Posts Tagged: central banks


In a major revamp of the financial sector architecture, the finance ministry on Thursday issued a fresh draft of the Indian Financial Code (IFC) that proposed a monetary policy committee headed by the “chairperson” of the Reserve Bank of India to decide on key interest rates by a majority vote. “Inflation target for each financial year will be determined in terms of the consumer price index by the Central government in consultation with the Reserve Bank every three years,” said the revised draft of the IFC. 

Apart from the RBI chairperson, the monetary policy committee (MPC) would consist of five members — one executive member of the Reserve Bank Board nominated by the Reserve Bank Board; one employee of the Reserve Bank nominated by the Reserve Bank chairperson; and four persons appointed by the Central government. The original draft, too, had proposed the MPC, but the RBI chairperson had power to “supersede the decision” of the committee in “exceptional and unusual circumstances” though decisions normally would be taken by the majority vote. In the revised draft, the chairperson does not enjoy any such power but will have the casting vote in case of tie. The RBI and the finance ministry have signed a monetary policy framework agreement earlier this year that would include targeting retail inflation for policy rates and an MPC is expected to be set up — possibly during the course of this year.

At present, the RBI Governor consults a Technical Advisory Committee on policy rates but he can choose to take an independent decision. The revised code has also proposed that the Centre can nominate one representative to attend all the meetings of the MPC and take part in deliberations but will not have a casting vote. Further, the MPC must meet once every two months. The central bank would also be expected to publish a report every two months on the sources of inflation and the forecast for inflation. Further, in case, the inflation target is not met, the RBI would be expected to submit a report to the Central government on the reasons. The revised IFC has been put out by the finance ministry for public comments until August 8. >> Read More


Eurozone officials have informally discussed a liquidity for loan guarantee arrangement, according to Bloomberg.

  • Finance ministries have exchanged views on the need for keeping or increasing liquidity to respond to humanitarian situation
  • Arrangement would help Greek banks keep operating
  • Prospect of using ESM for guarantee has been discussed
  • No specific proposal under formal discussion

The ECB’s ELA lending program is frozen at 88.6B euros but on Monday the ECB raised the haircut for Greek debt, effectively tightening the program. That eventually set off yesterday’s rout in the euro and European stocks.


Central banks around the region look to be in an easing cycle for the foreseeable future. Thank God, says HSBC.

Base rate cuts have been a pretty common feature across the region (excluding Japan) with central banks in China, India, South Korea and Thailand all doing so at least once this year to stimulate economic growth. Yet debt service costs have increased, notes economist Frederic Neumann, as credit has climbed to record highs.

In the short-term this isn’t too problematic, but as Mr Neumann argues, low funding costs are only a temporary solution. Interest rates won’t remain low forever.

Here’s the scary part: having crunched the numbers, he says that the ratio of debt servicing costs to GDP is nearing a level comparable of that to just before the Asian Financial Crisis of 1997. The chart below illustrates how this will rise under three scenarios: interest rate increases of 1, 2 or 3 per cent – and where the line heads under each is worrying. As Mr Neumann concludes:

Assuming the latter, the average debt service ratio in emerging Asia would rise by a full percentage point of GDP to 5.8%. That’s roughly equivalent where it was at the height of the Asian Financial Crisis. Let’s hope inflation stays subdued for a while longer, obviating the need for central banks to slam the brakes. Please.


With capital controls already imposed on Greece, some have wondered if this is as bad as it gets. Unfortunately, as the Cyprus “template” has already shown us, for Greece thenightmare on Eurozone street is just beginning.

As a reminder, over the past few months there have been recurring rumors that as part of its strong-arming tactics the ECB may eventually move to raise the haircuts the Bank of Greece is required to apply to assets pledged by Greek banks as collateral for ELA. The idea is to ensure the haircuts are representative of both the deteriorating condition of Greece’s banking sector and the decreased likelihood that Athens will reach a deal with its creditors.

Flashback to April when, on the heels of a decree by the Greek government that mandated the sweep of “excess” cash balances from local governments to the Bank of Greece’s coffers, Bloomberg reported that the ECB was considering three options for haircuts on ELA collateral posted by Greek banks. “Haircuts could be returned to the level of late last year, before the ECB eased its Greek collateral requirements; set at 75 percent; or set at 90 percent,” Bloomberg wrote, adding that “the latter two options could be applied if Greece is in an ‘orderly default’ under a formal ECB program or a ‘disorderly default.’” 

While it’s too early to say just how “orderly” Greece’s default will ultimately be, default they just did if only to the IMF (for now), in the process ending their eligibility under the bailout program and ending any obligation by the European Central Bank to maintain its ELA or its current haircut on Greek collateral, meaning the ECB will once again reconsider their treatment of assets pledged for ELA and as FT reported earlier todayMario Draghi may look to tighten the screws as early as tomorrow: >> Read More


In order to “help” Greece, since 2010, we’ve seen fiscal transfers and foreign intervention into its domestic economic policies. Greece’s debt to GDP ratio is now around 180% to GDP, while a lot of the bailout cash has merely served to bail out banks, as Open Europe alreadywarned in 2012.

A number of policy makers now wants to try something new: a Greek exit from the Eurozone. One of them is Christian von Stetten, a Member of Germany’s Parliament and of Angela Merkel’s CDU. He states what a majority of Germans believe should happen: “The experiment with the Greeks in the eurozone, who are unwilling to implement reforms, has failed and must be ended”. He adds that he’s in favour of providing “many billions” in support so Greece can make the transition onto its own currency.

Hereunder I explore what would happen if Greece were to leave the Eurozone, through a legal fudge.

