in April 2006 as vice chairman of the Fed. Kohn has been a governor since 2002.

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Weak German team in Brussels

Soon after failing to win the World Cup, Germans started moaning about their poor team in Brussels. Very few Germans have made it recently to the top of the European Commission. For instance, Alexander Schaub, head of the Commission’s internal market department, retired at the beginning of July but no German successor has been found, although there are rumours that Gerd Hausler who will be leaving the IMF shortly is considered a possible replacement for Schaub.

More vacancies will become available soon but Germany’s position is weak. Even now, fewer Germans than French, Belgians, Brits or Spaniards are in top and middle positions at the European Commission. The only Germans at the director-general level are Mathias Ruete, Klaus Regling, Nikolaus van der Pas, Walter Deffaa, Franz Bruner and Roland Schinkel.

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Issing for the CFS….

Ottmar Issing has become president of the Frankfurt-based Center for Financial Studies (CFS), an independent research institute affiliated to the University of Frankfurt. The former ECB executive board member has succeeded former Bundesbank president (1980–1991) Karl Otto Pohl who has held this office for ten years. Issing has been an active member of the CFS since 2000. In the last eight years, he has met with critics at the “ECB and its Watchers” conferences organized by the CFS.

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…and Pohl still euro-sceptic

At a CFS panel discussion, Pohl said he is not yet convinced that the euro will be a success. According to him, some tensions are likely to emerge as the movement to political union is not moving forward and economic imbalances between euro-countries are growing. Pohl is worried about the fragile construction of the eurosystem. While being more positive on the euro than Pohl, Issing also expressed concerns about the political environment. He stressed the necessity to meet the criteria of the stability and growth pact.

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SWIFT gives financial data to US

The New York Times published a story on 22 June detailing how US anti-terrorism had secretly been given access to selected elements of the databases of the international financial messaging group, SWIFT. The databases contain personal information such as the names, branch and account numbers of individuals transferring money internationally, which the US administration says allows it to track transactions between terrorist cells. The US administration strongly criticised the Times for publishing the story.

The incident exposed the lack of clarity over the application of privacy and confidentiality laws to critical components of the international financial infrastructure, and who should enforce compliance other than the boards of the institutions concerned.

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Europe’s clearing needs better governance

David Hardy’s resignation as chief executive of LCH.Clearnet raised some fundamental questions about the European clearing infrastructure. Hardy’s resignation ends a 19-year career with the London Clearing House (LCH), which merged with Clearnet in 2003 to form LCH.Clearnet. The final straw in what were increasingly strained relations between Hardy and the board appears to have been the failure of a project aimed at improving LCH.Clearnet’s IT platform.

But the problems are more deep-seated. At the time of the merger it was argued that the creation of an integrated pan-European clearer would bring down costs and improve organisational efficiency. Three years later, many disgruntled users are wondering what has become of these promises.

Euronext, which is the majority shareholder in LCH.Clearnet, has no incentive to push for a cheaper and more efficiently-run clearing service provider. In fact, it is happy to see LCH.Clearnet make money, while its users are not sufficiently represented in the board to insist on change. Reducing the dominance of exchanges in the ownership of Europe’s clearing service looks to be an essential step towards the goal of an efficient and integrated European clearing system.

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Iraq keeps stability despite bombings

A bomb exploded near Iraq's central bank in central Baghdad on 10 July, killing several people. Police said the bomb had been planted outside a restaurant in Rasheed Street, a busy commercial area and the main artery of old downtown Baghdad. There were unconfirmed reports that the attack was carried out by a suicide bomber.
Sinan Shabibi, the governor of the central bank, said that solid progress was being made in reforming the country’s financial sector despite ongoing disruptions and that enough reserves existed to defend the currency. "I can say that we are succeeding in maintaining a stable financial situation in Iraq," he was quoted by Reuters as saying at the Arab Economic Forum in Beirut. "This level of reserves is helping us keep the currency exchange rate stable." Shabibi said.

The central bank chief also said Iraq was on track in its financial reforms, including transformation of the banking system "from one depending on cash to a system depending on credit."

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…and so does Lebanon

Lebanon's currency is stable and its banks' reserves remain liquid despite the ongoing Israeli bombing campaign, the central bank governor told the FT on 24 July.

Amid concern that banks were not allowing withdrawals of dollars, Riad Salameh said that the US currency was "going to be brought in by sea with international agreement, under US protection."

Salameh told the FT that the central bank was committed to the stability of the Lebanese lira and would maintain the confidence of the financial markets.

Israel's bombing campaign found Lebanon in a relatively strong economic position, with a "historically high level of foreign reserves and foreign holdings.”

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New governor for Spain -

As reported in last month’s Newsmakers, Spain's finance minister, Pedro Solbes, has proposed Miguel Angel Fernandez Ordonez as the new governor of the Bank of Spain. Ordóñez, currently a secretary of State in the Treasury, would take over from Jaime Caruana when Caruana's six-year term ends on 11 July and he leaves to go to his new job in Washington.

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…for Sao Tome

The government of Sao Tome and Principe has dismissed governor Maria do Carmo Silveira, a former prime minister of the country, because of alleged irregularities detected in the construction work of the new central bank building, valued at US$8 million, a statement from Sao Tome’s cabinet said. The new governor, Arlindo Carvalho, kicked his term off by saying he will give priority to increasing corporate confidence and obtaining debt relief. He also wants to introduce a new payment system.

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…for Sri Lanka

Effective from Thursday 22 June Ajith Nivard Cabraal has became the new governor of the Central Bank of Sri Lanka. He was appointed by President Mahinda Rajapaksa to fill the vacancy left by the previous governor’s resignation. Nivard Cabraal, an accountant by profession, succeeds Sunil Mendis who relinquished his post recently for personal reasons.

"The Central Bank of Sri Lanka is an institution which operates with some independence," governor Ajith Nivard Cabraal said, addressing bank employees and invited guests on his appointment. "I know that we can protect this independence and go forward. Independence is not fighting with other people. Independence is to persuade others to our view point. If we know that we are correct we can put forward our argument and get together with them and go forward," he said in Sinhalese.

Sri Lanka's main opposition has called for a parliamentary select committee probe the appointment and the governor’s alleged relations with GoldQuest, a company whose activities have fallen foul of the country's anti-pyramiding laws.

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…for Australia

Treasurer Peter Costello has said he hopes outgoing Reserve Bank of Australia governor Ian Macfarlane will consider working with the government after he retires.

Macfarlane retires in September. Costello said Macfarlane had been an outstanding governor in whom he had great confidence.

"I hope that he can continue to serve Australia," Mr Costello told reporters.
Glenn Stevens, currently deputy governor, is expected to be named shortly as his successor. That is, when Costello can take enough time off from pursuing his own ambition to become prime minister.

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…for Mozambique

Ernesto Gove is to be the new governor of the Bank of Mozambique. Gove will replace Adriano Maleiane, who had been in the role for the last 15 years, Officials said. Gove had served as Maleiane's deputy and was given a five year term of office.

The central bank’s last major operation with Maleiane at the helm was a currency reform, under which three digits were knocked off the value of coins and bank notes.

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