How OMFIF covered a decade of turbulence:
Commentaries and meetings 2010-20
Promoting dialogue with central banks
London, January 2010
OMFIF’s aim ‘to promote a dialogue on issues of particular interest for central banks and sovereign funds, and the community that follows them’ is set out by David Marsh in the first OMFIF Monthly Bulletin in January 2010. A Letter from the Chairman states: ‘We bring a specialised but also a creative eye to scanning these matters… We highlight asset management, financial supervision and regulation, and the structure of the financial industry worldwide.’
In the January 2010 Bulletin (changed to quarterly in January 2019) Meghnad Desai calls for a restoration of gold in international financial dealings. Stewart Fleming advises the US Congress to copy the European Central Bank’s statutes and limit the Federal Reserve chairman’s term. Harold James points out how the European Union’s fissiparous structure impeded solutions for troubled banks.
William Keegan assesses problems facing Mervyn King, Bank of England governor. John Nugée ponders risks for central bank independence. John Plender casts a sceptical glance at macroprudential supervision. Michael Lafferty (who set up OMFIF as co-chairman with Marsh) berates the accounting profession for rehabilitating hidden reserves. The Bulletin includes a statement that subsequently came adrift. Jürgen Stark, ECB board member, said, ‘Whoever believes that the European Union state members will put their hands in their pockets to save Greece will end up deluded.’
Volcker urges investment and commercial banking split
London, January 2010
Paul Volcker writes In the inaugural Bulletin: ‘Commercial banking is core and needs to be protected. Non-banking activities like hedge funds, equity funds and so on are not core. If they fail, they fail.’ The former Federal Reserve chairman states. ‘We simply cannot afford further financial market breakdowns.’ The world needs better surveillance of the ‘grossly swollen shadow world’ of derivatives, including credit default swaps.
‘These are financial innovations that stretched beyond a certain point will do more harm than good.… But, beyond all else, we must deal with a fundamental issue. I favour a separation of commercial banking activities that are essential to the functioning of our financial system from more speculative trading-oriented capital markets activities that are not.’
‘We must recognise that commercial banks – running payments, taking deposits, furnishing credit for individuals and businesses, underwriting corporate debt – lie at the heart of any financial system. That is why these activities have always been regulated and protected. That will continue to be the case.’ Volcker points out the adverse effects of bank rescues. ‘However necessary in the circumstances, these interventions bring adverse consequences, most damagingly by generating expectations of future rescues, thus encouraging further risk-taking – the essence of moral hazard.’
Europe’s gloom on growth
Frankfurt, March 2010
Disquiet about long-term growth prospects for Germany and Europe, in view of the burden of public debt after the financial crisis, is one of the main themes at OMFIF’s inaugural meeting at the Deutsche Bundesbank on 2-3 March 2010. Led by Axel Weber, Bundesbank president, the seminar assembles 67 delegates among 35 institutions from 28 countries. They comprise 25 central banks and multinational organisations, four sovereign funds, two regulatory agencies and four large private sector financial institutions.
Participants focus on the timing of the exit from stimulatory monetary policies at a time of excessive public debt and still-fragile economic recovery. Faltering economies in the industrialised West, juxtaposed with relatively strong growth in the emerging economies, exacerbate perceptions of economic recovery divergence between the trans-Atlantic area and Asia.
Delegates say weak growth prospects pose a headache for policy-makers facing the challenge of withdrawing monetary stimulus while trying to rein in excessive fiscal deficits, as well as unwinding official support extended to many major banks. According to one (excessively gloomy) participant, ‘There has been a strong decline in trend growth in Germany.’ German gross domestic product growth between 2010 and 2020 could, on this view, be as little as 0.75%, only half the prevailing rate before the financial crisis struck.
Sovereign funds should rethink stance on governance
London, March 2010
Sovereign wealth funds have the potential to make a major contribution towards better governance of western companies, according to John Nugée, a State Street Global Advisor bank and former reserve manager at the Bank of England. With their large stakes, their global viewpoint and their very long investment horizons, sovereign funds should reconsider their passive role in governance, Nugée writes in the Bulletin in March 2010. ‘A more active role in shareholder governance would be in the general interest.’
Sovereign funds’ policies on investment arose above all from experience in 2007, when high-profile purchases of stakes in the developed world’s financial companies engendered considerable comment, much of it hostile, in the western media. Sovereign funds hastened to quash speculation that ‘companies were being ceded to overseas holders … and backed up these words by declaring that they would waive shareholder rights. However, while this was undoubtedly meant as a conciliatory gesture, it weakened shareholder governance and allowed headstrong and poor management too much freedom.’
Nugée writes: ‘Such complete passivity by major shareholders is neither in the company’s nor in society’s interest. The time has come to ask whether SWFs’ current passive stance is optimal.’
Euro crisis casts Asian shadows
Kuala Lumpur, May 2010
The Inaugural OMFIF Meeting in Asia, held at Bank Negara Malaysia and presided over by Governor Zeti Aziz, coincided with moderate improvement in the world economy after the financial shocks of 2007-08 and the steep recession in 2009, but with disturbances spreading as a result of the euro crisis. Industrialised countries’ debt problems are casting shadows over relationships between the dollar and the euro.
Delegates express serious concerns about the European single currency’s stability despite the €750bn rescue package. ‘Safe haven’ flows of funds into the dollar are temporarily easing the US Treasury’s deficit-financing task but considerable scepticism remains over America’s long-term debt challenges. The seminar brings together 76 delegates with 39 institutions from 22 countries. These include 19 central banks, two governments, three sovereign funds, one regulatory agency and seven private sector financial institutions.
Regarding Asia’s economic prospects, Asian officials looking at continued trans-Atlantic financial unrest insist they have learnt the lessons of the 1997-98 Asian crisis. They suggested the West needs a similar period of lengthy adjustment. Participants forecast prospective increases in Asian investment and consumption will help rebalance world growth. In view of international interdependence, delegates however generally doubt whether Asia’s ‘growth model’ could decouple from the West.
Europe may need debt restructuring
Copenhagen, September 2010
Niels Thygesen, one of the members of the Delors committee that helped forge economic and monetary union, calls on European governments to accept ‘orderly debt restructuring’ in cases where euro member countries could not meet austerity commitments. Financial markets recognise the need for much greater differentiation of euro area sovereign debt, Thygesen writes in the September 2010 Bulletin.
‘This approach implies that the risk of debt restructuring cannot be excluded. Euro area policy-makers, in common with the governments of the most exposed countries, say their actions in the spring of 2010 have removed this risk, at least for a couple of years. But an important question remains. Should there not be a Plan B in the shape of a more permanent crisis management mechanism – or provisions for orderly debt restructuring’ – to meet the possibility of failure of austerity commitments?’
Reflecting the lack of a concrete permanent framework, ambiguity about debt restructuring should be seen as a constructive element, enhancing the market discipline faced by sovereign borrowers. ‘The closer monitoring now being prepared does not make stronger elements of market discipline superfluous. On the contrary, governments and markets could reinforce each other constructively, provided they do not continue to follow the temptation to dismiss each other’s messages.’
