Lagarde Pays Tributes to Japan’s Leadership During Crisis July 6, 2012

Managing Director of the International Monetary Fund (IMF) Christine Lagarde today said that the continuing global economic crisis needs a cooperative policy response more than ever before. In this regard, Lagarde paid tribute to Japan’s global citizenship and its deep support for international cooperation.

“Over the past few months, the outlook has, regrettably, become more worrisome,” Ms. Lagarde said in a speech to a policy forum organized by Nikkei ahead of the October 2012 Annual Meetings in Tokyo. There are signs of slowing economic activity across both advanced and emerging economies.

While developments in Europe remain the most pressing risk for the global economy, Lagarde was encouraged by the outcome of the June 28 Summit, where “European leaders agreed to significant steps in the right direction to address the immediate crisis.” Yet, she stressed that “further progress will continue to be needed to overcome the crisis decisively and avoid the damaging effects on stability and growth.”

However, Lagarde was clear that the crisis is not just a European concern. “This is a global crisis. In today’s interconnected world, we can no longer afford to look only at what goes on within our national borders. This crisis does not recognize borders.”

Japan and the Asian region have coped with the crisis remarkably well so far, contributing more than half of total global growth since 2008. However, “this does not mean that Asia is immune. The spillovers from Europe are increasingly visible here,” Lagarde said.

Given these interconnections and the potential for spillovers, Lagarde stressed the need for effective solutions to be grounded in cooperation. She welcomed recent examples of countries taking account of those connections, including recent actions in Europe and the decision to strengthen the Chiang Mai Initiative Multilateralization.

Lagarde outlined the need for coordinated policy actions in three areas: dealing with high public debt across advanced economies; repairing and reforming the financial sector; and delivering strong, sustainable and inclusive growth.

As global policymakers work to tackle these challenges, Lagarde said Japan’s partnership and spirit of community was an invaluable guide for the international community. “When the global economy faced its darkest hours, you stood by your fellow global citizens,” Lagarde said, praising Japan being the “first to offer loans to boost the IMF’s resources and help stave off an even more dire global economic collapse.”

Lagarde was also impressed by the “heroic community response and the amazing adaptability of the Japanese people” following the Great East Japan earthquake and tsunami.

The IMF-World Bank Annual Meetings will take place in Tokyo this October, in a year that celebrates sixty years of membership at of both institutions. Looking ahead to the meetings, Lagarde said “the whole world will be looking to Japan’s leadership, spirit, and commitment to multilateralism—at a time when the world needs these qualities, and needs Japan, more than ever before.”

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IMF Concluding Statement of the 2012 Article IV Mission to The United States of America July 3, 2012

The U.S. recovery remains tepid and subject to elevated downside risks, in light of financial strains in the euro area and uncertainty over domestic fiscal plans. Against this background, policies need to decisively tackle medium-term challenges while using the available room to support the recovery. Specifically, it is critical to ensure a pace of fiscal adjustment in the short run that is supportive of the recovery, removing the threat of a very large fiscal adjustment in 2013, and to adopt a credible medium-term plan restoring fiscal sustainability.

Monetary policy conditions appropriately remain very accommodative, with some room for further easing should the outlook deteriorate. Aggressive implementation of the measures proposed by the Administration to speed up the housing recovery could yield sizable benefits to the broader economy. Good progress has been made in reforming the U.S. financial system, but vulnerabilities remain and appropriate resources should be devoted to complete and implement the new regulatory framework and monitor systemic risk.

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NEWS RELEASE ISSUED BY THE MINISTER OF FINANCE

Finance Minister Bill English today announced his intention to appoint Graeme Wheeler governor and chief executive of the Reserve Bank of New Zealand, after Alan Bollard’s second five-year term expires on 25 September 2012.

Mr Wheeler will be governor-designate until a new policy targets agreement is finalised in the next few months. This is required before a new governor is appointed.

