• Speculation on Krueger’s successor
• Stephen Roach turns bullish – markets crash?
• Currency adjustments so far had been smooth:
• UK Financial stability – Who’s responsible?
• Most irritating
• Otmar Issing’s 70th
• Weber defends monetary pillar
• Draghi to chair FSF
• Padoa-Schioppa to “save Italy”
• - and EMU
• Matti Vanhala remembered
• Bernanke on inflation “target”
• - and finds gold price “puzzling”
• So what is happening to gold?
• King Hails IMF’s mandate
• Prince says Europe “uninviting” to a global bank
• Riksbank cuts dollar reserves
• BOJ travel expenses hitch
• Legal adviser for Bank of England
• Sarbanov acquitted
• UK money market reforms
• Why Australians devour news on central banking
• STEPHEN LONG: So why is our media so fixated on the dismal science?

Speculation on Krueger’s successor

Anne Krueger, first deputy managing director of the International Monetary Fund, is to leave the Fund at end of her term on 31 August. Now attention will turn to her successor. Given the determination of the Fund’s MD Roderigo de Rato to reform the institution, his or her main qualification must be an intimate knowledge and understanding of financial markets and the way financial influences have come to dominate so many key policy decisions, and the dynamics involved. Krueger was an outstanding trade economist, but she did not have a deep understanding or sympathy with finance, capital and banking. Many observers feel that one of the most well-qualified successors would by John Lipsky, JPMorgan Chase’s chief economist, and editor of its World Financial Markets and Global Issues publications. He started his career at the IMF (1974-84) before joining Salomon Brothers where he was chief economist from 1992 to 1997. The other name in the frame is Ken Rogoff, who apart from his skills as an outstanding economist would bring a sense of humour to this bureaucratic role and a gift for the memorable one-liner.

The senior deputy managing director is an American – that is one convention that certainly won’t change in the “new” IMF everybody is talking about. Since the post was created it has been filled by two top economists – Stanley Fischer, now governor of the Bank of Israel, and Anne Krueger. Maybe it is time for an economist with market experience.

The procedure is that the managing director has to consult with the board (representing constituencies and national governments) about the appropriate qualifications and profile of the candidate, but he then makes the actual decision on who to appoint.

page top^

Stephen Roach turns bullish – markets crash?

I’ve been wringing my hands over the mounting global imbalances for longer than I care to remember,” said Stephen Roach of Morgan Stanley in a comment to clients last weekend. But now he is more cheerful. "I must confess that I am now feeling better about the prognosis for the world economy for the first time in ages."

The turning point for Roach, who has for years warned against impending disaster, was the new mandate given to the IMF to help resolve global imbalances:

“The world is finally taking its medicine - or at least considering the possibility of doing so. The risk is that this is so far only on paper, but it’s a critically important first step.”

UK Financial stability – Who’s responsible?

Sir John Gieve, the incoming deputy governor of the Bank of England, is responsible for that part of the Bank’s work to do with overseeing the UK’s financial stability, and will be trotting off to Basel regularly to chat to his new colleagues on the Financial Stability Forum. But the Bank itself is no longer “responsible” for financial stability. Let us explain.

In March, the UK Treasury, Bank of England and Financial Services Authority issued an updated memorandum of understanding about who does what in the area of financial stability. The original agreement was forged in 1997 as banking supervision was spun off from the bank to the new standalone regulator. The new one was drawn up by Sir John’s old pals at the Treasury, just in time for his arrival in the City.

Stifling a collective yawn, the UK financial press managed to contain its excitement at this item of news. One reason, perhaps, was that the press release avoided any detailed comparison of old and new versions of the MoU. In addition, electronic copies of the 1997 agreement, which might have allowed hacks to compare versions themselves, became suddenly strangely unavailable. Although Newsmakers is the last to suspect conspiracies, shall we just say that document management policies were suddenly working very efficiently.

Recourse to the dusty archives of Central Banking Publications however yielded a dog-eared copy of the old MOU. Comparisons revealed that one of the most important elements in the official mandate of the Bank of England had been completely overturned. In 1997 these were summarised in the first section of the MoU thus:
"The Bank will be responsible for the overall stability of the financial system as a whole".

Under the equivalent section of the new agreement the Bank merely "contributes to the maintenance of the stability of the financial system as a whole". Which begs the question: who now bears the "overall" responsibility which the Bank has sloughed off? As usual, everybody and nobody.