Middle East fears over competitive devaluations
Abu Dhabi, November 2010
The Inaugural OMFIF Meeting in the Middle East highlights worries about countries attempting to benefit from competitive devaluations (‘currency wars’), alongside renewed scepticism on whether Europe has done enough to protect economic and monetary union.
More than three years after the start of the trans-Atlantic financial crisis, the meeting – at the Central Bank of the United Arab Emirates, on 31 October-2 November 2010 – coincides with renewed uncertainty over the world economy. Attending are 29 central banks (including multinational organisations), seven national and sub-national government institutions, seven debt management agencies, four sovereign funds and 14 private sector & academic institutions – a total of 121 delegates from 61 institutions among 35 countries.
The meeting is opened by Sultan Bin Nasser Al Suwaidi, governor of the UAE Central Bank. Participants worry whether the US economic recovery wil prove sustainable and whether the Chinese economic upswing will falter as a result of overheating in parts of the economy. These concerns offset some positive developments reflecting buoyant growth in developing and emerging economies and a pick-up in demand caused by low interest rates. Delegates question whether the G20 process is continuing to meet the requirements of the world economy or is in some ways becoming counter-productive.
Schmidt hits at ‘great mistakes’ on euro
Hamburg, December 2010
The European Union made ‘great mistakes’ by deciding to start economic and monetary union in the 1990s with a wider rather than a narrower group of countries, according to former German Chancellor Helmut Schmidt. Schmidt tells the Bulletin in December 2010 that a ‘hard core’ European Union is likely to emerge in 20 years, including Germany and France but not the UK. He casts doubt on Germany’s ability to weather EMU tensions, labelling Chancellor Angela Merkel ‘not a very smooth operator’.
Schmidt says: ‘They not only invited everybody to become a member of European Union but they also invented the euro and invited everybody to become a member of the euro area. And this was done without changing the rules or clarifying the rules beforehand.’ Europe should have taken more note of rising current account deficits in the peripheral countries. ‘They should have defined more strongly the rules on the economic behaviour of the participants. The so-called stability and growth Pact is not an instrument of law. It’s just an agreement between governments. And it was not helpful that both France and Germany violated the rules of the pact.’
Why China should internationalise renminbi
London, February 2011
An OMFIF report urges the Chinese leadership to ‘overhaul [its] present piecemeal approach of announcing renminbi internationalisation moves in a step-by-step manner without placing them in a well-rounded political and strategic context.’ China should put forward ‘in greater depth and stronger detail proposals for improving the sub-optimal state of the world monetary order.’
The OMFIF review says, ‘China needs to design, promote and publicise a clear programme for full renminbi internationalisation in the next 10 years’, facilitating a move for the renminbi to become, over time, the No. 2 reserve and market currency after the dollar.
The policy would allow the renminbi to circulate with steadily greater freedom on foreign banking and financial markets and to be used in larger volumes and in a greater variety of international transactions. The Chinese authorities should progressively extend freedom for public and private sector Chinese investors to invest abroad. This would involve strengthening China’s own financial markets and banking infrastructure.
A ‘convincing and consistent’ framework allowing the renminbi to find its own level on foreign exchange markets would mark a substantial Chinese advance towards maturity in international financial relations. The renminbi’s gradual co-existence with the other large reserve currencies would allow China access to renminbi financing from foreign sources.
Lifetime achievement award for Botswana governor
Pretoria, August 2011
The Inaugural OMFIF Meeting in Africa, at the South African Reserve Bank in Pretoria on 22-23 August 2011, comes against the background of slowing growth in the industrialised world, concern about the downgrading of the US credit rating by Standard & Poor’s and further worries about the European sovereign debt crisis. There is a mood of cautious optimism about Africa’s ability to cope with its own problems, but these difficulties in industrialised countries are seen overall as negative developments for the world economy. A principal highlight is a dinner where Governor Linah Mohohlo of the Bank of Botswana is presented with an OMFIF lifetime achievement award for services to central banking.
The meeting discusses possible setbacks caused by softer commodity prices. But it emphasised an overall brighter outlook for Africa, based on greater political stability, broader wealth creation, reduced debt burdens and more efficient financing. Other crucial requirements for the future include progress in fighting corruption and strengthening trade integration with other faster growing regions.
The seminar assembles 133 delegates among 69 institutions from 28 countries. There are 18 central banks (including multinational organisations), seven international and intergovernmental institutions and six national and sub-national government institutions, 38 private sector and academic institutions.
Race against time for euro
Berlin, September 2012
Europe is engaged in a ‘race against time’ in attempting a cure for economic and monetary union, while Americans are riled by ambiguity over the crisis ion Berlin, write Frank Scheidig and Michael Burda in the September 2012 Bulletin. (EMU). Necessary steps have been put into place by European governments to improve euro area decision-making. A start is being made in healing the worst of the intra-EMU economic imbalances. But this is a race against time.
A rebalancing of European economies, with the relatively better-performing northern economies losing competitiveness against the recession-hit south, could over time lead to a calming of financial markets. The problem is that, left to their own devices, the markets will take fright at the large volume of financing that still has to be done for the under-performing south in the next few months.
Given the scale of the current and capital account imbalances that still need to be financed, and the sharp rise in bond market interest rates for the most heavily exposed countries, Italy and Spain, there is no substitute for some kind of official financing for Spain and conceivably, too, for Italy in coming months.
Central banks’ wider powers bring greater restraints
Central bankers need to adjust to an increasingly public and prominent position on the political stage, according to a joint OMFIF-EY report ‘Challenges for central banks: wider powers, greater restraint’ published in September 2012. A fundamental debate about the position of central banking and its relationship to government is under way.
Financial and economic crises have thrust central bankers centre stage and cast them as leading actors, simultaneously berated as progenitors of the crisis and hailed as potential saviours. The financial crisis has led to considerable interlinked economic, sovereign debt and financial sector turbulence as well as political volatility.
Central bankers have achieved a new prominence and become pivotal members of the policy-making establishments. Extension of powers and remit is unlikely to be temporary and may not be entirely desirable. It raises questions about central banks’ accountability and transparency.
Central banks have become national and global firemen with growing responsibility for the resilience of economies, the stability of financial systems and individual financial institutions, macro-and microprudential regulation, and macroeconomic and quasi-fiscal policy. They have gleaned far greater exposure to the media, politics and electorates. They have also taken on a new strategic and operational task and become exposed to far greater financial, reputational and operational risks.
IMF’s welcome switch on capital controls
London, December 2012
At last, the International Monetary Fund has changed its stance on capital controls, setting out its ‘institutional view’ which shifts position in a way the emerging economies have been urging for decades, writes Meghnad Desai in the December 2012 Bulletin. ‘Even though the espousal of capital controls is guarded, let’s hope this thin end of the wedge represents the beginning of wisdom at the IMF.’
Capital controls are now to be called Capital Flow Management Measures (CFMs). ‘Controls’ smack of dirigiste regimes, while ‘management’ is entirely kosher. Either way the IMF
has now nodded realistically in the right direction. The executive summary of the Fund’s paper, ’The Liberalisation and Management of Capital Flows’, says: ‘In certain circumstances, capital flow management measures (CFMs), i.e. measures that are designed to limit capital flows, can be useful and appropriate. These circumstances include situations in which the room for macroeconomic policy adjustment is limited, or appropriate policies take undue time to be effective.’