“Mr Wheeler’s extensive experience makes him a highly respected figure in world financial markets and within New Zealand,” Mr English says. “We were fortunate to have someone of his calibre available for this important role.”

From 1997 to 2010, Mr Wheeler was employed by the World Bank. His most recent roles there included managing director operations (2006-2010), and vice-president and treasurer (2001-2006). Previously, he was at the New Zealand Treasury as deputy secretary and treasurer of the Debt Management Office.

Mr Wheeler, a New Zealander, currently lives in the United States and runs his own advisory business.

As required under the Reserve Bank Act 1989, the Reserve Bank board of directors recommended Mr Wheeler’s appointment to Mr English, after an extensive recruitment process domestically and internationally.

“Given his experience and standing, combined with his technical and leadership qualities, the board considered that he has all the qualities required to become governor and chief executive of the Reserve Bank,” Mr English says.

He does not envisage any major changes to the policy targets agreement.

“I consider that the current PTA has served New Zealand well and there are benefits in maintaining consistency in the PTA.

“However, the global financial crisis has focused some attention on monetary policy frameworks, and I want to ensure that the PTA continues to reflect best international practice.”

Mr English also paid tribute to Dr Bollard for his leadership at the Reserve Bank over the past 10 years.

“He helped steer the New Zealand financial system through the biggest global crisis in several generations. At the same time, he ensured that this country continued to enjoy one of the most stable inflation environments in the world.”


Note: Mr Wheeler will not be commenting on his nomination until after he has taken up his role in September.

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The Bank for International Settlements (BIS) in 82nd Annual Report Released

Five years on from the outbreak of the financial crisis, and the global economy is still unbalanced, seemingly becoming more so as interacting weaknesses continue to amplify each other. The goals of balanced growth, balanced economic policies and a safe financial system still elude us.

The Report points out that the financial sector, governments, and households and firms need to repair their balance sheets: "the financial sector needs to recognise losses and recapitalise; governments must put fiscal trajectories on a sustainable path; and households and firms need to deleverage. As things stand, each sector's burdens ... are worsening the position of the other two."

"The financial sector is putting pressure on the government," the Report continues. "Governments, with their deteriorating creditworthiness and need for fiscal consolidation, are hurting the ability of the other sectors to right themselves. And as households and firms work to reduce their debt levels, they hamper the recovery of governments and banks. All of these linkages are creating a variety of vicious cycles."

"Central banks," the Report says, "find themselves in the middle of all of this, pushed to use what power they have to contain the damage: pushed to directly fund the financial sector and pushed to maintain extraordinarily low interest rates to ease the strains on fiscal authorities, households and firms. This intense pressure puts at risk the central banks' price stability objective, their credibility and, ultimately, their independence."

Breaking the vicious cycles, and thereby reducing the pressure on central banks, the BIS says, is critical. It can be accomplished by "cleaning up and strengthening banks at the same time as the size and riskiness of the financial sector are brought under control. ... Only then, when balance sheets across all sectors are repaired, can we hope to move back to a balanced growth path. Only then will virtuous cycles replace the vicious ones now gripping the global economy."

Christian Noyer, BIS Chairman and Governor of the Bank of France, said today: "We have yet to achieve the goal of a strong and stable financial environment for the global economy. To get there, the international community must intensify its cooperative efforts to reduce global financial imbalances and improve international financial regulation."

BIS General Manager Jaime Caruana told central bankers gathered for the Bank's Annual General Meeting in Basel today: "The current difficulties of the world economy have deep roots and will require fundamental solutions. Fiscal adjustment, the repair of banks' balance sheets and other reforms cannot be put off in the hope of better times. Relying only on central banks but failing to act on other fronts would ultimately damage confidence and increase the risks to macroeconomic and financial stability."

The BIS's financial results, which were also published in the Annual Report, included a balance sheet total of SDR 255.7 billion (USD 395.9 billion) at end-March 2012 and a net profit of SDR 758.9 million (USD 1,174.9 million).

