Tag Archives: ECB

Intuitu Personæ: Who Should Lead the ECB?

There’s quite a lot of talk recently about who should replace Jean-Claude Trichet as president of the European Central Bank. Sylvester Eijffinger and Edin Mujagic from Tilburg University say that a firm ECB president, unwilling to yield to political pressure, is needed. Jean Quatremer provides, as usual, a very detailed picture of the behind-the-curtain negotiations surrounding the nomination of the future president of the ECB.

Two things are important here. First, we should avoid at all cost a North-South polarization surrounding this issue. True, the ECB president is elected by qualified majority, but any trust in the eurozone that is still available will be lost if Member States start fighting over this post. Second, whoever is elected should be able to guarantee strong leadership. We certainly do not need an ECB president that divides instead of unifying the eurozone.

At a time of great peril there’s no room for experimenting. I do hope that all Member States, and France and Germany in particular, will not try to over-politicize this nomination. Otherwise consequences may become overwhelming, and history will apportion blame accordingly.



Trichet States the Obvious

The President of the ECB, Jean-Claude Trichet, has called for a “quasi-budget federation” in front of the Economic and Monetary Affairs Committee of the European Parliament. The “f” word, however, is ominously missing from the EP’s press release. Mr. Trichet went on to say that “pundits are tending to underestimate the determination of [EU] governments”.

The determination of EU to rescue the euro notwithstanding, things continue to look bad. The interest rate spread between Italian bonds and benchmark German Bunds have come to a euro-lifetime high. Belgian 10-year bonds spread to German bunds of similar maturity widened to the highest levels since at least 1993. In other words, markets are not buying the “determination” stunt, at least for now.

Hence Mr. Trichet’s comments. He is quite aware that in the long term the current institutional framework of the eurozone is NOT sustainable. Even if the ECB manages to calm the markets for the moment (which is by no means certain), new, more powerful crises may follow in the next decade, vastly undermining economic growth in the whole European Union.

So Mr. Trichet is doing two things. First, he is trying to calm the markets, which is a very sensible thing to do. Second, he is telling European politicians that the complacency on the eurozone institutional framework is no longer possible and discussions must start now. Now the question is are they listening?



EU to Greece: Show Us the Reforms

The European Union has asked Greece to produce detailed plans for its budget deficit reduction targets for the period 2010-2012. This should be done this week, in order for the European Commission and the ECB to provide an assessment to eurozone Member States, which must approve unilaterally the release of credit funds for Greece.

8.5 billion of Greek debt payments come due on 19 May. Now the question is whether the Greek government can produce a plan that is acceptable for the German Bundestag on time. Greek financial minister George Papaconstantinou has hinted on the opportunity of bridge loans if the procedure for release of financing is too slow. But many analysts think that debt restructuring (a polite form of bankruptcy) may be necessary.

Meanwhile the prominent American economist and Harvard Professor Kenneth Rogoff says that at least one more country in the eurozone will need help from the IMF over the next two to three years. Other problematic cases include Ireland, Spain and Portugal. Mr. Rogoff said that:

“A lot of countries have to consolidate their budgets and some may have to turn to the IMF for someone to blame”.

Wolfgang Münchau says that this is going to be “the most important week” in the 11-year history of Europe’s monetary union.

HLG on Financial Supervision: No Micro-Supervision for ECB

The High level Group on Financial Supervision in the EU has published its long-awaited report. The group is chaired by Jacques de Larosière, and includes Leszek Balcerowicz and Otmar Issing, among others.

The report first analyses the causes of the financial crisis. One of the main reasons in the report is that “very low US interest rates helped create a widespread housing bubble“.The report claims that “the credit expansion in the US was financed by massive capital inflows from the major emerging countries with external surpluses, notably China”.

The HLG believes that there have been fundamental failures in the assessment of risk, both by financial firms and by those who regulated and supervised them. The members of the group believe that insufficient attention was given to the liquidity of markets. An important point of the report is that regulators and supervisors focused on the micro-prudential supervision of individual financial institutions and not sufficiently on the macro-systemic risks of a contagion of correlated horizontal shocks.

The report suggests some counter-cyclical regulation measures:
– introducing dynamic provisioning or counter-cyclical reserves on banks in “good times” to limit credit expansion and so alleviate pro-cyclicality effects in the “bad times”;
– making rules on loans to value more restrictive;
– modifying tax rules that excessively stimulate the demand for assets.

The HLG believes that the Basel 2 framework nevertheless needs fundamental review. The report suggests that:
• the assets of the banking system should be examined in terms not only of their levels, but also of their quality;
stricter rules should be applied for off-balance sheet vehicles;
• the EU should agree on a clear, common and comprehensive definition of own funds.

As for credit rating agencies (CRA), the report suggests a fundamental review of CRAs’ business model, its financing and of the scope for separating rating and advisory activities should be undertaken. More, the report demands that the use of ratings in financial regulations should be significantly reduced over time.
Some of the other important ideas include:
• at least one well-capitalised central clearing house for credit default swaps in the EU;
• the assessment of bonuses for should be set in a multi-year framework, spreading bonus payments over the cycle;
Deposit Guarantee Schemes (DGS) in the EU should be harmonized and preferably be pre-funded by the private sector.

The HLG states that “while the Group supports an extended role for the ECB in macro-prudential oversight, it does not support any role for the ECB for micro-prudential supervision“. The report suggests a new group, replacing the current Banking Supervision Committee (BSC) of the ECB, called the European Systemic Risk Council (ESRC) should be set up under the auspices and with the logistical support of the ECB. Its task would be to form judgements and make recommendations on macroprudential policy, issue risk warnings, compare observations on macro-economic and prudential developments and give direction on these issues.