In its heyday, the Fed espoused a strong version of monetarism and New Classical economics, Chicago-style, Desai says. Now, with the Fed and the Bank of England issuing money through quantitative easing, the tenets of monetarism have been thrown to the winds.
Bank of England laments deflationary forces in euro area
London, May 2013
Restoring the euro area to growth requires dealing with accumulated financial imbalances, as well as restoring competitiveness and rebalancing demand and production, according to Charlie Bean, deputy governor of the Bank of England, at an OMFIF City lecture on 29 May 2013. He underlines the danger of in-built deflationary forces. ‘On the face of it, that rebalancing is under way, with a narrowing in the current account deficits of the periphery. However, much of that is attributable to the substantial fall in imports associated with the collapse in domestic demand, rather than a rise in exports.’
The necessary reallocation of resources is harder to achieve in a currency union than in a country with its own currency, as the exchange rate is not free to adjust. ‘Absent a supply-side miracle to raise productivity in the periphery, the necessary reversal in the movements in relative unit labour costs needs instead to come about through wage and price adjustment.’
Bean points out that the euro’s architecture encompasses an ‘inherent asymmetry, noted long ago by Keynes, that when credit flows dry up, adjustment is compulsory for the debtor but only voluntary for the creditor.’ Consequently pressure for austerity is greater in the periphery than it is to boost demand in the core. ‘
Renminbi will rise with gold
Beijing, January 2013
Reserve holders will spread investments more widely among assets and sectors, in a move that will benefit gold, according to an OMFIF report on the links between the renminbi and gold in January 2013. The world is heading towards the ‘uncharted waters of a durable multi-currency reserve system’, where the dollar will share a pivotal role with a range of other currencies, including the renminbi. ‘All paths lead to towards a multicurrency system, in which gold’s role is likely to become more significant.’
OMFIF says gold’s international role would be further enhanced in the coming 10 years as a result of basic uncertainties over the dollar and the euro.
‘China will rise as the US wanes, but this rebalancing will occur gradually rather than abruptly and setbacks and perturbations are likely along the way.’ The report underlines lessons from reserve currency evolution over the past century. Gold’s monetary use rose during the transition; the role of geopolitics in the international monetary system increased as the system became more complex. ‘The rebalancing of the global economy – with the East again home to some of the most important world economies – means that growing international reserves will naturally become more diversified away from the dollar.’
Schröder says two-speed Europe a reality
London, June 2013
The crisis affecting the euro is less a currency crisis than a crisis of European policy, Gerhard Schröder, former German chancellor, tells an OMFIF dinner on 6 June. ‘To solve the basic problem of the euro, we must change the structures of European institutions. The fundamental mistake of monetary union is that there is no coordination of economic and financial policy in the euro area. We must create this coordination in the future. The direction of European economic and financial policies must move away from pure austerity and towards growth-orientated policies. National economies risk being strangled by strict austerity measures. We need budgetary discipline and structural reforms, but we also need growth.’
Renewing structures is difficult in a European Union with 27 member states and a monetary union with 17 countries, Schröder says. ‘But we must change course if both the euro and the EU itself are to remain sustainable. Evidently, there is a Europe of “two speeds”. A core Europe, that grows together more quickly politically, and a fringe Europe wishing greater autonomy. These are two very different visions. There are those who imagine Europe as a political union; and those who think of Europe only as a single market, while the political process should remain largely national. Europe must decide between these two positions.’
Threats to emerging market economies
Brasilia, June 2013
The growing complexity of the world economy poses significant challenges for emerging market economies, according to Carlos Hamilton Araújo, deputy governor, Banco Central do Brasil, at the inaugural OMFIF meeting in Latin America, at the central bank in Brasilia on 17-18 June 2013. ‘Five years after the outbreak of the financial crisis, we are still searching for a solution that improves world activity and provides economic and financial long-run stability.’
Despite the economic growth that has been seen in emerging markets, these economies are dealing with several threats. Many emerging market economies are facing growth deceleration, inflation risks, as well as risks stemming from volatile capital flows.
The ‘systemically important’ emerging markets have slowed with important impacts on international prices and growth. This suggests that the Latin American economies will not benefit much from beneficial tailwinds. The OMFIF meeting, including 68 participants from 23 countries, ‘gave us a chance to discuss important global issues, including the economic crises, economic integration, investment funding, monetary and macroprudential measures, and new international currencies,’ Araújo says. ’ Brazil has an important role to play for the region, not only in trade, integration and financial facilities, but also in regional co-operation and coordination.’
Why Yellen should become Fed chairman
London, June 2013
Janet Yellen is the best bet to head the Federal Reserve when Ben Bernanke steps down as expected in January 2014, Meghnad Desai writes in the June 2013 Bulletin. ‘She has steady hands and will be a consensus-building chairman.’
Desai reflects on Yellen’s reputation as a ‘dove’ – despite her record as chairman of the Council of Economic Advisers when the budget was balanced. ‘In the probable circumstances of the US and world economy in coming years, dovishness may not be a bad thing. ‘The need for now in the western economies is to get a sustained recovery. Fiscal tools have been blunted, as a result of the debt burden. ‘It will be a clever monetary policy that will do the trick. Yellen can deliver it.’
Desai says he hopes Yellen, facing candidates such as Lawrence Summers, will not suffer the female handicap of being undervalued. Desai got to know Yellen during her two-year stint at the London School of Economics. George Akerlof, her husband, later a Nobel laureate, had been made professor. ‘Janet was the real monetary economist in that family but was undervalued by the LSE and was given only a lectureship. Yellen’s subsequent career has shown how wrong the LSE was.’
China’s risk of capital outflows
London, September 2013
On full opening of the capital account, China faces a risk that large capital outflows may cause the renminbi to fall substantially, with the danger of a currency crisis. In such an eventuality, the Beijing authorities should accommodate outflows, while using the country’s large foreign exchange reserves to stabilise the renminbi, according to an OMFIF report on China’s monetary and economic transformation published on 3 September 2013.
The report – part of OMFIF’s ‘Renminbi Focus 2013’ – deals with the monetary policy implications for China and the rest of the world of the planned switch towards a more market-orientated system, including through the liberalisation of the capital account and interest rates. The OMFIF report says this fundamental Chinese transition is a great opportunity, but also poses deflationary risks.
Chinese policy-makers have a better chance of rising to forthcoming challenges than many other developing countries. China’s macroeconomic situation is relatively positive and the Beijing authorities have a positive longer-term track record in monetary affairs. The report recommends a shift to a more conventional monetary framework; robust regulation and supervision before the removal of capital controls; and improved communication on monetary policy.
Yellen’s spirit of eclectic pragmatism
Janet Yellen, likely to be confirmed as the first female chairman of the US Federal Reserve, encapsulates a new mood of eclectic pragmatism in international central banking, writes Darrell Delamaide in the November 2013 Bulletin. Central banks’ ever-wider set of responsibilities strains their operating manoeuvrability as well as their independence.
Yellen seems likely to accomplish that task better than most. But she had to overcome the favouritism of the old boy network, where President Barack Obama haplessly clung on, almost to the last moment, to his preferred choice, former Treasury secretary Lawrence Summers. By raising her reputation for independence and damaging that of the president for sound judgment, the episode is likely to harm Obama more than Yellen.
