OMFIFOMFIF BULLETIN GlobalOfficial MonetaryInsight on and Official Monetary and Financial Institutions Financial Institutions Forum September 2012 Race against time for the euro Beyond ECB action, we need political will Frank Scheidig, Deputy Chairman, Advisory Board e are still waiting for a cure recession-hit south, could over time for some kind of official financing for Wfor the woes of economic and lead to a calming of financial markets. Spain and conceivably, too, for Italy in monetary union (EMU). Necessary The problem is that, left to their own coming months. steps have been put into place by devices, the markets will take fright at European governments to improve the large volume of financing that still The fate of Greece can be expected to euro area decision-making. A start is has to be done for the under-performing dominate Europe’s political calendar, being made in healing the worst of the south in the next few months. but the real story focuses on the third intra-EMU economic imbalances. But and fourth economies of the euro area. this is a race against time. Given the scale of the current and The conditionality advanced by the capital account imbalances that still European Central Bank is useful and A rebalancing of European need to be financed, and the sharp necessary, but beyond that we need economies, with the relatively better- rise in bond market interest rates for political will to put taxpayers’ money performing northern economies losing the most heavily exposed countries, on the table to forestall excessive competitiveness against the necessarily Italy and Spain, there is no substitute behaviour. (continued on page 8 ...) Conflicting signals from Berlin: ingenuous chaos meets ingenious ambiguity The ebb and flow of bad economic news has wreaked havoc on European yield curves, but the Anglo- American camp is more riled about conflicting signals from Germany and the lack of decisive steps to end the crisis, writes Michael Burda, Advisory Board, from Berlin. Chancellor Angela Merkel, in contrast, insists on petit pas and quid pro quos. (continued on page 8...) ContentsContents ChallengesChallenges forfor centralcentral banksbanks PhilPhil MiddletonMiddleton 33 US politics rules BanksBanks andand thethe newnew environmentenvironment MichaelMichael LaffertyLafferty 55 Beijing may react LongLong shadowshadow ofof EuropeanEuropean crisiscrisis JamesJames BullardBullard 66 Kishore Mahbubani, Singapore Structural,Structural, social,social, greengreen AngelAngel GurríaGurría 99 CautiousCautious approachapproach onon growthgrowth StefanStefan BielmeierBielmeier 108 he decision by the New York State Department of Financial China’sChina's nextnext reformreform phasephase LindaLinda YuehYueh 1111 TServices to make public its strictures against the UK bank Standard Chartered could spark off similarly heavy-handed GuideGuide toto marketmarket sentimentsentiment AllanAllan LaneLane 1313 action by China. MonetaryMonetary lawlessnesslawlessness onon riserise BrendanBrendan BrownBrown 1515 DutchDutch SocialistsSocialists toto thethe forefore RoelRoel JanssenJanssen 1717 Benjamin Lawsky, the department’s superintendent, should EuroEuro moneymoney supplysupply boostboost neededneeded GabrielGabriel SteinStein 1919 have considered the possibility that his action may encourage Beijing to use its growing economic clout to take similar Debate on stimulus grows sharper Darrell Delamaide 24 Debate on stimulus grows sharper Darrell Delamaide 24 unilateral action against US banks. OMFIFOMFIF AdvisoryAdvisory BoardBoard 2626 MomentumMomentum dropsdrops worldwideworldwide StatisticalStatistical forecastforecast 2929 Lawsky’s decision to go after Standard Chartered appears to have been driven by domestic political considerations, not by TheThe shiftshift toto externalexternal lawyerslawyers PoomaPooma KimisKimis 3131 the merits of the case. In the US political climate, anyone who HighHigh stakesstakes inin euroeuro dramadrama MichaelMichael KaimakliotisKaimakliotis 3232 stands up to Iran is a hero. The superintendent has enhanced ArchiveArchive InsightInsight GermanGerman bondbond spreespree 3434 his reputation. Dow’sDow's lessonlesson ofof pastpast recessionsrecessions WilliamWilliam KeeganKeegan 3636 Additionally, he has undermined the move to create global co-operation among financial regulators. Finance is not ThisThis documentdocument mustmust notnot bebe copiedcopied a domestic industry. The only way to regulate it is through OMFIFOMFIF andand isis onlyonly toto bebe mademade availableavailable OfficialOfficial MonetaryMonetary andand FinancialFinancial InstitutionsInstitutions ForumForum toto OMFIFOMFIF members,members, prospectiveprospective global norms and