Some former BOE employees mutter that Mervyn King has never had much time for financial stability work, but in truth no central bank has been able clearly to define what are its “deliverables” in this area. It was only because Eddie George kicked up such a fuss at having supervision taken away from the BOE in 1997 that the words about it having “overall responsibility” were inserted – giving a hostage to fortune because the Bank simply does not have the resources to ensure or promise financial stability, whatever that means. And neither does any other central bank.
 

Most irritating

By the way, “I take full responsibility” must surely rank as currently the most irritating and sickening sentence in the English language. You know as soon as you hear a minister saying that they take “full responsibility” that they are in fact not going to take any. Scandals come and go, but the scoundrels always try to hang on, though some are eventually forced out. Mercifully you don’t often hear a central banker saying he takes “full responsibility”, do you?

So John Gieve will not be expected to take “full responsibility” for the financial stability of the UK banking system. All he has to do is to figure out how he can “contribute” to it: “I take full responsibility for my important but immeasurable contribution to….”?

page top^

Otmar Issing’s 70th

Last week Bundesbank president Axel Weber gave a talk at Wurzburg University on the occasion of the celebration of the 70th birthday of Otmar Issing, ECB board member and professor at Wurzburg University. In fact, Issing's birthday was already on 27 March but the party was postponed. Weber spoke on the subject of "Independent Monetary Policy in Europe: The First Seven Years". Weber compared the independence of the European System of Central Banks (ESCB) with that of the Deutsche Bundesbank. He concluded that the safeguarding of the ESCB's independence was “much more comprehensive” than the legendary independence of Bundesbank. The Bundesbank law was actually comparatively easy to change. However, because of Germany’s “distinctive culture of price stability” it was able time and again to defend its independence.

page top^

Draghi to chair FSF

Following consultations within the Financial Stability Forum's (FSF) membership, the G7 finance ministers and central bank governors confirmed their support for the designation of Mario Draghi, governor of the bank of Italy, as Chairman of the FSF. He will succeed Roger W. Ferguson, Jr, who has been the FSF's Chairman since May 2003, when he steps down at the end of April.

page top^

Padoa-Schioppa to “save Italy”

Romano Prodi has picked former European Central Bank board member Tommaso Padoa-Schioppa as economy minister, enabling Tommaso to leapfrog neatly over what had been scheduled as his next pit stop at the Via Nazionale. Prodi says that Padoa-Schioppa’s experience and international standing will help him to “relaunch Italy”. His plans will certainly be ambitious. He believes that while coalitions need to stick together to gain power, once in office their agenda can be “almost limitless”. The big challenge will be to find a compromise with the communists.

- and EMU

On gold reserves, Noyer is not yet talking about buying back the gold he is selling despite saying Europe needs big reserves. Instead, he is recommending that euro zone central banks and regimes look at the French arrangement for managing the profit from gold sales. The French procedure requires that the profit realized from gold sales remains with the Bank of France in order to offset currency losses. Changes in the procedure need the signatures of the finance minister and the governor, he noted, making alterations difficult.

Actually, the Germans did look at that. And some say the Bundesbank would have accepted the Noyer solution and acquiesced in the government’s desire to sell some gold under the European gold agreement. But that would have required a change in the law in Germany. Apparently the German government wanted to use this proposed legal change to push the Bundesbank into investing the proceeds in more risky assets so as to raise the yield on their currency investments (the profits go to the government), as well as selling gold. The Bundesbank dug in its toes and decided not to sell any gold for yet another year.

page top^

Matti Vanhala remembered

The speech at the unveiling of a portrait of Matti Vanhala was given by Erkki Liikanen, the Governor of the Bank of Finland. Matti Vanhala held the post from 1998 until his untimely death from cancer in 2004. The occasion was attended by Mr Vanhala's widow, Liisa Vanhala, and other close relatives. The guest-list also included Mauno Koivisto, a former governor now aged 83, who later became president of Finland from 1982 to 1994, the portrait artist Markku Kolehmainen, former governor of the Bank of Finland Rolf Kullberg as well as Ele Alenius, Harri Holkeri, Esko Ollila and Markku Puntila – all past members of the board of the Bank of Finland.

page top^

Bernanke on inflation “target”