For reasons unconnected to gender, she has made history. At 67, she is the oldest person – and the first vice chairman – ever appointed Fed chief. She is the first Democrat to lead the Fed since Paul Volcker in 1979. Yellen is likely to prove resolute yet flexible and pragmatic, moving cautiously to tighten monetary policy as economic conditions warrant. One big question mark is how well she can handle the Fed’s regulatory responsibilities, expanded under the Dodd-Frank financial reform. Yellen has called this the Fed’s ‘third mandate’.
Middle East sees US in lead
Doha, November 2013
The US is leading the world out of recession, while the euro area remains in the doldrums, alleviated by brighter prospects in countries like Germany. Japan’s economic picture is brightening under the impact of measures launched by Prime Minister Shinzo Abe to bring inflation up to 2%. That is the picture served to delegates at the Second Main Meeting in the Middle East in Doha on 27-28 November 2013, investigating ‘The role of the Middle East in the world economy – perspectives for growth and change’.
Sentiment in the financial markets remains robust despite the prospect of a slowdown in the Federal Reserve’s extraordinary asset purchases, which have maintained financial market buoyancy over the past year.
The meeting examines the role of the Middle East in the fast-changing global economy and the implication for capital flows in and out of the region. Delegates also focus on the outlook for world energy prices and energy substitution, including the impact of the shale gas revolution in the US on the GCC region and its effects on worldwide energy investments. The symposium brings together a total of 40 institutions, including delegates from 20 countries representing central banks, international financial institutions, governmental institutions, the private sector and academic institutions.
Capital account liberalisation in China
Beijing, February 2014
The Chinese leadership will need careful synchronisation of internal and external liberalisation as well as solid regulatory preparations in its ambitious plan to open up the country to international capital flows, according to an OMFIF report published in Chinese on 21 February 2014.
The report, ‘Capital account liberalisation in China’, launched at the Chongyang Institute for Financial Studies at Renmin University in Beijing, warns that China needs to be prepared for the unexpected, since previous cases of exchange control relaxation around the world have led to a great variety of outcomes, ranging from asset price bubbles to currency crises.
‘Capital account liberalisation can lead to large inflows and outflows of capital. What matters is not the flows but how the authorities react to them,’ according to Gabriel Stein, main author of the report, at the Chongyang Institute.
The study, issued in English in December, is the fourth in OMFIF’s 2013 Year of Renminbi Focus. The report contains lessons from seven case studies comprising countries that have liberalised capital controls in recent decades: Israel, Malaysia, Mauritius, Mexico, South Africa, Sweden and the UK.
Asset allocation report shows shift into alternatives
London, November 2014
Allocating assets towards ‘alternative’ investments beyond public equity and fixed income is an accelerating trend among many funds, according to OMFIF’s public sector asset allocation report published in November 2014. Furthermore, in the last 10 years, portfolios have been shifting away from assets in fixed income to a bigger proportion in public equity, illustrated by Canadian Pension Plan Investment Board and Norges Bank Investment Management. NBIM has 60% public equity and 40% fixed income; before 2008 the opposite was true. Since 2000 CPPIB has been lowering its allocation in fixed income, shifting assets to public equity and alternatives.
Illustrating the shift to alternatives, China Investment Corporation has an equal amount allocated to alternatives as equity (40%). Australia’s Future Fund is moving its allocation away from cash and into growing portfolios of property and infrastructure and private equity. Since 2004 CPPIB has increased its allocation in alternatives every year, to 21.6% in 2013.
Since the financial crisis, CPPIB has been moving more of its allocation towards real estate and infrastructure. In 2008 it had 5.6% in real estate, in 2013 the proportion stood at 11.6%; its infrastructure allocation has risen from 2.2% to 6.1%. Future Fund has followed a similar trend increasing its property and infrastructure allocation from 1.4% to 14.1%.
China’s position at Bretton Woods: parallels with 2015
London/Washington, July 2015
There is a surprising amount of policy-making continuity in the position of the Chinese Nationalist government in 1944 compared with that of the Communist leadership now, according to an OMFIF report, ‘The Chinese Delegation at the 1944 Bretton Woods Conference’, published in July 2015.
The report, by Jin Zhongxia, China’s executive director at the International Monetary Fund, shows how China sent the second-biggest delegation to the 1944 conference, did its best to gain an adequate quota as the fourth-biggest country in the IMF and was plainly seeking a greater voice, next to the US, in a fast-changing monetary and financial world. ‘It was fighting to find its feet – just as is the case today. Jin’s paper throws light on the parallels as well as on the contrasts, and OMFIF is very pleased to publish this English translation,’ David Marsh writes
The paper comes at a propitious time. The Chinese economy is at a turning point as it prepares to enter a period of slowdown in which domestically generated growth takes over from export-driven expansion. The renminbi is tracking the dollar higher on the foreign exchanges, causing pain to the export sector but bringing Chinese consumers and corporations considerable terms of trade benefits.
Crossing the collateral rubicon
London/New York, September 2015
Sovereign institutions have developed beyond their traditional roles on money and capital markets, according to BNY Mellon and OMFIF in a joint report ‘Crossing the Collateral Rubicon – A new territory of challenge and opportunity’, published in September 2015. They are being called upon to provide collateral in the form of stocks of high-quality bonds used to facilitate basic transactions, such as repurchase agreements at the heart of bank and market finance in many jurisdictions.
Providing collateral through sovereign institutions could play an important part in overcoming liquidity shortages which might otherwise drive up market volatility during periods of financial turbulence. Collateral trades could be one of the instruments helping prevent a recurrence of financial crises similar to 2008-09. Sovereign investment institutions have been gradually adjusting to their positions as systemically important players in the world economy.
These institutions have occupied the limelight for several years as significant providers of capital for international companies, governments and large-scale projects such as infrastructure. Now, as the result of important regulatory and macroeconomic developments, global public investors are emerging on financial markets in a new role as potential large-scale providers of high-value collateral to inject liquidity and facilitate transactions vital for the real economy.
Future of European Central Bank
London, September 2015
The financial and economic crisis has hit Europe particularly hard, demonstrating the fragility of the financial sector, fundamental market differences among euro members and the inability of a monetary union without a fiscal and political union to counter asymmetric shocks, according to an OMFIF report published on 29 September 2015. Over the past five years, the ECB has taken extensive measures to improve the workings of financial markets and create conditions for higher economic growth. These form part of more fundamental political efforts to shore up the foundations of economic and monetary union.
The report, discussed at a seminar including Hans Eichel, former German finance minister, investigates how the crisis has reshaped the euro area and its central bank. Through the lens of six years of OMFIF articles and commentaries, this report evaluates the challenges and opportunities for the ECB in the next decade. It focuses on why has the ECB evolved in the direction it has taken, how other central banks responded to the crisis and why the ECB expanded its supervisory role? Other issues covered include the long-run effects of quantitative easing and the options for radically improving the structure of monetary union.
ECB grows into political role
The European Central Bank has evolved from a largely technical central bank into a very important part of the political structure of the euro area and the European Union, writes John Nugee in the OMFIF report ‘Future of the European Central Bank’ in September 2016. ‘Not entirely of its own accord,’ Nugee adds. ‘Most central bankers prefer to be technicians.’
