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The Impact Of The Euro Crisis And Investment In Bosnia And Herzegovina

The Impact Of The Euro Crisis And Investment Opportunities In Bosnia And Herzegovina

articles & speeches

The Impact of the Euro crisis on the Financial Stability

What is the euro crisis? By the euro crisis I do not mean only the crisis of the eurozone, but all the underlying crises behind it. It is a sovereign debt crisis, it is a real sector crisis and a financial/banking crisis at the same time. But first of all, it is a crisis of confidence, confidence in the existing model. We have to face the harsh reality.

I would like to thank the organizers for the invitation, hosts for the great venue; as always, Oxford is an extremely stimulating environment for intellectual exercises and confrontations (explain why confrontation is good for creativity). There is only one big drawback for having this Workshop here, the opportunity cost of not seeing Sarajevo again. But, ten minutes is not much to talk about the euro crisis alone, to say nothing about its impact, especially on the region and on BiH in particular. I have organized my comments around the following topics. First, clarify a little bit the term euro crisis and its magnitude, second, talk about the impact on the financial system in particular, and finally, have a look into the crystal ball to foresee the possible consequences for BiH and the region.

I want to say that the topic of financial stability is very dear to my heart. Long before the crisis I advocated the need for central banks in the region to have a financial stability review. I have read my memos to the CBBH from June 2006, when we started working on the FSI, on the reorganization of the department, etc. I am very pleased to say that much was achieved.

It is interesting to mention that almost five years ago, in mid-September 2007, we celebrated the 10th anniversary of the Central Bank of Bosnia and Herzegovina. I attended the second session: “Monetary Stability in the Function of Financial Stability” and the title of my presentation was “Financial Challenges for the B10 Central Banks”. Boy, was I right. Although there were not many banking or financial crises in the region, central banks had a full plate dealing with financial stability in those last five years and will continue to do so. But first the good news, not only for the first ten, but for the whole fifteen years, the central bank has successfully kept its currency board. This is no small feat, solid reserves, the principles of currency board preserved and, as far as I can see from the aggregates, the credibility of the currency is there. Congratulations to the Governor (and, of course, to his predecessor, as well as to all CB board members and staff). I have no doubt that the credibility of the currency board will continue. However we should not take it for granted, as I will try to explain…

Central Banking In The 21st Century

Rethinking Central Banking In The 21st Century

articles & speeches

Some Advice from an Ex-central Banker

Central banking has experienced a tremendous change in the last three decades. From “behind the scene” secretive rulers of the world (the Plaza Accord of in 1985), to the period of great moderation, attributed to monetary policy, when central banking was called “boring” (until 2007), to the recent almost celebrity status of some central banks and governors.

Truth to be told, some past governors are considered as causes of economic troubles and some that are in office nowadays are looked up to like modern day saviours, expected to pull out the latest trick out of their sleeves to save the economy.

First, where does the criticism of central banking come from? At the end of 2011 (the time of writing) the world economy is still in a deep financial, economic and structural crisis and more volatility lies ahead. The economic profession is unable to clearly identify its causes, but various narratives float around.

Some of them “blame” central banks for the mess we are in. Some see the causes of our problems in the neoliberal approach to economics and, more specifically, in the so-called light-touch financial regulation often done by central banks (which was highly praised only a couple of years ago). Some are more specific and point out the “Greenspan put” in particular and too loose monetary policy with low interest rates, especially after the 2002 dot.com bubble burst, which according to this narrative created the new, real estate bubbles, starting in the US and then spilling over to the rest of the world. Others blame financial innovation and, in particular, derivatives (“financial weapons of mass destruction”, as Warren Buffet called them). Some say it was greedy bankers and their skewed incentive/ bonus structure (which can be described as “head I win, tail you lose”) and regulators/central banks that did not stop them. And of course, there is an almost infinite variety of any linear combination of the mentioned factors (plus other ones). The “inconvenient truth” for the economic profession is that: a) we do not know for sure what the causes of the crisis are and b) central banking is often mentioned as a cause of the troubles. Others look at central banks as the last hope to save the world from a complete meltdown.

The aim of this note is neither to judge the past nor to offer a clear look into the future. It is too early to make qualified judgments on the past, and rethinking the future of central banking will take a lot of collective effort from experts in this area. This note intends to give some advice from an ex central banker which might be useful when facing future challenges.

