The rescue package for the beleaguered Greeks taking shape in one of the usual iterative compromises between Paris and Berlin has got some interesting twists. Since Greece is in the eurozone, the International Monetary Fund, which is being wheeled in to lend an air of credibility to the whole affair, can’t ask it to do anything on the exchange rate or interest rates. The only tool the Greeks have is to grind down heavily on the fiscal deficit and hope the capital markets like it enough to take them off the path to debt default.
This is an unusual position for the IMF to be in. There have been occasions before when a borrower pretty much had only fiscal policy to rely on, as in the $30bn Brazil rescue in 2002 when the indexing of Brazil’s debt to the dollar or short-term interest rates precluded the use of monetary policy. But a country actually stuck in a monetary union? The only analogy I could think of was the CFA franc zone – an arrangement whereby a bunch of west African countries adopted a common currency linked to the French franc. But Arvind Subramanian of the Peterson Institute here in DC pointed out that the CFA franc had in fact been forced to devalue in 1994 under IMF pressure. Somehow I can’t see the ECB under Trichet, who doesn’t want IMF involvement in Greece anyway, trying to drive down the euro to help out Athens.
There was little news in today’s prepared testimony by Ben Bernanke, Federal Reserve chairman, on the exit strategy. Mr Bernanke chose not to talk about the discount rate except to say that lasts month’s increase should not be viewed as a monetary policy shift.
And he mostly went over what he had already said last month in terms of the sequencing of the tightening, with reverse repurchase agreements and term deposits ramping up before – or alongside – an increase in the interest rate on reserves. Scant if any change there.
But one shift in tone did stand out. Read more
During part one of the House Financial Services hearing on unwinding the Fed’s emergency liquidity programmes Ben Bernanke, chairman of the Federal Reserve, was quizzed on Okun’s law, an economic model, here-to-fore confined to the vocabulary of economics geeks.
So what is happening during part two of the hearing – when a group of independent economists will be brought together. Will it be a party with a punchbowl? Will anyone be willing to take it away? Read more
A rare event – an European Central Bank surprise! Under Jean-Claude Trichet, president, the ECB has prided itself in its predictability (whatever the frustrations for journalists). But his announcement in the European Parliament today that the ECB was abandoning its plans to revert to its pre-crisis minimum credit requirement for collateral was unexpected. After all, he was mum on the subject as recently as Monday, when he was also in the European Parliament.
Still, those who watch these things closely had always guessed the ECB would have to back down eventually, given the pressure on Greece over its public finances. It has also become clear in recent days that the ECB saw a need for eurozone leaders to shore-up their reputation for crisis management. As the FT has reported, ECB policymakers have been upset by the intransigence of Angela Merkel, German chancellor, and the idea that Europe will have to turn instead to the International Monetary Fund. The timing of yesterday’s announcement meant that the ECB could contribute itself towards calming markets. If it had waited longer, it might have been seen as creating obstacles to the resolving of Greece’s problems.
Snow could delay the hearing, but not the exit.
Today, after a six-week inclement weather delay, Ben Bernanke, chairman of the Federal Reserve, spoke before the House Financial Service Committee on how the central bank plans to become, once again, a standard central bank, unwinding itself from the emergency liquidity programmes it developed during the crisis and getting its balance sheet back to a more normal size. Mr Bernanke’s testimony was released when the committee was originally scheduled to meet in February.
So has the Fed developed further details in its exit strategy? Here’s what’s new from the hearing, as it happened. Read more
No country would hand the controls of a nuclear device to a third party. But that is, in effect, what the European Central Bank is doing with its repo facility for eurozone sovereign debt.
Greece will be helped by an ECB decision to keep the minimum credit threshold in its liquidity-providing operations at investment grade level (BBB-) beyond the end of 2010 in a vital change of policy. This will help Greece because an increase in the framework to A-, which was originally planned at the end of this year, could have left the country’s banks in a perilous situation as they could have ended up ineligible to exchange Greek bonds for loans for funding purposes. Also by David Oakley. More on ft.com.
Bloomberg reports an end to the crisis-time policy of excess money in Taiwan:
Taiwan said it would issue longer-dated certificates of deposit to soak up extra liquidity in the economy. Governor Perng Fai-nan and his board left the discount rate on 10-day loans to banks at 1.25 per cent, as forecast. “The central bank has exited quantitative loose policy, now monetary policy has returned to normal,” Mr Perng told reporters in Taipei.