NEWSMAKERS

• Mervyn King Joins The Barmy Army
• The Problem With Inflation Targeting In The Us
• International Payments Summit 2007
• Hartsink Admits Sepa Setback
• AVEZ-VOUS FFr500?
• Pboc Looks To Singapore
• Key Adviser Urges Wealth Fund For China
• HKMA's Yam defend's PEG
• Bernanke Wants Supervision
• Simor For Hungary?
• Jarai Charges Government With Incompetence
• Poland's Central Bank to be Purged?
• Euro Entry can wait
• Tuma Slams Euro Entry Rules
• Kozlov Murder Suspects Held
• Cathy Minehan To Retire
• Dick Fisher's Think Tank
• Orr Quits
• Chavez Threatens Central Bank
• Buba Balances Money And Growth
• How Many People?

Mervyn King Joins The Barmy Army
The venue for Mervyn King's final speech of 2006 caught Newsmakers' roving eye. Working right up until the last days before Christmas, the globetrotting governor chose to lecture on how to reform the IMF at the ..... Melbourne Centre for Financial Studies.

A long way to go to give a talk? You might think so but maybe not if you are an avid cricket fan, as the governor is, and if England is playing Australia in the same city a few days later.

So King joined the rest of the travelling "Barmy Army", as England 's fans are known, to be treated to a ghastly England performance. The heroes of summer 2005 were resoundingly trounced inside three of the five days possible for play. The sorry poms then sloped off to Sydney for another thrashing to allow the Aussies to complete a 5-0 whitewash.

So should we expect the governor to draw on his antipodean experience for his next sporting analogy?

Perhaps an opportunity will come along if he has to write a letter to Gordon Brown, the UK chancellor of the exchequer, explaining why he has failed to keep inflation down below its target ceiling: we fielded our best team, but were defeated by superior forces, dropped catches, didn't keep our eye on the ball, etc etc.

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The Problem With Inflation Targeting In The Us

Despite all the talk of Ben Bernanke getting the Federal Reserve to adopt a specific inflation target, this has always seemed unlikely. One reason is clearly explained by the veteran Fed watcher John Berry in a recent article (Bloomberg, 5 January).

Asked about that possibility after a speech at the National Press Club on 3 January, Barney Frank, the incoming chairman of the House Financial Services Committee, said "There are people who have been arguing that the Fed should have its mandate changed. That's not going to happen when we are in power."

An explicit inflation target is often seen by its advocates as a way of getting across to the general public a central bank's main objective.

Nevertheless, Congress is not about to change the provision of the Federal Reserve Act that specifies the Fed should seek "to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."

The Federal Reserve fully accepts those responsibilities, as was spelled out as recently as the minutes of an FOMC meeting on 24-25 October. The pros and cons of adopting an inflation target were discussed at that meeting. There is no problem in economic theory:

"Participants stressed that any such step had to be consistent with the statutory objectives for monetary policy" the minutes said. "In that regard, it was noted that over time price stability is a prerequisite for maximum employment and moderate long-term interest rates."

The real problem is political. Having a numerical, rather than a qualitative, inflation goal -- and no similar goal for employment or unemployment -- could easily give the impression that keeping inflation low is seen as more important than keeping employment high.

In other words, an explicit inflation target could be represented to amount to a change of mandate even if that was not the case.

Hartsink Admits Sepa Setback

Europe's banks can no longer commit to providing the new SEPA direct debit on 1 January 2008, revealed Gerard Hartsink, chair of the European Payments Council, in an exclusive interview in the Winter issue of SPEED, the new payments journal, published last week. The announcement is a blow to the plans of Europe's policymakers who had hoped to move most euro payments to SEPA products in a two-year timeframe.

"We cannot continue to promise 1 January 2008 for direct debits" he said, adding that while banks had done their bit, in specifying how the direct debits will work, but Europe's lawmakers have failed to pass the Payment Services Directive (PSD), which provides the legal framework underpinning SEPA, in time. Existing national laws will work for cards and credit transfers, says Mr Hartsink, but not for direct debits:

"The problem is for direct debits. Although many banks will be ready, we don't have the legal certainty of an agreed Payment Services Directive (PSD)" he said. "The direct debit instrument is unmanageable from a corporate point of view if de facto the rules of the game are different."

The idea behind SEPA (the Single Euro Payments Area) is that payments can be made and received in euro, across Europe , under the same basic conditions, rights and obligations, regardless of their location. Direct debits have risen in use in Europe and according to European Central Bank data, the euro area made 13.44bn direct debit transactions in 2004, which represented 29% of non-cash transactions.

Ironically, the delay in passing the directive, which it had been hoped would be finalised by end-2006, is due to disagreements over issues unrelated to direct debits, he says. However, given the work needed to pass the directive, a nine-month delay is now the best that can be hoped for.

AVEZ-VOUS FFr500?

It may be worth looking in that jar of foreign coins and banknotes again. Come the end of February the Banque de France will no longer change its Pascal 500 franc note for euros. There were still 2.7 million of these notes floating around in September last year the central bank says worth a cool - 208m.