For the first 10 years after its founding in 1998, the ECB experienced the relatively calm times of the Great Moderation. It learned about central banking within a monetary union and how to manage the euro area and its monetary policy. The ECB acquired these technical skills rapidly, along with great respect.
Since 2008, tasks have changed. The ECB has had to manage a central bank of a common currency in more difficult times. The bank has lost three of its most valued assets and gained a new role. It has maintained its statutory independence, enshrined in law in each of the 28 member states. Yet it has seen this independence influenced and constrained by new political and economic realities. The three assets which the ECB had in 2007 but no longer enjoys are certainty of mission, certainty of method and certainty of political support.
Sovereignty to the fore in EU referendum
London, February 2016
The populist banner for the Leave campaign is for control of immigration, the assertion of sovereignty, and the reassertion of nation state integrity, writes Philip Middleton on 29 February 2016, starting a 110-strong OMFIF article series on the EU referendum.
For Remainers, the nation state is an archaic concept, superseded by the subtleties of a multipolar world based on alliances and pooled sovereignty. The populist banner for Remain is the so-called ‘project fear’, based on the twin ogres of economic chaos and diminished security which Remainers believe Brexit would unleash. ‘The debate promises to be fierce and increasingly divisive, encompassing questions of nationality, economics, jurisprudence, sovereignty and democracy.’
The UK has always been a semi-detached member of the EU. The institution has rarely aroused much passion among Britons. Now the core principle of membership has become the primary issue. What started as a parochial debate within the Conservative party has produced a confrontational referendum with immense consequences.
Beneath the slogans lie fundamental questions for the UK, the EU, and the post-war western liberal consensus. This debate will not be resolved by any one event, even by a poll as momentous as the referendum. But 23 June sets a milestone, for the UK and internationally.
Likely reversal of foreign exchange reserves decline
China’s falling foreign exchange reserves have captured the headlines, reflecting the size of the decline and a wider story of China’s slowing economy and the authorities’ struggles to maintain an orderly renminbi market, write John Nugee and Gary Smith in an OMFIF report ‘Foreign exchange reserves in a volatile world’ in April 2016. Some commentators predict further declining reserves in the emerging world. ‘We are not going to predict an imminent end to the recent decline, but we are doubtful that forecasts of an extended and sharp deterioration in foreign exchange reserves are likely to be correct.’
In view of the underlying economics of emerging markets, the surge in global reserves in the 15 years to 2014 is unlikely to go into full reverse. After almost 15 years of unremitting growth to end -2014, reserves totals have begun to decline, in some nations, relatively quickly. China’s reserves, after peaking at $4tn in December 2014, have fallen 20% to $3.2 tn. In our September 2015 paper (‘The changing role of central bank foreign exchange reserves’) analysed the uses and likely path of central bank foreign exchange reserves. After a turbulent six months in markets, we develop further themes that have risen to prominence.
Managing centrifugal forces
In the aftermath of the European Union referendum, the UK will still struggle to balance with being an open country, commercially and culturally, and regulating the entry of foreigners seeking to settle, writes Philip Lagayette in the July 2016 Bulletin. There is no quick fix. This is even more true in respect of globalisation, which will continue to create tensions detrimental to less educated people. Europe is only the channel for globalisation, at best attempting to use the collective weight of member states vis-à-vis the rest of the world. Divergence between so-called elites and the people is not the result of a Brussels plot. It is visible in many countries, including the US.
Europe will not be easier to run following a UK exit. Not only because of the complex and lengthy negotiations to come, which will take up decision-makers’ time and energy for years to come. But because Europe will have to manage various centrifugal forces more frequently. Europe has a pressing need to reduce the internal weaknesses on which the UK vote has shone a cruel light. The Brussels system of power is too far from the people. This is the view of public opinion in several countries, and has become the basis for populist political criticism.
Trump the unorthodox: figure who surprises
London/Washington, July 2016
Donald Trump is an unorthodox political and economic thinker but should be taken seriously as candidate for the White House, according to a report by Meghnad Desai on 20 July 2016, three months before the US presidential election. Trump has been careful not to articulate a complete and consistent economic philosophy, Desai says. Tactically this is shrewd – he is a moving target and difficult for his critics to shoot at.
He is not a fool as many say he is. Nor is he confused or self-contradictory. His is a studied stance intended to sow confusion in the minds of his opponents. Trump has made promises to create jobs, restrict immigration, build a wall along the US-Mexico border, and reverse the ‘drain’ caused by trade, particularly in respect of China. The Republican nominee is a mercantilist and a protectionist – a hallowed American tradition. The British referendum decision to leave the European Union will help Trump. The rightwing populist and xenophobic thrust that was a feature of the UK Leave campaign is very much in his style.
‘Donald Trump would not be a particularly palatable US president, but he is far from improbable,’ concludes David Marsh. ‘Trump is unusual and, in many ways, disturbing, but he is electable.’
Action for sovereigns on global liquidity
Government and central bank responses to the financial crisis have contributed to a mismatch between supply and demand of safe and liquid assets, according to a report , ‘Mastering flows, strengthening markets – How sovereign institutions can enhance global liquidity’, published by OMFIF and BNY Mellon in September 2016.
The composition of market participants has changed, including the growth of ‘shadow banking’, adding to complexity on counterparty risks and trade strategies. All this provides challenges, but also great opportunities, for sovereign institutions including central banks, sovereign funds and pension funds, capable of acting together to help mitigate conditions inimical to sustained economic expansion.
Post-crisis regulations have raised the cost of balance sheet-intensive activities for banks and dealers, leading to greater risk aversion and disintermediation. Highly accommodative monetary policy has contributed to changes in bond issuance practices, trade strategies and market participants, reducing resilience to future liquidity strains. Low yields on high-quality assets have pushed investors into more risky markets, with a risk of illiquidity when monetary conditions change. Underlined by the survey carried out for this report, sovereigns show a growing willingness to play a role in mitigating these challenges, especially via increased capital markets activities such as securities lending and direct funding of less-liquid asset classes.
Britain’s European divorce will be half-way house
Athens, June 2016
A complete British divorce from Europe is highly unlikely, writes David Marsh on 30 June 2016, a week after the referendum decision to leave the EU. ‘Much more probable is a flexible halfway house relationship, far from the absolutist or apocalyptic predictions of Leave or Remain campaigners. The UK and its EU partners will still carry out substantial trade and investment. Britain will make reduced payments into the European budget. And restrictions, but no swingeing clampdown, will be in place on free movement of people between the UK and the EU.
Writing from the Greek capital, Marsh said: ‘Athens is a useful vantage point from which to reflect on the surreal nature of European plebiscites, following the ‘bizarre [Greek] referendum U-turn over Greek austerity a year ago.’
Almost nothing any protagonist said before the referendum holds true in the new post-referendum world. The circumstances embody a touch of fantasy. ‘David Cameron, the UK prime minister, has lost a referendum he probably never believed would take place and that his opponents (led by Boris Johnson, the now somewhat baffled-looking former mayor of London) never really expected to win.’
Emerging markets hold key to gold’s renaissance
London, September 2016
The rebuilding of central bank gold reserves since the 2008 crisis marks the latest phase in a two centuries-long cycle of changing policies on the yellow metal, which fall into seven distinct periods, write David Marsh and Ben Robinson on 21 September 2016.