At a time when many central banks are still concerned about what is the most useful definition of inflation to focus on, Bernanke has made clear that the Fed looks to maintain stability in overall prices, and not core prices excluding food and energy. This accords with the general trend among central banks who target inflation - which the Fed does not – at least not yet. Several have switched from targeting core to targeting headline inflation, for ease of communication with the public.

page top^

- and finds gold price “puzzling”

In response to questions from the Congressional Joint Economic Committee, Bernanke said the Fed and other leading central banks had done a better job keeping inflation under control. He added that the higher gold prices were a "puzzle" since other indicators of future inflation such as the spread between nominal and inflation-linked securities suggest that expectations remain generally contained.

page top^

So what is happening to gold?

At $665 an ounce as this edition of Newsmakers goes to subscribers, the gold price continues its remarkable ascent - or, if you prefer to look at it another way, the dollar (and other currencies) continue their plunge against gold. In the long run, gold tends to keep fairly closely to its real purchasing power value, in all currencies (though fluctuating widely around it over periods of up to 30 years). Thus gold contains an embedded benchmark against which to measure its current value. Other currencies, commodities and assets lack any such benchmark. Depending on how you measure its long term real value, its current price in dollars is probably at about that long-term level or somewhat above it (having been miles below it for the past ten years).

So while gold is no longer a bargain, and is certainly vulnerable to a correction, it can probably continue to attract long-term investors as well as bandwagon, speculative funds. Market rumours suggest that among those sniffing around the market now are several central banks and sovereign investment funds. Better late than never; central banks have after all seen their dollar reserves halve in value against gold. The risk for the system would come if a number of sizeable countries all tried to purchase gold at the same time. Then Bernanke would really have something to worry about.

page top^

Prince says Europe “uninviting” to a global bank

At a discussion organised by the London School of Economics last week, Karel Lannoo of the Centre for European Policy Studies talked about the transformation of the European financial system. He cited the recent case of Citigroup, whose ban on new acquisitions, imposed by the Federal Reserve after regulatory problems in Japan and Europe, was recently lifted. But Charles Prince, CEO of Citigroup, has maintained that Western Europe was “uninviting” to a big bank looking to expand due to its “Balkanised” regulatory regimes. Subsequent discussion suggested nobody thought that this Balkanisation would end any time soon. So presumably big non-EU banks will look elsewhere for their future expansion.

page top^

Riksbank cuts dollar reserves

The Swedish Riksbank dropped a bit of a bombshell on international currency markets on Friday 21 April by announcing a big cut in the share of dollars and yen in its foreign reserves portfolio.

The Riksbank said it had cut the share of dollars in its reserves from 37% to 20%. It also revealed it had sold off all its yen-holdings, which previously amounted to 8% of the central bank’s reserves portfolio. These reductions were balanced by increases in euro-holdings from 37% to 50%, and a new Norwegian krone position of 10%. There were also slight reductions in the central bank’s sterling share (from 11% to 10%), as well as small increases in the holding of Australian (3% to 5%) and Canadian dollars (4% to 5%).

The Riksbank said the changes were made “within the framework of the new regulations for asset management that came into force at the beginning of the year”. The rules state that the objective of the Riksbank’s financial asset management is to generate a good long-term risk-adjusted return without compromising the central bank’s ability to carry out its statutory tasks related to monetary and exchange rate policy and the stability of the financial system.

“The purpose of the reallocation has been to reduce the effect of exchange rate fluctuations on the foreign currency reserve’s annual result measured in Swedish kronor. The choice of currency allocation is based on the currencies’ fluctuations and variations in relation to one another over a longer period of time”, the central bank said in a statement. The Bank of Finland then announced that it too was altering the composition of its financial assets, eliminating Swedish Krona and Danish Krone in favour of euros. The Swiss National bank is another central bank to have greatly reduced its dollar ratio in recent years. Official diversification away from the dollar is growing, but the big Asian central banks have yet to show their hand.

page top^

BOJ travel expenses hitch

The Bank of Japan has paid overstated amounts of domestic travel expenses claimed by some of its personnel and has been told by the Board of Audit of Japan to correct the problem, Jiji Press reported Thursday 20 April.

Following the independent audit, the BoJ has launched an emergency in-house investigation targeting some 2,000 employees at its head and branch offices, accounting for 40 percent of its total workforce, informed sources were quoted as saying.