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IMF Managing Director Christine Lagarde Welcomes Additional Pledges to Increase IMF Resources, Bringing Total Commitments to US$456 Billion

Ms. Christine Lagarde, Managing Director of the International Monetary Fund (IMF), issued the following statement in Los Cabos, Mexico during the G-20 Leaders’ Summit:

“A number of IMF member countries have announced pledges to boost IMF resources, completing the effort launched jointly at our Spring Meetings in April 2012 by the International Monetary and Financial Committee (IMFC) and G-20 (see Press Release No. 12/147). Countries large and small have rallied to our call for action, and more may join. I salute them and their commitment to multilateralism. As a result, total pledges have risen to US$456 billion, almost doubling our lending capacity.

“With announcements by an additional 12 countries, a total of 37 IMF member countries, representing about three-fifths of total quota in the organization, have joined this collective effort, demonstrating the broad commitment of the membership to ensure the IMF has access to adequate resources to carry out its mandate in the interests of global financial stability.

“These resources are being made available for crisis prevention and resolution and to meet the potential financing needs of all IMF members. They will be drawn only if they are needed as a second line of defense after resources already available from quota and the existing New Arrangements to Borrow are substantially used. If drawn, they will be repaid with interest. The IMF is committed to assuring our members’ interests and resources are safeguarded.”

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The 2012 Q2 issue of the Bank of England Quarterly Bulletin

The so-called “productivity puzzle” has been discussed by Bank policymakers on numerous occasions in recent months. Measured labour productivity in the United Kingdom has been persistently weak since the 2008/09 recession. Understanding whether this has arisen because of a demand in shortfall or whether it has been accompanied by a fall in underlying productivity (and hence the supply potential of the economy), is a central issue for policymakers. The article in this edition – UK labour productivity during and after the crisis – an international and historical perspective - compares the UK experience following this recession to that of other countries, and to historic episodes of financial crisis. Amongst other things, it finds that persistently weak labour productivity is not a feature of previous financial crises, but has been a feature of the recent crisis for a number of economies including the UK.

For much of the past four years, CPI Inflation has been persistently above the 2% target set by the Government. This has led to concerns that inflation expectations might become less well anchored by monetary policy. An article in this edition – How has the risk to inflation from inflation expectations evolved? – looks at a range of indicators to assess how the risk to inflation from inflation expectations has evolved, by applying the framework previously set out in the Q2 2011 Quarterly Bulletin. Public awareness and understanding of the monetary policy framework more generally are key to the Bank’s success in achieving its monetary policy objectives. In this edition, the annual article reviewing the latest survey data for public attitudes to monetary policy and satisfaction with the Bank is published. The results suggest that the public’s awareness and understanding of the setting of interest rates has changed little since the survey began in 1999. But the February 2012 survey indicates that QE is less well understood. Since the onset of the financial crisis, satisfaction with the way in which the Bank has set interest rates to control inflation has fallen, but remains positive. It has also been more volatile over the past few quarters than has been observed previously.

Between March 2009 and May 2012, the Bank of England’s large scale asset purchases - under its policy commonly referred to as QE – have totalled £325bn. Identifying the impact of QE on gilt yields has become increasingly difficult as MPC announcements about the amount of assets the Bank intends to purchase are now widely anticipated by financial markets, based on economic news and data releases. The article in this edition – Using changes in auction maturity sectors to help identify the impact of QE on gilt yields – tries to overcome this identification problem by using three ‘natural experiments’ associated with operational changes that contained news about the distribution of future gilt purchases (that is, those in March 2009, August 2009 and February 2012). This approach can be used to identify one of the channels through which QE affects gilt yields – known as the local supply channel. The results in this article show that the local supply channel is significant and is estimated to account for around half of the reduction in gilt yields due to QE. And the strength of this channel has remained broadly constant since QE was introduced in 2009.