South East Europe: Investing In The Future

South East Europe: Investing In The Future

articles & speeches

SEESOX, St. Anthony’s College, University of Oxford

The eurozone sovereign banking and fully blown financial crisis is unfolding daily in front of our eyes.

1.How is the situation in the eurozone today affecting the SEE countries?

The eurozone sovereign banking and fully blown financial crisis is unfolding daily in front of our eyes. It is like a movie, a thriller, only that this time we know who did it, but we do not know if the culprits will end up in jail and if we will live happily ever after. Three things are almost certain:

  • this crisis will not end up any time soon;
  • I doubt that we will have a “big bang” solution, probably a series of small changes;
  • whatever happens, we will end up in a new world, institutionally, structurally and in terms of potential GDP growth. Regarding growth, it is almost certain that the eurozone will end up in a new recession in Q4 and at least Q1 2012. Downside risks are in the rise. When I was reading the Seminar program I thought it funny that it mentioned a recovery. We do not see any recovery for Croatia either this or next year.

The latest developments will obviously negatively affect the SEE economies. This is a no brainer, but I would like to elaborate a little bit more on possible transmission cannels:

  • the trade channel (exports, including tourism);
  • risk contagion via higher pricing for the region, for example Croatia’s CDS, 250 to 530 BPS;
  • the banking channel (the structure of the banking industry, foreign banks). In 2012 we can expect either no new capital inflows (either capital and/or deposits, especially long-term), or even deleveraging and outflows due to Austria’s regulator LDR of 110%, RBA’s and Erste’s announcements of deleverage (even exit) from some countries. Vienna seems to be dying if not dead, and some countries might experience a credit crunch. Again the banking channel, but via bad news that may create (another) run on banks. When our banks were privatized, reputable foreign owners added credibility to the domestic banking system, now it seems to work the other way around.
  • Uncertainties about the euro in general create negative expectations for domestic savings and investments. We daily receive a lot of questions about what will happen to savings and economies if the euro disappears. Advanced economies have always been looked up to and creating positive expectations. Now, Mervyn King’s yesterday statement to get ready for the break-up of the eurozone is not good news for us. And in the era of globalization and IT, I observe a big difference when compared to the world fifteen years ago (the Asian crisis) – whatever bad news on euro/international developments is reported in specialized press, it finds its way to evening prime-time news.

Bank Of Albania-Oxford University Seminar

Futuristic View Of Banks In Albania

articles & speeches

Current Economic Challenges and Regional Co-operation in Southeast Europe

There is no substitute for hard work. T.A. Edison. This, I think is the most important lesson I have drawn so far. Let me be more specific about what I have in mind here.
When I was working in the region (Bosnia in particular) there was a lot of discussion on the exchange rate regime and competitiveness. Like what is the “exit policy” for a currency board or fx risk in the region (in relation to foreign exchange lending at the time)?

It is a great honour for me to be invited to this seminar and even more to speak at it. I have to admit that I was in a way humbled by the title of this presentation, which sounds very ambitious. I decided to leave it as it was suggested by the organizers, but I immediately have to start with several disclaimers. You might call this “intellectual hedging” or maybe the truth is that I am simply trying to diminish your expectations. So, here are the reasons why it is extremely difficult to draw economic lessons from the crisis for the region:

First, I am not sure which crisis we have in mind and, consequently, I am not sure if it is over. If we refer to the global crisis, we may argue that the worst is over. Plus, one can only hope that Dr. Doom (for those who still do not know his real name: Nouriel Roubini) and his latest forecast of a double dip in 2013 is again wrong, but let us be patient. Second, if we refer to the European sovereign debt crisis, it is still unfolding as we speak. Finally, countries in the region are in a different status regarding their exit out of the crisis. Croatia does not expect any growth this year (probably at most 1%) while Albania might see a growth of more than 3%. For the Albanians the crisis was over last year, while we in Croatia still had a fall in GDP in Q1 2011. So, my first disclaimer is that it may be a little bit premature to draw definite lesson from this crisis or, in other words, we still lack the perspective for such an exercise.

