“A significant amount, if not all, of the speculative attacks on the ruble are funded by the central bank itself,” said Vladimir Osakovsky, Moscow-based economist for UniCredit

The underlying dynamics of the current ruble devaluation are provoking more than a little consternation in Russia at the moment. In the forefront of the debate are data from Bank Rossii (the central bank) which show they lent 7.7 trillion rubles ($214 billion) in overnight and seven-day loans (secured with bonds or other collateral) in just 16 trading days last month – this was about double the 4.8 trillion rubles provided via so-called repurchase auctions in December. Over the same period the ruble lost 18 percent against the dollar. The question is, is there a connection here?

Russia’s banking authorities now certainly seem to think there is and Kommersant reported (Friday) that policy makers planned to reduce bank loans in an attempt to limit bets on the ongoing ruble devaluation. As a result the ruble remained safely within the target band all day Friday, and there was no need for any kind of intervention.

The decision follows several days of severe criticism over the way in which Russian banks appeared to be using the loans being made available to them. Oleg Vyugin, former deputy central banker and currently chairman of MDM Bank has suggested that Russia’s banks have now accumulated about $40bn in hard currency deposited for their clients on accounts with the central bank and another $40bn on accounts held with foreign banks.

Policy makers lifted the rate on overnight and seven-day loans obtained through the auctions by 1 percentage point to 11 percent this week, the highest since at least November 2007. Banks used “almost all” the money from loan auctions to bet against the ruble, Natalia Orlova chief economist at Alfa, Russia’s largest non-government bank, said. Policy makers “have basically fueled the speculation on the ruble themselves…..The market is intent on testing the central bank’s ability to spend reserves and they’re going to really have to tighten liquidity, or something, if they want to have a hope against that.”

Continue reading →

Some readers are asking whether issuing EU bonds is possible under the Maastricht Treaty. The answer would seem to be yes, under article 119. As follows:

Article 119

1. Where a Member State is in difficulties or is seriously threatened with difficulties as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal, and where such difficulties are liable in particular to jeopardise the functioning of the common market or the progressive implementation of the common commercial policy, the Commission shall immediately investigate the position of the State in question and the action which, making use of all the means at its disposal, that State has taken or may take in accordance with the provisions of this Treaty. The Commission shall state what measures it recommends the State concerned to take.

If the action taken by a Member State and the measures suggested by the Commission do not prove sufficient to overcome the difficulties which have arisen or which threaten, the Commission shall, after consulting the Committee referred to in Article 114, recommend to the Council the granting of mutual assistance and appropriate methods therefor.

The Commission shall keep the Council regularly informed of the situation and of how it is developing.

2. The Council, acting by a qualified majority, shall grant such mutual assistance; it shall adopt directives or decisions laying down the conditions and details of such assistance, which may take such forms as:

(a) a concerted approach to or within any other international organisations to which Member States may have recourse;
(b) measures needed to avoid deflection of trade where the State which is in difficulties maintains or reintroduces quantitative restrictions against third countries;
(c) the granting of limited credits by other Member States, subject to their agreement.

Indeed not only are such bond possible, the initiative has already been taken in the case of the Hungary bailout last November:

“The European Commission stands ready to provide a loan of €6.5 billion to Hungary,” the EU executive said in a statement on Wednesday (29 October), adding that “the concrete modalities will shortly be finalised in cooperation with the Hungarian authorities”.

Under the plans, the Commission will borrow money from the markets using EU-denominated bonds and then lend it to Hungary, without drawing from the EU budget. The facility is established under Article 119 of the Treaty.

It is the first time that Brussels has used the instrument to help an EU country (see background). The facility foresees an overall ceiling of €12 billion of outstanding loans. This funding is limited to EU countries which are not part of the euro zone.

The money will be collected on the financial market on behalf of the European Community. Rulesexternal governing the use of the facility enable the Commission to issue directly “up to €4 billion” in EU bonds, with maturities ranging between three months to 30 years. “The size reflects a realistic assessment of near-term financing needs and could be rapidly increased at the Commission initiative, if needed,” according to the EU executive.

Goldman Sachs and Deutsche Bank are responsible for placing the bonds with European and international investors.

That’s it for this post. I will write separate posts about each of the four items in my package of proposals about how to respond to the crisis over the days to come. Basically the one I put up earlier today explaining “credit crunches” and “liquidity traps” in connection with the kind of issues which might likely lie in front of us was a sort of theoretical precursor, even if it is rather obscure and theoretical. I’m afraid these things are already becoming household words.

“Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history?” Paul Krugman asked his readers back in Novermber last year. In fact on reading this I felt immediately filled with the urge to stand on my chair and shout out loud across the Atlantic to him “Hi Prof, yes me”, since – to plagiarise a phrase from Robert Lucas – scarcely a day has passed since the 9 August 2007 (the day PNB Paribas found themselves short of $2 billion dollars to “close” their books) when I have not been thinking about this. In fact, despite the many bad things that can obviously be said about the present crisis, it does have one saving virtue – it enables many of us economists to get “close up and personal” and take a ringside seat and really see for ourselves, and at first hand, just how things may actually have worked back then. In this sense I would like to extend my profound thanks and deep gratitude to each and everyone of the 45 million Spanish men and women and the 140 million odd Russians who are idling away their time at the moment running round and round the treadmill, all in the cause of helping me triangulate, and sort out a few nagging questions that have been haunting me ever since my late adolesence. Continue reading →

The world’s major economies could emerge from recession by the end of this year, boosted by low commodity prices, reduced interest rates and government stimulus packages, said European Central Bank Governing Council member Christian Noyer. “Several factors make us think it’s not unrealistic to imagine pulling out of recession by the end of the year,” Noyer, who is governor of the Bank of France, said in an interview with France Culture radio.

Advanced economies are already in a “depression” and the financial crisis may deepen unless the banking system is fixed, International Monetary Fund Managing Director Dominique Strauss-Kahn said. “The worst cannot be ruled out,” Strauss-Kahn said in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. “There’s a lot of downside risk.”

Personally I’m with Strauss-Kahn, I think there is massive downside risk out there. Noyer is being over optimistic, but then France is perhaps the least badly affected EU member. Incidentally Strauss-Kahn has also come out in favour of greater eurozone economic coordination, although he doesn’t mention the idea of EU bonds.

Stability in the euro zone will be in danger if governments do not coordinate more closely on economic policy, the head of the International Monetary Fund (IMF) was quoted as saying by German weekly Zeit on Wednesday. “The euro zone needs more cooperation on economic policy. Otherwise, differences between states will become too big and the stability of the currency zone is in danger,” IMF Managing Director Dominique Strauss-Kahn told Zeit in an interview.

And maybe someone somewhere is listening to him, since Merkel and Sarkozy are about to announce a new initiative. Or could it be that Tremonti’s threat has moved someone somewhere, after all we have no news of any bank bailout in Italy, and then again there is nothing like the prospect of a “systemic” bank failing to concentrate the mind.

Germany and France will present a joint initiative to help Europe better cope with crises like the current economic turbulence, Chancellor Angela Merkel and President Nicolas Sarkozy said on Saturday. “We will approach the Czech presidency (of the European Union) with a joint initiative by Germany and France on how we can emphasise Europe’s strength in these difficult times,” Merkel told reporters in Munich.

This is all purely precautionary, you understand, nevertheless:

The International Monetary Fund is holding talks with Poland, central Europe’s largest economy, on a possible loan to fend off contagion from the global financial crisis that forced the Fund to intervene in Hungary.

“The Poles are saying that they are okay today and I think they are right,” IMF Managing Director Dominique Strauss-Kahn said on Saturday after he attended a central bankers meeting in Kuala Lumpur. “They also say its not impossible that in the future they may be under pressure, so we are discussing with them to see if they need or don’t need more global (agreement) with the Fund,” Strauss-Kahn said.

According to research from investment bank UBS, Poland is the sixth most vulnerable of its universe of emerging market economies based on its short term financing requirements as a percentage of gross domestic product versus its reserves. That means it is reliant on market financing, something that is in short supply as banks shy away from lending outside home markets and credit is in any case in short supply.

You can read the background to the present situation in my two posts “Poland To Consider Interbank Guarantees As The Forex Lending Crisis Deepens” (October 2008) and “The Forex Lending Crunch Means Trouble Is Looming Large In Poland” (January 2009). Continue reading →

You see, this isn’t a brainstorming session — it’s a collision of fundamentally incompatible world views.
Paul Krugman

As a wise man recently said, failure to act effectively risks turning this slump into a catastrophe. Yet there’s a sense, watching the process so far, of low energy. What’s going on?
Paul Krugman

First, focus all attention on reversing the collapse in demand now, rather than on the global architecture. Second, employ overwhelming force. The time for “shock and awe” in economic policymaking is now.
Martin Wolf

OK, I think no regular reader of this blog could seriously suggest I have much sympathy for the sort of views you normally find being propagated by Italy’s Finance Minister Guilio Tremonti, but when he starts to send out the kind of red warning light danger signals that he has been doing over recent days, then I think we should all be taking note, and when the republic is in danger, then its all hands to the pumps, regardless of who is sounding the alert. This is not a brainstorming session, it is a real flesh and blood crisis. Continue reading →