Much work has been done in recent months by the authorities, payment systems and banks to address how banks can fail in an orderly manner. One aspect of this work is to ensure that any impact from bank resolutions to the continuity of payments for customers is minimised. The article - Considering the continuity of payments for customers in a bank recovery or resolution - highlights some areas where changes could be made so that payments schemes and banks, in conjunction with the authorities, are best prepared for future recovery and resolution scenarios.

Financial market sentiment worsened markedly since the last Bulletin amid a renewed focus in financial markets on the challenges facing the euro area. The Markets and operations article reviews developments in this area and also describes recent changes to intraday liquidity provision by the Bank of England in the CREST system and development of a Standardised Credit Support Annex to be used in over-the-counter derivatives transactions.

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Inflation targeting a robust framework

For more than 20 years, including during vastly different economic conditions, monetary policy in New Zealand has been doing what it was supposed to do - keeping inflation low, said Reserve Bank Assistant Governor John McDermott today.

Speaking at a Bank for International Settlements’ research workshop held in Hong Kong, Dr McDermott said: “The Bank’s analysis on the recent business cycle underscores that the inflation targeting framework is an effective way to conduct monetary policy under a range of testing circumstances.”

Low inflation and the credibility of inflation targeting had meant less volatility in price levels, he said.

“This is helpful for resource allocation, affecting longer term performance and for macroeconomic stability over the medium term,” Dr McDermott said.

Inflation targeting remained a useful tool for the future, but its success did not mean the framework could not be improved, he said.

“Over the course of the past 20 years or so the framework has evolved to reflect lessons learned and is likely to evolve further in response to new developments,” Dr McDermott said.

In particular, the Reserve Bank had increased its monitoring of monetary and credit information in the wake of the Global Financial Crisis.

“The Reserve Bank has also been looking into the effectiveness of some macroprudential instruments that may limit build-ups of problems in future periods of rapid credit growth,” he said.

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ECB PRESS RELEASE 12 June 2012 - Financial Stability Review June 2012

The overall outlook for financial stability has remained very challenging in the euro area. Significant financial market turmoil experienced late last year gave way to some respite in the early months of 2012 following resolute Eurosystem measures, against the background of cumulative political action geared towards a comprehensive strategy to address the causes of the euro area crisis. This relative calm, however, has proven to be fragile and renewed pressures have again emerged since April. Remaining vulnerabilities in the financial stability outlook demonstrate that there is no room for complacency in implementing needed adjustment, either on the part of governments or on that of banks. In particular, Member States should step up their initiatives to strengthen the fiscal and banking components of a robust monetary union.

The Financial Stability Review (FSR) June 2012 identifies three key risks to euro area financial stability:

A potential aggravation of the debt crisis for euro area sovereigns

Bank profitability risk stemming from weaker economic growth and associated higher credit and asset valuation losses

Excessive pace of deleveraging of the banking sector due to frontloaded changes to banks’ business models

There remains a clear need for a continued focus on tackling the root causes of the crisis, and a comprehensive response remains key to decisively ending a spiral of systemic risk augmentation. Concretely, a proactive rigorous policy implementation is needed in five areas:

First, continued action is needed at the national level to both ensure fiscal discipline and accelerate structural reforms for growth and employment.

Second, an effective use of the financial backstops is needed to halt the downward spiral of self-fulfilling dynamics in the pernicious interplay between sovereign, banking and macroeconomic forces.

Third, durable changes to banking models must complement temporary Eurosystem support and provide lasting funding certainty, to accompany the strengthening of the capital base of European banks in the first half of 2012.

Fourth, continued progress is needed to eliminate political and economic uncertainty, not only to stem the forces of contagion but also to provide a more solid basis for markets to manage risk.

Fifth, measures to strengthen economic and fiscal surveillance, and to enhance governance, must be taken and not remain contingent on market-driven pressure – thereby providing credible reassurance that the crisis that has engulfed the euro area over the last few years will never be permitted to recur.