1.    Default

If Greece wouldn’t have already defaulted before it would introduce a new currency, Grexit would  make it virtually certain that the country would default. It’s not wise to take out a considerable loan in a foreign currency, but that’s what Greece has done since 2001, when it entered the Eurozone. If Greece would introduce a new currency, which then likely would lose value against the euro, it would still need to pay back its debt in euro, which woud appreciate in value as compared to the new Drachma, making this task even harder.

If Greece would only pay back what it owes in a new, devalued currency, this would be considered a default.  As a result, the Greek government would face higher borrowing rates in the future. In theory, the fact that it wouldn’t be burdened by an excessive 180% debt to GDP may serve as a factor countering this, giving that the financial situation of the government would look more rosy. But this ignores the second aspect of Grexit, which I’ll discuss next.

2.    The Greek banking system would be cut off from the ECB’s cheap money canal, with real austerity to follow

A default would only relieve Greece from its excessive external public debt burden, not from the exposure it has to its banking system. Almost half the “capital” in the four largest Greek banks really consists of “deferred tax assets” or discounts on future tax bills. When banks make no profit, they won’t enjoy such discounts. >> Read More


Tickety boo, then? The Bank of Greece did not request any increase in the amount of emergency loans it can offer its troubled lenders, according to two people familiar with the matter.

It is the third day in a row that the Greek central bank has not asked for the limit to be raised — a signal that the jog on deposits has slowed.

The emergency loans, which the Greek central bank provides but which the European Central Bank’s governing council must approve, have kept the country’s lenders afloat since February as tensions between Athens and its creditors have risen

The governing council has held daily conference calls on emergency liquidity assistance, or ELA, this week following a spate of withdrawals earlier in the week and last week. The council granted a total of just under EUR3bn in liquidity on Monday and Tuesday.

The Bank of Greece can provide just short of EUR89bn-worth of emergency loans to protect its lenders against withdrawals by savers.


In Athens on Friday, the ATM lines began to form in earnest.

(via Corriere)

Although estimates vary, Kathimerini, citing Greek banking officials, puts Friday’s deposit outflow at €1.7 billion. If true, that would mark a serious step up from the estimated €1.2 billion that left the banking system on Thursday and serves to underscore just how critical the ECB’s emergency decision to lift the ELA cap by €1.8 billion truly was. “Banks expressed relief following Frankfurt’s reaction, acknowledging that Friday could have ended very differently without a new cash injection,” the Greek daily said, adding that the ECB’s expectation of “a positive outcome in Monday’s meeting”, suggests ELA could be frozen if the stalemate remains after leaders convene the ad hoc summit. Bloomberg has more on the summit: >> Read More

BOJ announcement: NO CHANGE

19 June 2015 - 8:40 am

Announcement from the Bank of Japan monetary policy meeting 

  • Keeps monetary policy steady, pledges to increase monetary base at annual pace of 80 trln yen
  • BOJ’s policy decision was made by 8-1 vote
  • BOJ board member Kiuchi votes against policy decision
  • Kiuchi proposed tapering annual jgb purchases to 45 trln yen, which was turned down by majority vote
  • Kiuchi proposed keeping asset buying, zero rates for as long as needed under flexible price target, which was turned down by 8-1
  • BOJ says will cut number of policy-setting meetings from next year
  • Number of policy-setting meetings each year will be cut to 8 times from current 14
  • BOJ says Japan’s economy continues to recover moderately, keeps assessment unchanged
  • BOJ says to issue outlook report on economy, prices 4 times annually from next year, vs 2 times now
  • Will release document containing summary of opinions presented at each policy meeting about a week after each meeting
  • Will continue to issue Minutes of its policy meetings as it does now


Next up from the Bank of Japan, Governor Kuroda press conference at 0630GMT



The market does, for now, and it adds to today’s already impressive massive short squeeze, stop run and Fed “green light” rally, and now a new all time high appears imminent.

Here is Die Zeit reports citing the now traditional anonymous sources, google translated.


In Greek debt dispute, a dramatic turn offing. The creditors of Greece want to preserve the threatened bankruptcy of the country at the last minute with an ultimate offer from bankruptcy.


According to information from TIME and TIME ONLINE is to be extended until the end of the current rescue program. In this program, ten billion euros are left, which should be actually used for the recapitalization of banks. This money will now be used to settle the Greek debt to the European Central Bank (ECB) and the International Monetary Fund (IMF) in the coming months.


The ECB participates in the financing, by will allow the Greek government to spend additional short-dated government bonds for two billion euros. These bonds would buy Greek banks and can deposit as security for fresh money from the ECB. So far, the central bank, however, had always resisted.

>> Read More


The National Bank of Greece has released a new report offering a new window into the financial chaos embroiling the country.

The bank said the most serious impact of the current situation has been the loss of confidence which has pushed up bond yields, locked Greek companies out of capital markets and caused deposit outflows to increase.

It said €30bn in deposits was taken out of Greek banks between October 2014 and April 2015, largely in cash form for hoarding or capital flight.

These outflows have squeezed lending capacity, forcing banks to resort to emergency liquidity assistance from the Bank of Greece, it said. It warned that the country’s economic slowdown will accelerate in the second quarter and put the country at renewed risk of recession.

Parts of the report will certainly not make happy reading for Greece’s creditors. The bank called for the lowering of primary surplus targets to give Greece “additional degrees of freedom in the conduct of fiscal policy,” and debt relief to “spare future generations burdens that we have no right to saddle them with.”

It also advocated the “development and implementation of a coherent and targeted social safety net to provide lasting, rather than piecemeal, support to those truly in need.”

Striking a particularly optimistic note, the bank suggested an agreement “would allow Greece to benefit from the favourable global environment and the ECB’s quantitative easing programme”. >> Read More

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Team ASR,
Baroda, India.