India central bank to sell dollars to oil companies to shore up rupee

A currency trader is pictured through the symbol for the Indian Rupee on the floor of a trading firm in Mumbai May 31, 2013.

Credit: Reuters/Vivek Prakash

By Neha Dasgupta and Suvashree Dey Choudhury

MUMBAI | Wed Aug 28, 2013 6:46pm BST

MUMBAI (Reuters) - India's central bank will provide dollars directly to state oil companies in its latest attempt to shore up a currency that has slumped to a record low, reflecting the stiff economic challenges facing the country in an uncertain global environment.

The Reserve Bank of India announced late on Wednesday a special window "with immediate effect" to sell dollars through a designated bank to Indian Oil Corp Ltd (IOC.NS), Hindustan Petroleum Corp (HPCL.NS), and Bharat Petroleum Corp "until further notice".

The RBI last opened such a window during the 2008 global financial crisis, although it had been widely expected to re-implement the measures after last month telling oil companies to buy dollars from a single bank.

The steps are the latest in a series of extraordinary measures undertaken by the RBI to combat a currency fall of more than 20 percent this year, by far the biggest decline among the Asian currencies tracked by Reuters.

State-run companies are the biggest source of dollar demand in markets - worth $400 million (257 million pounds) to $500 million daily - and directing them to a special window is meant to reduce pressure on the rupee, which fell as much as 3.7 percent to an all-time low of 68.85 on Wednesday, recording its biggest one-day fall in 18 years.

Rupees traded in markets outside of India recovered after the measures, with one-month forward contracts dealt at 68.30 from levels of around 70 rupees before the announcement.

"Immediately it should help the spot market and improve sentiment," said A. Prasanna, an economist at ICICI Securities Primary Dealership in Mumbai.

"But then we have to see how global markets move because some of fall in the last few days is also because of global developments."

The rupee fell on Wednesday on worries that foreign investors will continue to sell out of a country in the midst of domestic woes and a global environment marked by fears of a possible U.S.-led military strike against Syria and the looming end to the Federal Reserve's period of cheap money.

Officials familiar with RBI thinking told Reuters the dollar sales for state-run oil companies would be offset by positions in forward markets.

That means that although the RBI would need to dip into its currency reserves, it had the prospect of replenishing the lost dollars at a future date by redeeming the forward contracts from oil companies when the rupee stabilises.

The offsetting positions would essentially make these dollar loans, designed to reduce concerns about reserves that at $279 billion, cover only about seven months of imports.

The action further cements the role the central bank is taking to combat the fall in the rupee, as the government has yet to unveil steps that can convince markets it can stabilise the rupee and attract foreign investment.

India badly needs this capital as it struggles with a record high current account deficit, growing fiscal pressures and an economy growing at the slowest in a decade.

LACKING CONFIDENCE

The failure to address India's economic challenges is becoming an increasing source of tension at a time when rising domestic bond yields threaten to raise borrowing costs across the already slowing economy, while global prices of oil and gold - the country's two biggest imports - have surged this week.

Foreign investors have sold almost $1 billion of Indian shares in the eight sessions through Tuesday - a worrisome prospect given stocks had been India's one sturdy source of capital inflows with net purchases so far this year still totalling nearly $12 billion.

India's main National Stock Exchange index .NSEI fell as much as 3.2 percent on Wednesday, although suspected buying by state-run insurer Life Insurance Corporation - often the buyer of last resort - led the index to recover by the close.

In bond markets, foreign investors have sold more heavily, with outflows reaching nearly $4.6 billion so far this year.

"If steps are not taken to implement the reforms necessary to tackle the structural issues, the government will be left with the so-called "3D options": debt default, devaluation, deflation," said Angelo Corbetta, head of Asia equity for Pioneer Investments in London.

"In India, devaluation is happening now and deflation could be about to start. The good news is that the debt default is highly unlikely."

BNP Paribas on Wednesday slashed its economic growth forecast for India for the fiscal year to March 2014 to 3.7 percent from its previous 5.2 percent - the weakest growth since 1991-92 when India buckled under a balance of payments crisis that required a loan from the International Monetary Fund.

"India's parliament remains toxically dysfunctional with little, if any, business conducted," BNP said.

"And, with next year's general election looming ever nearer, the government's willingness to instigate a politically unpopular fiscal tightening is close to nil."

