solvency

Alan Beattie

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.

The board of Nigeria’s central bank voted unanimously on Tuesday to keep the monetary policy rate at 6 per cent and the key lending rate at 8 per cent, though it reduced the borrowing rate from 4 to 2 per cent. Inflation poses a “serious threat in the months ahead,” said governor Lamido Sanusi. The all-item CPI rose to 12.4 per cent year-on-year in November from 11.6 and 10.4 per cent in the two previous months.

The board also chose to extend the guarantee on bank transfers to December 31, 2010. The Nigerian banking industry is still in serious trouble. Read more

Argentina seems determined not to repeat the default of 2001. Economy minister Amado Boudou has said $6.6bn of the central bank’s international reserves will be placed into a fund this month, to help the government pay bondholders and international lenders for debts. The fund will cover about half of $13bn interest and principal payments due in 2010. The government said today it will give the central bank 10-year dollar-denominated notes, known as Letes, in exchange for the funds. Read more