While these five areas provide the necessary critical foundations upon which a sustainable monetary union must be based, there is now a need to go beyond these areas and conceive a banking union as an integral counterpart of Monetary Union. Such an endeavour would clearly take time to implement and could require legal changes. But once in place, three critical objectives could be achieved:

First, strengthening the euro area-wide supervision of the banking sector in order to reinforce financial integration, mitigate macroeconomic imbalances and, therefore, improve the smooth conduct of the single monetary policy.

Second, breaking the link between banks and sovereigns – which significantly exacerbates the impact of any financial disturbance – also by establishing a European deposit guarantee scheme and resolution arrangements.

Third, minimising the risks for taxpayers through adequate contributions by the financial industry.

All in all, developments in the last few weeks have continued to illustrate the persistent negative interplay of key risks, and underscore the need for concerted and comprehensive decisions of Member States to put an end to the turbulence that has been affecting the euro area for over two years.

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RBA RATE CUT TO SLOWER CAPITAL INFLOW INTO AUSTRALIAN DOLLAR

RBA decided to cut the rate for another 0.25 % after previously they lowered for 0.50 % to bring their cash rate down to 3.50 %. Further rate cut remains possible to lower the equilibrium internal rate of return. However, the current 3.50 % cash rate remains the highest rates amongst the major currencies and followed by New Zealand for 2.50 %.

The rate cut will cause the AUD currency band to be aligned to downward direction (for positive interest rate differential) and to upward direction (for negative interest rate differential) as the result of the tightening on their interest rate differential. However, although the lower and upper bands to be aligned to both direction, their exchange rate target zone will be narrowed and result lower volatility for the coming trades.

Positive interest rate differential currency pairs (AUD/USD, AUD/CHF, AUD/JPY, AUD/CAD) will revisit their previous lows and may break them to re-establish a new lower currency band's margin. Accordingly, AUD/USD may revisit and break the level of 0.9650 down to 0.9500. AUD/CHF may revisit and break the previous low 0.9250 as well as AUD/JPY to visit and break the level of 73.00. Although AUD/CAD has the second strongest performance interior the AUD currency band and already feasible to long/buy, the pair will be under pressure until another pairs to reach their lowest equal average traded weighted rates at their new lower currency band's margin. AUD/NZD represents the strongest performance interior the AUD currency band. However, the pair will also under pressure until their equal lowest average traded weighted rates to be stabilized and measurable at their new lower currency band's margin.

Negative interest rate differential currency pairs (EUR/AUD and GBP/AUD) will revisit the previous high or near the previous high until their highest average traded weighted rates at their upper currency band's margin to be measurable.

And, should the lowest equal average traded weighted rates of the positive pairs equals to the highest equal average traded weighted rates of the negative pairs, then the long on the positive pairs and the short on the negative pairs become commendable. However, their turning points will be mixed.

Accordingly, the RBA rate cut will only to slower the capital inflow into AUD currencies and AUD-denominated interest bearing securities. Both carry traders and macro traders will resume their investment into those securities. At such, AUD currency band will continue to have the strongest performance amongst the major currencies.

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G-7 Leaders Pledge to Cooperate in Tackling Spain, Greece

Finance ministers and central bank governors from the world’s leading economies agreed to coordinate their response to Europe’s financial crisis on a conference call that dealt with Spain and Greece.

Group of Seven officials said they will work together to help both euro-area countries place their public finances on a sustainable footing, Japanese Finance Minister Jun Azumi told reporters in Tokyo following the call today. Azumi said he urged European leaders to do more to address investors’ concerns about the region’s finances.

European representatives “said they will speed up their efforts to resolve those problems, which was encouraging to us,” Azumi said. “Japan is ready to provide support if there is anything we can do.” The officials didn’t discuss a possible Greek exit from the euro, he said.

