OMFIFOMFIF BULLETIN GlobalOfficial MonetaryInsight on and Official Monetary and Financial Institutions Financial Institutions Forum June 2012 SPECIAL ISSUE: TOWARDS THE EURO END-GAME Greek exit may be Europe’s chance After long denial, stark choice beckons Meghnad Desai, Chairman, Advisory Board he Grexit may be upon us. It a linkage similar to the old exchange we first met in Frankfurt in March Tsounds like a weird creature from rate mechanism. The Spanish bank 2010. In this special edition, we bring Dr. Seuss, the fabled children’s story- bail-out on 9 June makes a Greek exit many proposals on Europe’s future, teller. It certainly brings a new phase in less worrisome. including David Owen’s suggestion economic and monetary union (EMU). for a restructured Europe (p.3), Greece faces a stark choice. Either stay The euro core is planning some kind of Fabrizio Saccomanni’s ideas on crisis in the euro and sign up to a generation fiscal union. Yet the strong showing by management (p.5), Edward Krubasik’s of austerity. Or exit, suffer immense the combined Left in the first round of and Ruud Lubbers’ /Paul van Seters’ pain instantly and then muddle along the French parliamentary elections on plea (respectively) for ‘smart’ (p.10) on its own. 10 June may make a Franco-German and ‘green’ growth’ (p.12) to improve compromise more difficult. the European economy, and Michael Greece may force a new equilibrium, Butler’s blueprint for a parallel euro with a bifurcation between weak and OMFIF has been anticipating a currency (p.13). strong euro economies connected by possible Greek EMU departure since (continued on page 6 ...) Emerging market central banks under-allocated to gold Central bank reserve managers accumulated 80 tonnes of gold in the first quarter this year, writesAshish Bhatia, World Gold Council. The gold purchases partly reflect lower attractiveness of sovereign bonds. They also appear to stem from a fundamental gold under-allocation by emerging market central banks, a finding borne out by recent work on gold’s relatively low volatility in emerging market currencies. SEE ARTICLE ON GOLD VOLATILITY AND EMERGING MARKET CENTRAL BANKS, P. 21-22 Contents New rule-book Why Europe must be restructured David Owen 3 Changing standards Fire brigades as well as firewalls Fabrizio Saccomanni 5 Michael Lafferty, Co-chairman Rediscovering family spirit Michael Kaimakliotis 7 Heightened political and economic risks Statistical forecasts 8 he rule-makers in the world of accounting standards-setting Flexibility on budget goals Stefan Bielmeier 9 Tare about to re-write one of the most sacred accounting principles, after intense and largely covert pressure from Smart growth and restructuring Edward G. Krubasik 10 central bankers via the Basel Committee and the Financial Clarion call of green growth Ruud Lubbers 12 Stability Board. Parallel currency is the way Michael Butler 13 Hans Hoogervorst, the former Dutch finance minister who is now BankNotes - The Fed Darrell Delamaide 14 chairman of the global rule-setting International Accounting Why Greek exit is not suicide Gabriel Stein 16 Standards Board (IASB) admitted this in a speech to European central bankers on 4 June. He also criticised regulators for not OMFIF Advisory Board 18 going far enough in deleveraging the global banking system Making up ground in gold Ashish Bhatia 21 and for contributing to flawed bank accounting practices. Athenian affliction inspires and repels Poetry Corner 23 ‘Basel III will undoubtedly be a great improvement, because The Keegan commentary William Keegan 24 it enhances the capital requirements both quantitatively and This document must not be copied OMFIF and is only to be made available qualitatively... Yet, under Basel III, a bank is still allowed to be Official Monetary and Financial Institutions Forum to OMFIF members, prospective leveraged 33 times,’ Hoogervorst pointed out. members and partner organisations (continued on page 6 ...) www.omfif.org 1 OMFIF Official Monetary and Financial Institutions Forum Letter from the chairman Official Monetary and Financial Institutions Forum Necessary, not sufficient One Lyric Square London W6 0NB United Kingdom Where it’s best to stay away t: +44 (0)20 3008 8415 f: +44 (0)20 3008 8426 David Marsh, Co-chairman Advisory Board Meghnad Desai hen countries such as the UK, Denmark and Sweden opted not to join the euro, *Chairman, Advisory Board Wsome thought that governments in non-member countries would be permanently disadvantaged by being outside key meetings making landmark decisions on the John Nugée Frank Scheidig future of the continent. Certainly plenty of key meetings are going on, but London, Songzuo Xiang Copenhagen and Stockholm have been only too pleased not to be part of them. ** Deputy Chairmen, Advisory Board (See p.18-20 for full details) The lengthy euro area finance ministers telephone conference on 9 June that decided Management Board on a €100bn bail-out for