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Pboc Looks To Singapore

China could manage its massive foreign exchange reserves according to the “Temasek modelâ€_ of Singapore , according to Wu Xiaoling, vice-president of the People's Bank of China.

"China is likely to set up a special investment company with the government holding the majority stake," Wu told the Beijing Morning Post.

Temasek Holdings is wholly-owned by Singapore 's Ministry of Finance and the company's global investment reaps an average annual return of 18%. A delegation headed by Li Rongrong, chairman of the state-owned Assets Supervision and Administration Commission, visited Temasek's headquarters last month.

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HKMA's Yam defend's PEG

At a time when talk about Hong Kong abandoning its dollar peg in favour of pegging to a basket -- or even pegging to the Chinese renminbi -- has surfaced again, the chief executive of Hong Kong Monetary Authority, Joseph Yam, has insisted it is important to maintain the fixed rate to the US dollar to safeguard financial stability. Well, he would say that, wouldn't he?

What has prompted renewed questioning about Hong Kong's exchange rate system is the recent weakness of the US dollar and strength of the Chinese currency which has risen to reach parity, or close to it, with Hong Kong's dollar. However, a move to peg to the Chinese currency would make the Hong Kong dollar the focus of speculation on the future of the renminbi, and seems unlikely at present.

But if the US dollar were to fall steeply over a long period, one can imagine Hong Kong reverting to an informal link to the mother country's currency - it has had such a regime before - and that would in turn greatly boost China's international financial clout.

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Bernanke Wants Supervision

Following a path well trodden by his predecessors, the Federal Reserve chairman, Ben Bernanke, has set his face against suggestions that banking regulation in the US should be given to a single unified supervisor on the lines of the UK's FSA.

In a speech to an economic conference in Chicago , Bernanke argued last week that the United States gets significant benefits in having its central bank also involved in regulating banks.

"The supervisory authority of the Fed has significant collateral benefits in helping it carry out its responsibilities for financial stability" Bernanke said.

Bernanke pointedly noted that the institution was created to allow the government to cope better with banking problems.

"The Fed was founded in 1913 largely in response to the periodic episodes of banking panics and other forms of financial instability that had plagued the US economy during the 19th and early 20th centuries," he said.

Simor For Hungary?

The chief of the Hungarian arm of auditing and consulting group Deloitte, Andras Simor, has been tipped to become the new governor of Hungary 's central bank. The current governor, Zsigmond Jarai, will end his six-year-tenure in March. Jarai has been a fierce critic of the government's economic policy.

Jarai was appointed to the post in 2001 while the current opposition party, Fidesz, was in power. He served as finance minister prior to the posting.
The daily Nepszabadsag claimed that Simor is likely to be named as candidate within the next few days. Simor has some credibility. He has worked in the central bank in the past and he made a good impression on the prime minister while serving on the Convergence Council, which was set up last year to look at Hungary 's euro convergence programme.

Prior to his present position he spent four years as the chairman of the Budapest Stock Exchange. His previous experience also includes being the chairman of CA IB Investmentbank A.G., Vienna , where he merged two investment banks. From 1989 to 1997 Simor served as the CEO at Creditanstalt Securities Ltd., Budapest and built the company into a market leader.

Earlier he worked at the international department of the National Bank of Hungary , and at the Hungarian International Bank Ltd. in London . Simor studied international finance at the Budapest University of Economics.

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Jarai Charges Government With Incompetence
"Companies should not calculate on the euro in their mid-term plans" Jarai added. Hungary will be in a worse position in coming years than its neighbours, he said, referring to Slovenia and Slovakia, who looks set to join the euro in 2008 or 2009.

Jarai stated that Hungary has reached a point at which bad state management has become a burden on the country's economy. The misguided economic policy and poor state administration characteristic of recent years will continue to undermine Hungary's economy for some time to come, he concluded.

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Poland'a Central Bank to be Purged?
Slawomir Skrzypek's appointment as the next head of the National Bank of Poland has come in for sharp public criticism due to his apparent lack of appropriate qualifications and his close links to Poland's president, Lech Kaczynski. It also prompted a sharp fall in the value of the zloty.

Anybody would have a hard task following in the heels of Balcerovicz, one of the most outstanding leaders of the transition from communism to a market economy.

Balcerowicz commented that as he was unfamiliar with the Skrzypek's writings he was unable to assess his qualifications, but pointed out acidly that in other EU countries central bank chiefs are usually central bank officials, former finance ministers, or distinguished economists.

Skrzypek, previously acting president of PKO BP, a state-owned bank, was deputy mayor of Warsaw , in charge of finance, from 2002 to 2006, when Kaczynski was mayor. He is a graduate of University of Technology in Gliwice and earned a degree in economics at the Warsaw School of Economics. He completed an MBA programme at University of Wisconsin - La Crosse as well as business management studies at Georgetown University .

His main effort at his previous jobs seems to have been directed at purging the institutions of employees with any links to the former communist regime or any other regime before the present rule by the brothers Kaczynski. At PKO BP, in which the Polish Treasury holds a majority stake, as soon as he became CEO in 2005, he dismissed nearly 70 directors and deputy directors. They were replaced by candidates supported by the ruling camp, despite the fact that many apparently had no experience in banking.