Less than two weeks before a Group of 20 summit in Mexico that will take place as Greece holds its second round of elections in as many months, German Chancellor Angela Merkel is facing increasing pressure inside and outside the 17-nation euro area to to do more to stem the crisis. With the impact spilling over into the global economy, Spain for the first time today appealed for external funding for its banking system.

“The G-7 ministers and governors reviewed developments in the global economy and financial markets and the policy response under consideration, including the progress towards financial and fiscal union in Europe,” the U.S. Treasury said in a e- mail.
European ‘Cloud’

President Barack Obama said June 1 Europe’s recession is weakening U.S. growth in the run-up to the presidential election in November after payrolls increased by the smallest amount in a year in May. Obama toughened his language on Europe saying the bloc’s leaders haven’t done enough to dispel the “cloud that’s coming over from the Atlantic.” Last month he spoke of “significant steps” that Europe has taken.

Unemployment in the single currency area is at a record while the European Commission forecasts the euro-region economy will shrink 0.3 percent this year.

As the turmoil that began in Greece in late 2009 spreads to Spain, Spanish Budget Minister Cristobal Montoro today urged the EU to provide new funds for the country’s banks. Prime Minister Mariano Rajoy said June 1 he’s prepared to give up some control of Spain’s public finances and its banking system so that they can take shelter in a European framework.

“Progress toward real fiscal union is crucial for resolving the euro-region crisis,” a Bundesbank official said.

The extra yield investors demand to hold Spain’s 10-year debt instead of benchmark German bunds reached a record 548 basis points on June 1, raising doubts about the Spanish government’s ability to fund itself. Montoro said the Treasury is struggling to sell bonds.

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BOC RELEASE Ottawa, Ontario

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The outlook for global economic growth has weakened in recent weeks. Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in global financial conditions. While the U.S. economy continues to expand at a modest pace, economic activity in emerging-market economies is slowing a bit faster and a bit more broadly than had been expected. More modest global momentum and heightened financial risk aversion have reduced commodity prices.

Although economic growth in Canada was slightly slower than expected in the first quarter, underlying economic momentum appears largely consistent with expectations. However, the composition of growth is less balanced. In particular, housing activity has been stronger than expected, and households continue to add to their debt burden in an environment of modest income growth. Despite external events, business and household confidence has held up and domestic financial conditions remain very stimulative. The contribution of government spending to growth is expected to be quite modest over the projection horizon, in line with recent federal and provincial budgets. The recovery in net exports is likely to remain weak in light of modest external demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

The Canadian economy continues to operate with a small degree of excess capacity. Total CPI inflation is expected to fall below 2 per cent in the short term, as a result of lower gasoline prices, while core inflation is expected to remain around 2 per cent.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.

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Egan-Jones Ratings Cut Spain's Credit Level

The third downgrade from the agency in less than a month as the country's weak banks continue to worry investors, Egan-Jones Ratings cut Spain's credit level yet again on Tuesday.


The firm cut Spain to B from BB-minus.

Much as it did in downgrades last week and in late April, the company pointed to deteriorating public finances and worries that the country will be faced with sizable payments to support its banking sector.

Spain is battling a debt crisis that is shaking its government, banks and companies. The country will soon issue new bonds to fund ailing lenders and indebted regions despite borrowing costs nearing the 7 percent level that drove other states to seek a bailout.

In addition to the shaky public finances, Spain's banks have increasingly rattled global markets. This month Moody's Investors Service carried out a sweeping downgrade of 16 Spanish banks, including Banco Santander, the euro zone's largest bank.

Spain's own sovereign rating has suffered as well. Standard & Poor's cut its credit rating on Spain by two notches to BBB-plus from A last month.

Spain has an A3 rating from Moody's and an A from Fitch Ratings. All three ratings agencies have a negative outlook on Spain's rating.

The country is working to trim spending but economists fret those very austerity measures could delay a return to growth.

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