The Seven Ages of Gold have each lasted an average of around 30 years. And the current, ‘Rebuilding’ period is the longest protracted spell of gold accruals since 1950 to 1965, when central banks and treasuries acquired a net total of more than 7,000 tonnes during post-war recovery.
Since 2008 central banks have added more than 2,800 tonnes or 9.4 per cent to reserves, equal to annual net purchases of 350 tonnes. This brings purchases in line with the 100-year average up to 1970 — reflecting the metal’s renewed attractiveness as a safe haven asset.
One reason for gold’s renaissance has been developing countries’ hesitancy about the dollar. China seems to be following a strategy of using gold to counter the weight of the dollar. Last year China lifted part of the veil over its gold reserves, breaking a six-year silence to reveal holdings of 1,658 tonnes as of June 2015 against the previously reported 1,054 tonnes. In August it had 1,823 tonnes.
Zombie banks, zombie companies: the reckoning
Unconventional monetary policies –bond-buying programmes by central banks in Japan, the US and continental Europe – are fiscal policy in disguise, writes William White in the October 2016 Bulletin. As a result of central banks’ transgression into the political sphere, the 40-year period of central banking independence is now over. Current policies foster financial instability. By squeezing credit and term spreads, the business models of banks, insurance companies and pension funds are put at risk, as is their lending. Many asset prices are bid up dangerously high.
Resources have been locked in through zombie banks supporting zombie companies. The insidious effects of persistently ‘easy money’ policies can be seen in the alarming slowdown in global growth. Two vicious circles are at work, with a wounded financial system contributing to both. Accumulating debt creates headwinds that slow demand, leading to still more monetary expansion and yet more debt. Supply-side misallocations have a similar effect.
The exit route relies on government action rather than that of central banks. We need to adopt precepts from both Keynes and Hayek. To please Keynes, governments should use whatever room they have for fiscal expansion, with emphasis on infrastructure investment. Into the Hayekian category fall measures to address excessive debt through careful debt write-offs and restructuring.
OMFIF extends reach to Asia with Singapore opening
Singapore, November 2016
OMFIF is extending its Asian reach with its first international office, in Singapore, led by Adam Cotter, OMFIF head of Asia. The office is launched on 16 November 2016 with a reception at its premises in the Lee Kuan Yew School of Public Policy at the National University of Singapore.The launch is presided over by Meghnad Desai, Kishore Mahbubani, dean of LKY School of Public Policy, NUS, and Ravi Menon, managing director. Monetary Authority of Singapore.
‘The office is based in Singapore as it is one of Asia’s leading financial centres,’ said Desai. ‘It is in close proximity to many of OMFIF’s regional partners which have shown great support for the expansion.’ David Marsh adds, ‘A presence in Asia is the next step for the continued development of strong ties with both public and private sector institutions in the region.’ Cotter sees complementarity with other centres. ‘In developing our coverage and understanding of Asia, we will also bring policy-makers from the US, Africa, Latin America and Europe to the region.’
In the past seven years, OMFIF has held monetary policy meetings in Australia, China, Hong Kong, Indonesia, Japan, Laos, Malaysia, the Philippines, South Korea and Singapore.
Praet expects extended euro area recovery
Frankfurt, February 2017
‘We expect the euro area economy to recover further,’ Peter Praet, European Central Bank board member responsible for economics, tells an OMFIF lunchtime meeting. Private consumption growth and the continued cyclical recovery of business investment are expected to support domestic demand. Underpinning consumption are the improvements in labour market conditions, with unemployment steadily falling despite a rise in participation. These developments increase households’ real disposable income, which boosts the spending of established employees, who are confident about their earnings prospects, as well as new employees. Business investment is also expected to continue recovering amid support from better corporate profitability.
‘As a central bank with a clear price stability mandate, we need to ultimately judge economic developments with regard to their implications for price stability. Inflation has fallen short of the ECB’s medium-term inflation goal of below, but close to, 2% since the beginning of 2013. But recently, with the fading of the declines in energy prices that restrained inflation, headline inflation has moved up quite sharply. In the near future, we will have to assess how the forces that are driving prices today can influence the outlook for price stability in the medium term and help durably stabilise inflation around our goal.’
Central banks’ action on climate change
Frankfurt, July 2017
Luiz Awazu Pereira da Silva, deputy general manager at the Bank for International Settlements, tells an OMFIF seminar that central banks and financial regulators can play a positive and special role in combating climate change.
Speaking at a symposium convened by Deutsche Bundesbank, Bank for International Settlements, German Ministry of Finance, World Bank Group and OMFIF on 13 July 2017 in Frankfurt, Pereira da Silva says Global Public Investors can map and identify climate change-related risks. They can strengthen the process of labelling green finance instruments in a rigorous and credible way. And they can foster private sector investment in climate change-related new technologies.
The symposium concludes that the US decision to withdraw from the 2015 Paris climate change agreement would have little impact on the world’s determination to move to more sustainable The OMFIF Global Public Investor Symposium, at the Bundesbank’s regional headquarters, attracts 77 participants from nearly 30 countries. Of these, 60% were representatives from public institutions, including central banks, sovereign funds, public pensions, international financial organisations and governments. The meeting hears case studies of successful asset management and diversification, as well as methods for enhancing green bond issuance.
OMFIF chronicles UK exchange rate mechanism exit
Britain entered the European exchange rate mechanism in desperation, left in disgrace and prospered thereafter– a presaging the 2016 vote to leave the European Union, relates an OMFIF Press book on the ERM crisis. Britain’s 1990 entry was accompanied by a secret Bank of England warning of future trouble. On leaving in 1992, Prime Minister John Major insisted on time-wasting consultation that led to exhaustion of Britain’s reserves. Helmut Schlesinger, Bundesbank president in 1992, says in the book Six Days in September: Brexit, Black Wednesday and the Making of Europe he ‘regrets to this day’ how his remarks on currencies helped precipitate the run on the pound.
‘David Marsh, William Keegan and Richard Roberts have written a very balanced and detailed account. As a result of their diligent research they have unearthed many details, some which even I had forgotten,’ comments Lord (Norman) Lamont, Chancellor of the Exchequer (1990-93).
‘As well as providing a dramatic account of the events leading to Black Wednesday, this book illustrates the stresses and strains of operating a single currency without ultimately requiring economic and eventual political union. It’s an issue that’s been fudged since the inception of the euro, but it will never go away,’ according to Lord (Alistair) Darling, Chancellor of the Exchequer (2007-10).
Expanding research on gender balance
London, March 2018
OMFIF’s fourth annual report on gender balance in public financial institutions expands research to include separate indices for sovereign funds and European public pension funds. The Gender Balance Index highlights the absence of women at the highest levels of these institutions and emphasise the outstanding individuals who have successfully reached the top.
OMFIF hopes to encourage gender diversity within global public investment institutions and attract more women to an historically male-dominated ﬁeld. ‘Gender balance is not a lofty ideal, but a tool that can beneﬁt investment outcomes.’ Central banks’ score on the GBI has fallen to 19% this year from 31% in 2017, indicating that there are even fewer women in senior roles. Our analysis of sovereign funds and European pension funds ﬁnds the imbalance persists across institution types. Sovereign funds show an even bleaker picture, with a GBI value of 11%, while pension funds offer some hope with a score of 40%. Institutional GBI scores are calculated by tracking presence of men and women in the highest ranks, weighted by seniority.