The only qualification, it seems, of many of them was to have worked with Skrzypek at the Warsaw city hall; others were proposed by PiS (Law and Justice Party) coalition partners. Will PiS now get to infiltrate the central bank itself?

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Euro Entry can wait

While Balcerowicz has said the government should cut spending to adopt the euro as soon as possible, Skrzypek said euro adoption can wait.

"As long as there is no profound analysis of advantages and disadvantages, Poland should not set any time for joining the euro zone,'' Skrzypek said during Jan. 8 testimony before a parliamentary committee.

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Tuma Slams Euro Entry Rules

The Czech central bank governor, Zdenek Tuma, has argued strongly that the conditions for new member states to join the euro are outdated and should be overhauled.

The 1992 Maastricht treaty requires countries joining the euro to comply with a set of convergence criteria, including two years' membership of the ERM2 exchange rate system.

"Back then, these rules might have been perfectly legitimate, but today they are outdated and counter-productive"Tuma said in an article in the FT.

"Setting the inflation criterion in relative terms -- against the three best performers in the EU -- was an appropriate option ten years ago. But today we have another firm anchor: the single currency and the definition of price stability applied by the ECB" he said.

Last autumn the Czech government dropped plans to adopt the euro in 2010, noting an outlook for widening budget deficits and rising inflation. The cabinet, which set no new date, said it wants to design a new euro-adoption strategy by July next year.

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Cathy Minehan To Retire

Boston Federal Reserve Bank President and FOMC member Cathy Minehan is to retire this year after 13 years in the post and a long career in the Federal Reserve System. Minehan will continue in office and in her FOMC seat until a replacement has been named. As she turns 60 this year, her aim is to diversify and broaden her career.

Minehan is married to Gerald Corrigan, the gravel-voiced former president of the New York Fed. Her salary in 2005 was $355,600, and as Gerry has for many years been a managing director of Goldman Sachs, the couple aren't short of petty cash to pay the gas bills.

Minehan is currently the Fed's third longest-serving policy maker, after Gary Stern, head of the Minneapolis Fed since 1985, and Thomas Hoenig, who became the Kansas City Fed president in 1991.

So yet another vacancy opens up at the US central bank. Chicago Fed President Michael Moskow retires in August, and the Atlanta Fed is still without a president following the retirement of Jack Guynn. The Fed Board of Governors also has one vacancy.

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Dick Fisher's Think Tank

It is very good to see Richard Fisher keeping up his interest in and sponsorship of economic think tanks in his capacity as president of the Federal Reserve Bank of Dallas . Dick started his career as an assistant to the legendary economic statesman Robert Roosa, then a partner at Brown Brothers and active in building many non-profit institutions, and now is in the fortunate position of being able to set up one himself. This one will study the globalization of financial markets and the implications for monetary policy.

The institute is attracting some big names to serve on its advisory board, including Otmar Issing, former chief economist of the ECB, Charles Bean, chief economist at the Bank of England, Kenneth Rogoff, former IMF chief economist, Martin Feldstein of Harvard University , 2004 Nobel prize winner Finn Kidland and former U.S. Treasury Under Secretary John Taylor.

Readers of Newsmakers are invited to apply for the post of director.

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Orr Quits

Reserve Bank of New Zealand deputy governor and head of financial stability Adrian Orr is leaving the bank to take up the role of chief executive of the guardians of the New Zealand Superannuation Fund.

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Chavez Threatens Central Bank

To push forward his "socialist revolution," President Chavez of Venezuela , installened last week for another term in office, has pleged to remove the independence of the Central Bank of Venezuela (BCV).

''The Central Bank of Venezuela shouldn't be autonomous,'' he said, arguing that autonomy has allowed the bank to maintain reserves in foreign countries and bolster a "neoliberal model.''

Central bank director Domingo Maza Zavala retorted that a central bank with no autonomy was "unthinkable." True, autonomy does not imply autarchy and the central bank as an agency of the Venezuelan State should cooperate with other government bodies, he said. "BCV manages and complies with the relation between the Venezuelan State and the (International) Monetary Fund, because it is a member of the fund. However, if the government resolves to break ties with the Monetary Fund, BCV ought to back this measure."

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Buba Balances Money And Growth

August will see 50th anniversary of the venerable Bundesbank, that bastion of hard-money monetary policy and anchor of the country's post-war economic miracle. Germany's central bank plans to celebrate by minting a special silver ten-euro coin, the obverse of which features a pair of scales balancing images of money (in the form of good old gold bars) and trade or industry, symbolising the central bank's outlook.

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How Many People?

"About half I think" is a quip attributed to an erstwhile central banker when asked a few years ago how many people work at the Bundesbank. Now the central bank has set out its plans for a restructuring aiming to cut staff , which peaked at 17,000 following re-unification in 1991, to 10,300 by the end of 2010. Just over 11,800 work there now, which is a 30% reduction from 1991. The board too is in for a spot of pruning if the Frankfurter Allgemeine Zeitung is to be believed. The German paper reported at the weekend that a plan to cut the number of members from eight to six could be approved by the government in as little as two weeks.

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