The BoJ "takes seriously the fact that inappropriate payments have been made, and would like to deeply apologize for causing a public stir," Tomohisa Takeda, adviser to the governor for management strategy, budget and accounting, told reporters at the BoJ’s headquarters in Tokyo.

As for possible penalties against senior BOJ officials, Yoshiki Tanji, deputy director general of the personnel and corporate affairs department, was quoted as saying the central bank "will make an appropriate decision after making clear what really happened."

page top^

Legal adviser for Bank of England

Dame Juliet Wheldon is to be Chief Legal Adviser and Adviser to the Governor as from August 2006. She was previously the Treasury Solicitor and Head of the Government Legal Service. The position was held by Malcolm Glover until early 2005 and, since then, by Len Berkowitz, who agreed to return to the Bank temporarily until the role was filled on a permanent basis.

page top^

Sarbanov acquitted

On April 25, the Pervomai court of Bishkek delivered a verdict of not guilty to ex-chairman of the National Bank, Ulan Sarbanov; the former Kyrgyz Ambassador to Iran, Medet Sadyrkulov; the former Finance Minister, Sultan Mederov; the former head of the Treasury, Anarbek Satybaldiyev; and his deputy, Dinara Shaidiyeva.

Last April, Sarbanov was charged with authorising an allegedly illegal cash payment of $420,000 to a representative of the ministry of finance. The prosecution asked for Sarbanov, Mederov and Sadyrkulov to be sentenced to 12 years in prison and their property confiscated, but failed to prove their guilt. Many view the case against Sarbanov as a political manoeuvre. It was always clear that had made a big contribution to modernising the central bank and the Kyrgyz financial system, and had maintained the stability of the banking and financial system during the revolution that ousted the former dictator. The case has hurt the Kyrgyz Republic’s international reputation. The government could go a long way to repairing the damage by offering to re-instate Sarbanov to his rightful place as governor of the central bank.

The judge is reported to have said that none of the officials could have known how money passed to the ex-president, Askar Akayev would be used. The legal situation was that the former head of the National Bank could not refuse to fulfil a payment order from the government.

Ulan Sarbanov was reported by the BBS monitoring service as saying immediately after the case:

“I was worried. But I think that the judge was objective and unbiased. Although our country is criticized for the absence of law, I want to say that there was a rule of law here, and the judge…. I cannot analyse this, because I was listening to the judge's decision quite emotionally. Maybe, a bit later I will be able to think about it more clearly”.

page top^

UK money market reforms

As expected, the Bank of England has confirmed that it will introduce money-market reforms designed to reduce market volatility and implement interest rate decisions more effectively on May 18.

The reforms will involve a change to the way deposits held by banks and building societies with the central bank are calculated. The reforms 'represent a fundamental change in the way interest rate decisions made by the Monetary Policy Committee are channelled into the financial system, and in the framework within which banking system liquidity is managed.'

The reforms will modernise the nature of the market operations undertaken between the Bank of England and the banking system. For the first time in its history, the Bank will pay interest on balances held by the banks and building societies participating in the arrangements; banks will hold target balances with the Bank on average over a month rather than having to ‘square up’ every day; deposit and collateralised lending facilities will be widely available; and the Bank will move from daily to weekly open market operations.

page top^

Why Australians devour news on central banking

In a recent interview on YTV with reporter Stephen Long, Ian Macfarlane, governor of the Reserve Bank of Australia, revealed that the Reserve Bank conducted a mini survey about a year ago on media coverage of interest rate decisions. It added up the number of articles in three leading papers in Australia, the US and the UK on the day before, the day of, and the day after decisions to lift interest rates. In the United States there were 35 articles. In the United Kingdom there were 46 articles. In Australia there were 131 articles.

page top^

STEPHEN LONG: So why is our media so fixated on the dismal science?

IAN MACFARLANE: We don't have a royal family, not on our own soil at least, few earthquakes, our politicians do not have private lives as lurid as the British ones - I see the Deputy Prime Minister of the UK is keeping up the good work at the moment - or some recent US presidents. So instead our papers are taken up with the balance payments, statistics, national accounts, unemployment rates and budgets, and of course interest rates and monetary policy.

Macfarlane has many achievements to his credit but he has plainly failed one test - the Mervyn King test. He has failed to make monetary policy boring.

page top^