‘The imbalance is not new, but why it matters is of enduring relevance. Gender diversity in leadership is especially important given the implications for how institutional decisions are made.’
Bittersweet ECB message: euro ‘irreversible’, membership not
London, June 2018
The euro is irreversible, but the composition of the countries in Europe’s single currency is not. That is the bittersweet message from OMFIF’s 18 June 2018 London seminar commemorating the 20th anniversary of the European Central Bank’s establishment on 1 June 1998. Other conclusions are that debt restructuring within the euro area – including possibly for a large euro member such as Italy – is virtually inevitable at some stage; that the ECB had become increasingly politicised; and that the ECB is ill-prepared for a future international recession.
The discussion brought together Jürgen Stark and José Manuel González-Páramo, former ECB executive board members in 2006-11 and 2004-12 respectively, Lord (Adair) Turner, former chairman, UK Financial Services Authority, and John Kornblum, former US ambassador to Germany.
The ECB decision to leave interest rates in negative territory at least until summer 2019, at the same time as deciding to phase out its €2tn-plus quantitative easing at the end of 2018, was a relatively dovish decision. This would give the central bank less leeway to ease policy when the next world recession strikes, which could be as early as 2020. The US federal funds rate by that time may be 3.5%, representing a massive widening of the US-European interest rate spread.
Critical questions on automation
The loss of manufacturing jobs in advanced economies is due not only to the offshoring of production to emerging markets, but also due to the encroachment of robotics, automation and artificial intelligence on these processes, writes Bhavin Patel on 18 July 2018.
For policy-makers, striking an appropriate balance between economic growth through automation and the defence of workers will be a significant challenge in both advanced and emerging market economies. Universal basic income and taxes on robots have been suggested as methods of redistributing income and wealth more evenly. Others propose that a shorter working week will help redistribute time if some jobs are partially automated. Improving education in science, technology engineering and mathematics can mitigate poor labour market outcomes. Equally, bolstering industries that do not rely on robotics and are instead tied to human interaction, such as care-giving and teaching, will be essential.
Robots are becoming more reliable, proficient and cheap. The combination of machine learning, through studying large data sets, and artificial intelligence is expanding the number of functions that robots can take over from humans. In addition, the incorporation of advanced information technology systems in production has provided an abundance of relevant data for both sides of the supply chain, increasing production capacity by around 20%.
Strengthening operations in US
London/Washington, August 2018
OMFIF is strengthening its US operations by appointing Mark Sobel, a veteran US Treasury official at the forefront of international financial diplomacy for two decades, as US chairman. Sobel, who represented the US on the IMF executive board up to April, has had a 40-year Treasury career with extensive around-the-world engagement. He will deal with private and public sector organisations, and speak on international and US policy.
Sobel was Treasury deputy assistant secretary for international monetary and financial policy in 2000-15. He helped lead Treasury preparations for G7 and G20 finance minister and central bank governor meetings, formulated US positions at the IMF, and coordinated Treasury and regulatory agencies’ work on the Financial Stability Board.
Jack Lew, US Treasury secretary in 2013-17, says: ‘For decades Mark Sobel played a crucial role representing the US on international financial matters. His contributions to the G20 process helped chart a recovery from the financial crisis and great recession.’ Sobel founded the US/EU Financial Market Regulatory Dialogue and chaired an international group of private and official sovereign debt experts that enhanced collective action clauses for sovereign debt restructuring. He managed the $100bn-plus Treasury Exchange Stabilization Fund and played a key role in US foreign exchange policy.
Why central banks would restart quantitative easing
New York, September 2018
Quantitative easing on both sides of the Atlantic, introduced almost immediately after the financial crisis in the US and UK, much later in the euro area, produced the desired results with lower financial yields and higher economic activity, albeit with results that diminished over time. That is the considered view of participants at a QE seminar on 28 September 2018 in New York, organised by the OMFIF Foundation, attended by around 40 public and private sector participants.
if a severe downturn or recession were to arise in the US and other advanced countries), leading central banks would do it again – even though political constraints on central banks’ actions are likely to be greater next time round, say the respondents, including many officials who were part of rescue actions over the past decade.
The group hears a general admission that QE is no panacea and has produced plentiful drawbacks. ‘We took an awful situation and made it into a bad situation,’ comments one former monetary official. QE had destabilised some emerging market economies whose exporters suddenly faced difficulties from their currencies’ increased value. Furthermore, it inflated asset prices in the advanced nations that helped to expand inequality and thus contributed to social tensions.
Upheavals grow more likely
Berlin, November 2018
Europe is aware that, in the next two years, a new set of economic and financial upheavals will grow more likely. Policy-makers are torn between competing preoccupations over short- and long-term ways of shoring up European defences, a Berlin seminar on the future of the euro area heard on 1 November 2018.
The fundamental task is to meet the euro bloc’s longer-term challenges: low growth, poor investment and increasing electoral appeal of non-mainstream political parties. The seminar coincides with tension on the financial markets over the Italian government’s differences with the European Commission over its three-year budget plan. It comes just days after Chancellor Angela Merkel’s decision to step down from leadership of her Christian Democratic Union, the centrepiece of her fractious three-party Berlin coalition.
The plenary meeting and a pre-conference dinner at the Berlin headquarters of KfW offers a snapshot of Europe’s unsettled economic and political scene. All sides – particularly speakers from Germany –play down the squabble with Italy. Participants say that a compromise is possible, based on converging views on the Rome budget. Hardliners from the northern European creditor nations would have to modify their policies calling for full adhesion to agreed tax and spending rules.
Potential Italian friction over bond purchases
The European Central Bank faces a thorny dilemma and possible charges of discrimination from Italy over maintaining its quantitative easing next year, write David Marsh and Ben Robinson on 22 November 2018. Important technical changes in allocating reinvestment of national central banks’ maturing bond holdings in 2019 could exacerbate Italy’s dispute with the European Commission over Rome’s looser-than-promised budgetary policy.
More generally, a looming row with the eurosceptic Italian government could focus further unwelcome attention on the now built-in – and apparently self-perpetuating – north-south divide in economic and monetary union. The ECB leadership recognises this is a powerful and possibly incendiary source of discontent within the single currency.
Potential squabbles centre on the quinquennial recalculation of the ECB’s ‘capital key’, scheduled to come into force on 1 January, which governs the relative weights of individual countries in 19-member EMU. These changes reflect – and may in future aggravate – long-running differences over different countries’ benefits and disadvantages from euro membership.
ECB President Mario Draghi warned in November 2014, ‘If there are parts of the euro area that are worse off inside the Union, doubts may grow about whether they might ultimately have to leave.’ That was a prescient reminder of problems building up in his native Italy.
Theresa May – the great survivor
Theresa May is still standing after last week’s Cabinet battles over Brexit. The British prime minister is tougher and more resilient, and has better cards in her hand, than many of her opponents think, writes Meghnad Desai on 18 November 2018. My prediction is that she will survive to push the European Union withdrawal treaty through the House of Commons. This will be messy and complicated, but the outcome is fairly clear.