processes. However, New York’s unilateral membersmembers andand partnerpartner organisationsorganisations decision has further undermined confidence in American judgments. (continued on page 8 ...) www.omfif.org 1 OMFIF 2012-09_08.indd 1 8/30/2012 10:02:06 AM OMFIF Official Monetary and Financial Institutions Forum Letter from the chairman Official Monetary and Financial Institutions Forum Tensions in the air One Lyric Square London W6 0NB United Kingdom September – when things happen t: +44 (0)20 3008 8415 f: +44 (0)20 3008 5262 David Marsh, Chairman Advisory Board Meghnad Desai entral bankers and market participants return from their holidays with a sense *Chairman, Advisory Board Cthat something is about to happen. The tensions in the air – whether over the euro debt crisis, the US presidential elections or the slowdown in the Chinese economy – are John Nugée Frank Scheidig palpable. September is often the time, on foreign exchange and capital markets as well Songzuo Xiang as in the wider political arena, when the ‘balloon goes up.’ ** Deputy Chairmen, Advisory Board (see p. 26-28 for more details) In this edition, coinciding with the annual DZ Bank-OMFIF central banking seminar, this Management Board time in Berlin, Frank Scheidig calls on his native Germany to take greater responsibility David Marsh for the euro area as a whole. Official financing is a necessity for peripheral countries Chairman under great strain from economic rebalancing. Michael Burda says Angela Merkel's [email protected] tactics remind him of a Grimm fairy-tale. Roel Janssen looks at prospects for a change of Michael Lafferty government and shift to the left in the Netherlands, the No. 2 creditor in the euro area Deputy Chairman [email protected] after Germany, and asks what this means for consensus on euro area economic reform. Gabriel Stein Chief Economic Adviser Michael Kaimakliotis outlines the pressure on the Swiss authorities to hold the peg [email protected] against the euro in the face of massive upward foreign exchange pressure on the Swiss franc. Gabriel Stein analyses whether the European Central Bank is serious about Evelyn Hunter-Jordan [email protected] money, pointing to the disappointingly slugging growth in broad money since the worst of the financial crisis. Brendan Brown ponders on the implications of what he sees as a John Plender [email protected] rise in ‘monetary lawlessness’ in Europe and the US. Allan Lane explains how Exchange Traded Funds can offer a way out of uncertainty. OMFIF Secretariat Edward Longhust-Pierce Angel Gurría, secretary-general of the Organisation for Economic Cooperation and Dalin Hamilton Vikram Lopez Development, sets out the OECD’s plans to get economies moving again, including Nikolai Blackie through ‘green growth’. James Bullard of the Federal Reserve Bank of St Louis expounds [email protected] [email protected] on how the euro crisis has a deeper impact on the world economy and offers suggestions [email protected] for remedial action. We take an in-depth look at China. Linda Yueh points to the need [email protected] for a new phase of outward Chinese investment that will direct foreign technology Sanjay Ujoodia flows into the country, but says the authorities will take their time over renminbi Chief Financial Officer internationalisation. Stefan Bielmeier says the Chinese remain cautious on economic [email protected] +44 (0)20 3008 8421 stimulus measures and Beijing will not match the heady pace of recovery in 2009-10. Darrell Delamaide US Editor Darrell Delamaide in his monthly round-up on the Fed surveys growing evidence that [email protected] the US will move into easing mode in coming weeks, with the public ‘hawks v. doves’ +1 (0)202 248 1561 debate between Federal Open Market Committee members sharpening in tone. Phil Sales Middleton gives details on a new report by Ernst & Young and OMFIF on the changing Pooma Kimis Christopher Goodwin shape of international central banks, due to be launched in coming weeks. [email protected] On the vexed issue of banking and financial market irregularities, Kishore Mahbubani [email protected] says heavy-handed American action over Standard Chartered risks encouraging Thomas Heap China to take similar retaliatory action over US and other banks. Michael Lafferty Production Editor [email protected] warns emerging market economies with new outward-facing regimes against adopting western-style integrated banking systems. Pooma Kimis reports on how many banks and Strictly no photocopying is permitted. It is illegal to reproduce, store in a central retrieval system or transmit, financial firms are replacing in-house lawyers with external legal advisors, throwing electronically or otherwise, any of the