Second, I have not seen an agreement within the economic profession that clearly identifies the causes of this crisis . If we are not absolutely certain about its causes, how can we draw lessons from it? It is my understanding that at this point there are a lot of different theories around. I will mention but a few: a) the neoliberal approach in general and, more specifically, the so-called light-touch financial regulation (which was highly praised only a couple of years ago); b) some are more specific and point out the “Greenspan put” in particular and too loose monetary policy with low interest rates, especially after the 2002 dot.com bubble burst, which according to this narrative created the new, real estate bubbles; c) some, more generally, attribute this to crony capitalism;  d) others (like Ragu Rajan) put a lot of blame on growing income disparities (in the US) and politicians trying to rectify this by government subsidized mortgages; e) others blame financial innovation and, in particular, derivatives (“financial weapons of mass destruction”, as Warren Buffet called them already in 2003 in his now famous letter to shareholders); (one more  financial icon, Paul Volcker, could be put into this category with his statement that the ATM has been the most useful financial innovation in the last 25 years; f) some say it was greedy bankers and their skewed incentive/ bonus structure (which can be described as “head I win, tail you lose”); g) some in general blame the originate-to-distribute banking model  and securitization, as opposed to the originate-to-hold model; h) for others the main culprit is the “mispricing of risks”; i) academics, in more general terms, blame the unaddressed build-up of macroeconomic imbalances (bad fundamentals); j) and finally, the “leftists” see the market economy (capitalist system) itself as the root cause of crises. And of course, there is an almost infinite variety of any linear combination of the mentioned factors (plus other ones), differing only in relative weights attributed to them. Furthermore, I have deliberately mixed up the factors that should be labelled as the starting points with those that are the deep underlying causes. But, the “inconvenient truth” for the economic profession is that we do not know for sure what the causes of the crisis are and what the exact transmission mechanisms from advanced economies to the crisis in the region were. It may take decades of work to come to some sort of common understanding of those issues.

Financial Challenges For The B10 Central Banks

Financial Challenges For The B10 Central Banks

articles & speeches

10th Anniversary of the Central Bank of Bosnia and Herzegovina

The topic of this session is quite challenging. Its title:”Monetary Stability in the Function of Financial Stability” implies, if understood literally, the role of monetary policy (as an independent variable) in the stability of the financial system (as a dependent variable). This is challenging, especially in the framework of the CBBH and its currency board. So I decided to focus on the region, the B10 countries.

First of all, I would like to congratulate our hosts on the tenth anniversary of a very successful central bank. I am certain that if anyone during the labour pains at Dayton had been asked to describe a monetary framework for BiH for the ten years ahead, not even the biggest optimists would have dared to predict such a successful position for the CBBH. Stable inflation and increasing gross international reserves indicate the stability of the currency board and its growing credibility. So, congratulations to all the governors and their teams on this achievement.

Second, I am really honoured to be on this session. I hope I will be up to the challenge. If nothing else, I will do my best to stay within the time slot allocated to me. Therefore, I will go straight to the subject.

Third, the topic of this session is quite challenging. Its title:”Monetary Stability in the Function of Financial Stability” implies, if understood literally, the role of monetary policy (as an independent variable) in the stability of the financial system (as a dependent variable). This is challenging, especially in the framework of the CBBH and its currency board. So I decided to focus on the region, the B10 countries. The combinations of letters and numbers are quite fancy in the world of finance. The B10 is simply an acronym for ten Balkan countries, with Balkan being meant as a geographical term, not a socio-political adjective with the usual negative connotations attached to it, we are often concerned about in the region. Furthermore, Kosovo is not an independent country (UN Security Council Resolution 1244), but it has a monetary authority independent of Serbia, hence its separate treatment in the note. I will first focus on monetary stability, then on financial stability, and I will end up with some recommendations (advice is cheap) to the B10 central banks regarding maintaining financial stability in the context of rapid globalization, huge net capital inflows, financial innovations and shocks spreading almost instantly from one epicentre throughout the world.

Fourth, we should keep in mind that the financial system is very important for any economy. “The financial system is a coordinating mechanism that allocates capital to productive investment opportunities. If capital goes to the wrong uses or does not flow at all, the economy will operate inefficiently and economic growth will be very low.” (Mishkin, 2006, p. 1). Accordingly, there will be more focus on the financial system than on the monetary system…

Central Bank Modernization

Central Bank Modernization

articles & speeches

Do all central banks need a well developed brain?

The focus in this paper will be mostly on central banks in less developed economies and some emerging economies, especially transition ones. There is no need for elaboration of the importance of research in advanced economies’ central banks or monetary authorities. It is true that a lot of emerging market economies have well developed “brains”. However, some may need to pay more attention to its active use.

The aim of this paper is twofold. First, it will examine whether all central banks really need a well developed brain. Second, it will give some general guidelines on how central banks should proceed if they intend to develop and maintain a healthy brain.