Either before or after the Commons vote on the deal next month (which may vote it down first, May should be able to glean from the other Europeans small but important modifications on the wording over Northern Ireland and on the declaration on the UK’s future relationship.
May’s strengths are her apparent weakness and the lack of viable alternatives to her leadership. May is much like the deal she has spent so much time defending. Not to everyone’s liking – but there is no better choice available. Many say the political uproar is reminiscent of the 1956 Suez crisis, when an ill-fated Anglo-French military expedition in Egypt opposed by the Americans destabilised a previous Conservative government. Then, like now, Britain has to sign up and make the best of a bad situation.
Fed tightening pause highlights growth concerns
London, January 2019
Sobriety over the world economy overshadows the asset management and risk deliberations of central banks, sovereign funds and private participants at the Painters’ Hall in London on 31 January 2019. The seminar comes shortly after the Federal Reserve confirmed worries about a faltering recovery by announcing on 30 January its much-trailed pause in monetary tightening. Many observers expect this is the prelude to interest rate cuts later this year.
The discussions are coloured by increasing fears that the previously brighter global outlook is turning worryingly gloomy. There is considerable debate on US-China relations under President Donald Trump and implications for trade and capital flows in view of possible escalation of the trade conflict. The seminar reviews geopolitical risk in world markets, political changes in emerging markets, the rise of populist parties in Europe, and monetary policy divergence between leading central banks
One central banker says ‘a long period of reasonable growth rates, due to generous global liquidity provision and Chinese stimulus programmes, is now coming to an end’. This expected cyclical change is exacerbated by drying up of global liquidity and normalisation of unconventional monetary policies. ‘Broken’ world politics would hamper co-operation and coordination on economic policy reaction. Many important countries do not have sufficient policy manoeuvring room to stimulate economies.
Britain and Germany: partnership after Brexit
Berlin, March 2019
A new focus on bilateral relations after Brexit will allow Germany and the UK to surmount political uncertainties and share expertise, deepen bonds and provide leadership in international forums. That is the message of an OMFIF report – ‘UK-German futures: Relations refocused’ – published with the British embassy in Berlin, the British Chamber of Commerce in Germany and the German-British Chamber of Industry & Commerce.
The report describes how across 10 economic areas the two sides can extend co-operation ranging from manufacturing and services to education, gender balance and cyber security. In banking, Germany and the UK can work together to bolster European capital markets, an important development in an era of heightened financial competition. Over climate change, the two partners can apply their different comparative advantages to power a global shift towards sustainability. For trade, they can exploit an opportunity to accelerate supply chain digitalisation and eliminate administrative and bureaucratic burdens to the exchange of goods and services.
‘Acting together, buttressed by broader collaboration across Europe and the wider world, we can better tackle the great global challenges of the 21st century – climate change, digitalisation, ageing populations, social and economic inequality,’ says the report’s foreword, from the heads of the contributing organisations.
Johnson’s parallels with Groucho Marx
London, June 2019
Boris Johnson, likely to be Britain’s next prime minster, embodies one major trait likely to yield negotiating advantage – flexibility, write Meghnad Desai and David Marsh on 20 June 2019. This benefits springs from an intermingling of his weaknesses. Like many journalists, he has written or proclaimed, frequently contradictorily, many times on many issues.
Groucho Marx’s maxim comes to mind: ‘Those are my principles, and if you don’t like them… well, I have others.’ Prime Minister Theresa May’s flawed but workable Brexit deal – over which Johnson resigned from the cabinet in July 2018 but later voted for in the House of Commons – still presents (with some minor, realisable modifications) the best basis for UK departure.
Johnson embodies several problematic factors. He is charming, writes good newspaper columns and can spout Latin at the drop of a hat. But he polarises as much as he unites. It would not be the first time that a UK prime minister had a reputation for either unreliability, low capacity for sustained work, or inability to think strategically. It would probably be the first time that a leader combined all three traits.
Central banks never so powerful – nor so vulnerable
The central banks making up one third of the $37.9tn of assets surveyed in OMFIF’s 2019 Global Public Investor have never been so powerful – nor so vulnerable, writes David Marsh in June 2019 in the sixth annual report on public sector investment worldwide. They are both bolstering and countering disruptive influences by maintaining interest rates at a far lower level than during past recoveries.
The US Federal Reserve, under all-too-transparent White House prodding, has relented in its three-year march towards higher interest rates. The much-heralded world recession is nowhere in sight, but history teaches us that it may be just over the horizon.
Global Public Investors are navigating, and helping to shape, some blustery times. Forces for good and ill abound. Investors are coming to terms with climate change, and joining in efforts to combat it. They are tackling the invigorating and unsettling march of digital technology, the semi-revolutionary presidency of Donald Trump, the rise of China and the gradual move (back) to Asia of the world’s centre of economic gravity. Symptoms of Europe’s slow shift from centre stage are the travails of monetary union, Britain’s frequently chaotic withdrawal from the European Union and the trials of Russia and the West.
New chief executive signals expanded ambitions
London, July 2019
John Orchard, managing director of the banking and finance group at Euromoney Institutional Investor, has been appointed chief executive of OMFIF, signalling the organisation’s expanded ambitions. Orchard, who started with the London stock market-quoted global information business in 1994, will join OMFIF on 1 January. Orchard oversees all aspects of Euromoney’s £65m turnover finance and banking division, comprising Euromoney, the publishing and events business, GlobalCapital, the primary capital markets news, data and events service, and IMN, the New York-based securitisation and real estate events business.
He has been presiding over events and publications to mark Euromoney’s 50th anniversary, including the organisation’s celebratory dinner on 10 July at the London Hilton with 500 senior bankers and their teams.
David Marsh, OMFIF chairman and co-founder, who becomes non-executive in January, said, ‘John brings all-round strengths in product and editorial, operations, sales and marketing as well as data and training.’ Orchard says, ‘I have admired OMFIF for some time. The quality of the network is first-class, and its remit to foster communication, knowledge and understanding between the public and private sectors in finance is of paramount importance. I look forward to expanding the scope and impact of that remit.’
Trump’s welcome retreat on renminbi ‘manipulation’
The US Treasury has withdrawn its previous assertion that China manipulates its currency. The news is welcome, writes Mark Sobel on 16 January 2020. It comes in its latest (delayed) Treasury foreign exchange report, coinciding with phase one of President Donald Trump’s trade deal with the Chinese.
Writing the report could not have been easy for Treasury’s mandarins. They have carried out the about-turn with the dexterity of tutu-clad dancing elephants.
On presidential orders the Treasury designated China as carrying out currency ‘manipulation’ in an out of the blue August statement. The designation flew in the face of Treasury’s own criteria. In the delayed report, Treasury had to justify that unwarranted decision, and offer a rationale to back off of it, while claiming it had made major progress.
The international standard is ‘to avoid manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members (in international trade)’. China was designated as carrying out currency ‘manipulation’ in a moment of presidential pique when the renminbi fell below 7 to the dollar, responding to US tariff pressures. Twisting and turning amid curious argumentation, Treasury correctly reversed this mistaken decision. But the aftershocks may still reverberate for the international monetary system.