troubled Spanish banks was a necessary but not sufficient David Marsh step towards healing Europe’s woes. A victory for economic and monetary union Co-chairman (EMU)? Certainly a milestone (as it has become trite to say) that could possibly usher [email protected] +44 (0)20 3008 5207 in the end-game. Hence the special attention paid to this subject in this OMFIF Bulletin. Michael Lafferty Co-chairman All this takes place against the background of a world economy suffering growth [email protected] pangs. Yet countries which still have control over their own policies are taking steps +44 (0)20 3008 8415 to shift the economic trajectory. As Darrell Delamaide makes clear, the US Federal Evelyn Hunter-Jordan Reserve stands ready to relax policy further if employment flags during the summer. Managing Director [email protected] China has cut interest rates for the first time since 2008. Only the UK, the euro area’s +44 (0)20 3008 5283 most important trading partner, seems becalmed by inaction. OMFIF Secretariat What of Europe’s future? David Owen outlines his plan, elaborated in a new book Edward Longhurst-Pierce European Restructured?, for separating a remodelled European Community into two Annie Palacios Vikram Lopez groups of different levels of political and economic integration. Nikolai Blackie [email protected] Edward Krubasik, a former board member of Siemens and past president of Orgalime, [email protected] the European engineering association, favours integrating industrialists’ methods for [email protected] [email protected] successful corporate turnarounds into measures for reorganising European economies. +44 (0)20 3008 5262 Michael Butler spells out again his plan (first put forward in 2011) for a dual currency Sanjay Ujoodia solution to EMU members' competitiveness problems. Fabrizio Saccomanni wants Chief Financial Officer innovative monetary measures including action to prevent undue rises in interest rates [email protected] +44 (0)20 3008 8421 for problem countries: an idea to which Germany gives short shrift. Darrell Delamaide Michael Kamaikliotis says Chancellor Merkel is the only person who can save Europe. US Editor [email protected] He describes the heavy responsibility borne in the EMU imbroglio by Germany – a +1 (0)202 248 1561 fundamental issue on which dramatic fault lines run through the continent. Meghnad Sales Desai and Gabriel Stein take a more relaxed view on all this – in monetary unions, Pooma Kimis 'stuff happens'. Stefan Bielmeier is also more relaxed, saying the firewalls erected to Christopher Goodwin stop the debt crisis spreading are now considered sufficient. One way of finding this [email protected] out is, of course, to have a fire. [email protected] +44 (0)20 3008 5262 The euro’s plight clearly has an effect on central banks’ asset management preferences. Thomas Heap Production Editor Ashish Bhatia looks at what appears to be a fundamental under-allocation to gold by [email protected] emerging market central banks. Beyond the immediate challenges, Ruud Lubbers and Paul van Seters point to the importance of ‘green growth’ in stimulating sustainable Strictly no photocopying is permitted. It is illegal to reproduce, store in a central retrieval system or transmit, recovery. Michael Lafferty reveals a significant change in international accounting electronically or otherwise, any of the content of this standards, moving from a system of ‘incurred loss’ provisioning for bad and doubtful publication without the prior consent of the publisher. All OMFIF members are entitled to PDFs of the current issue debts to one where provision is made for ‘expected’ losses. and to an archive of past issues via the member area of the OMFIF website: www.omfif.org Meghad Desai introduces a new OMFIF speciality – poetry. In his postscript, William While every care is taken to provide accurate information, Keegan warns David Cameron about his credibility problem in intruding on the family the publisher cannot accept liability for any errors or omissions. No responsibility will be accepted for any loss affair of the euro mess. It is a long-drawn out affair in which we all seem to be caught occurred by any individual due to acting or not acting as up – whether or not we attend the meetings.y a result of any content in this publication. On any specific matter reference should be made to an appropriate adviser. Company Number: 7032533 2 www.omfif.org OMFIF OMFIF Official Monetary and Official Monetary and Financial Institutions Forum TNheews future of EMU Financial Institutions Forum Why Europe must be restructured EMU can survive only with closer union David Owen, Advisory Board he euro crisis is driving the European Union to a point when it can no longer be Those countries Tambivalent about the two basic models for Europe. One is the present one: a union of within the euro self-governing nations with a separation of powers between the supranational and the intergovernmental.