The focus in this paper will be mostly on central banks in less developed economies and some emerging economies, especially transition ones. There is no need for elaboration of the importance of research in advanced economies’ central banks or monetary authorities. It is true that a lot of emerging market economies have well developed “brains”. However, some may need to pay more attention to its active use.

This paper is primarily the result of the author’s own experience attained while working in or visiting central banks of Central and Eastern Europe and Middle East. But, conclusions could be applied to a broader population of central banks, mutatis mutandis.

In this paper the word «research» is not used in its narrow meaning. So, research is nod defined as: “ … the set of activities leading to economic analysis which strives to be up to academic standards, i.e. up to the standard of leading-edge scientific journal.” (Goodfriend at al, 2004, p. 2). The word research is used in a much more broader context encompassing analytical macro and microeconomic work (at central banks of course), synthetic conclusions, overall assessments of the economic situation – in short, active “use” of modern economic thinking on real world problems. It is not about new scientific discoveries in economics only (for which most of the countries referred to have no capacity and probably should not invest to have one soon), but about the application of modern economic ideas and techniques in solving problems faced by central banks in a specific country.

The Croatian Banking Crisis

The Croatian Banking Crisis

articles & speeches

Importance of the banking sector in transition economies

Commercial banks have played and will play a very important role in transition economies. But, to fulfil the demanding task of efficient financial intermediary, the banking sector must to undergo significant changes. It must be de-politicized, restructured, privatized, in short, it has to become completely different from what it was before transition started.

Since its independence in 1991, Croatia has undergone two banking crises. The first was a structural crisis of the old banks, due to their inheritance of bad assets from the previous economic system, the legacy of war, and the disintegration of the former Yugoslavia. All told, the costs of this first crisis are estimated to be approximately US $4.67 billion. Included in these costs was US $473 million, for the individual rehabilitation of four major banks, during the period 1995 to 1996, which represented 40% of total banking assets in the system.

The second crisis emerged at the beginning of 1998 in new banks founded during the liberalized banking market of the economic transition. This crisis was attributed to weak management (including fraud); connected and insider lending; increased market competition as the transition period progressed; and inadequate regulation and supervision of the banking industry.

By late 1998, following a slow stream of bank failures, the Croatian National Bank, responsible for banking supervision, was faced with a difficult decision – to either rescue more banks through costly rehabilitation schemes that would add to the public debt, or to initiate bankruptcy proceedings.

This case study is presented by Marko Skreb, who was Governor of the Croatian National Bank at the time of the Croatian banking crisis.

The Basel Core Principles on Effective Banking Supervision, issued by the Basel Committee in September 1997, sets out important issues for banking supervisors. This case draws on the following Core Principles and the associated Essential Criteria…

The Transition Process – It’s All About People, Isn’t It?

The Transition Process – It’s All About People, Isn’t It?

articles & speeches

What is the transition process all about?

Numerous researchers have analysed in depth the transition process in terms of speed of reforms, their sequencing, results and possible outcomes, but rarely do we ask ourselves the simple questions like: Why has transition started and why are we involved in it?

Numerous researchers have analysed in depth the transition process in terms of speed of reforms, their sequencing, results and possible outcomes, but rarely do we ask ourselves the simple questions like: Why has transition started and why are we involved in it? Without elaborating the answer in detail, let me offer just one possible answer. Socialism (as defined in Kornai, 2000), the predominant system in countries where EBRD operates today, has imploded, has collapsed.

This system was not able to meet the growing demands of the population for a better life, that is to say: raising living standards, and the development of a civil society and political freedoms. In a globalized world, information on living standards and developments of civil society and political freedoms from the neighbouring West could not be hidden any more from most transition economies, and discontent grew. The political conditions for change are symbolized in the fall of the Berlin Wall.

This created huge expectations among people in the countries of formerly socialist economies. The expectations of the population at that time were that there would be a rapid catch-up with the western standard of living (including political freedoms as well). With regard to the speed of catching up in terms of economic wellbeing, this turned out to be a naïve view.

The main goal of any economic policy should be to increase the welfare of the population, which includes a sustained and high growth of GDP and a desirable distribution of income. In other words, we want welfare to increase; we want people to be better off. Not many people should have trouble agreeing with that statement. Today, indeed, there is evidence that the dual goals of growth and equality of income distribution are mutually compatible (Wolf, 2000).

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