The government has tried but failed to provide a coherent response, analysts said.

Its approval of infrastructure projects on Tuesday was trumped by concerns about the fiscal deficit after the lower house of parliament this week approved a 1.35 trillion rupee ($19.6 billion) plan to provide cheap grain to the poor.

India is due to post April-June gross domestic product data on Friday, with analysts estimating the economy grew at an annual rate of 4.7 percent, roughly in line with the previous quarter. It will also post July federal fiscal deficit figures.

(Writing by Rafael Nam; Additional reporting by Swati Bhat, Himank Sharma, and Abhishek Vishnoi; Editing by Kim Coghill, Nick Macfie and David Evans)

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Central banks don't need to rush ultra-easy money exit: IMF's Lagarde

International Monetary Fund (IMF) managing director Christine Lagarde gestures as she speaks during the debate ''European Economic Integration: Challenges and Opportunities'' in Vilnius July 18, 2013.

Credit: Reuters/Ints Kalnins

By Alister Bull and Pedro da Costa

JACKSON HOLE, Wyoming | Fri Aug 23, 2013 4:05pm EDT

JACKSON HOLE, Wyoming (Reuters) - Central banks in Europe, the United States and Japan have no need to rush to exit the ultra-easy monetary policies they have put in place to spur growth, IMF Managing Director Christine Lagarde said on Friday.

But in prepared remarks at the U.S. Federal Reserve's annual Jackson Hole policy symposium, she also said that central banks must work with each other to minimize spillover from any withdrawal of policy accommodation that could stifle world growth.

"Policies and policy coordination are not yet where they need to be. Failing to act at the global level, with each country playing its part, could put the global recovery at risk," she said.

Central bankers from around the world are attending the annual conference hosted by the Kansas City Federal Reserve Bank in the mountainous splendor of Wyoming's Grand Teton National Park.

Lagarde, speaking during lunch on the first day of the two-day gathering, noted that concerns about the Fed withdrawing its support had knocked emerging markets in recent days. But she said the exit would proceed more slowly than "feared."

"I do not suggest a rush to the exit. UMP (unconventional monetary policy) is still needed in all places it is being used, albeit longer for some than for others. In Europe, for example, there is a good deal more mileage to be gained from UMP. In Japan too, exit is very likely some way off."

TAPER TANTRUM

The Fed expects to being scaling back monthly purchases of bonds later this year. But in June it set off violent swings in global financial markets by just talking about tapering its campaign of so-called quantitative easing.

However, Lagarde said there was no reason central banks could not manage this exit with the same success they had when they launched unconventional policies amid the financial crisis.

These include forward interest rate guidance and quantitative easing, adopted after banks lowered rates nearly to zero to shelter their economies from a severe recession sparked by the collapse of a bubble in the U.S. housing market.

The measures have been controversial, with critics, including some U.S. lawmakers, castigating the Fed for measures that could lead to further bubbles or future inflation.

But Lagarde said the steps had clearly worked for both the countries putting them in place and for other nations that benefited from the global recovery that these actions delivered.

That said, as the Fed, European Central Bank and Bank of Japan begin to normalize policies, emerging economies that have experienced massive capital inflows as a byproduct of their ultra-low interest rates will have to take steps to prepare.

"Exchange rate flexibility will help, but not at all cost. Some market intervention may help moderate exchange rate volatility or short-term liquidity pressures," she said.

Turkey and India have both announced foreign exchange measures after their currencies fell sharply this week, and there has been talk that the top emerging economies could set up currency swap lines to protect others from speculative attack.

Lagarde pointedly said that swap lines "can help" defend emerging markets from exit spillovers, and pledged that the IMF was ready to help with advice, and money, if needed.

"For the Fund's part, we stand ready to provide policy advice and financial support, including on a precautionary basis, through our various instruments," she said.

(Reporting by Alister Bull and Pedro da Costa; Editing by Dan Grebler)

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Central banks told to cooperate on managing global liquidity

The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013.

Credit: Reuters/Jonathan Ernst

JACKSON HOLE, Wyoming | Sat Aug 24, 2013 10:12am EDT

JACKSON HOLE, Wyoming (Reuters) - Central banks should coordinate to avoid unwanted side effects as they exit from ultra-easy monetary policies that have left the world awash in cheap money, top policymakers were told on Saturday.

Opening the second day of an annual monetary symposium in Jackson Hole, Wyoming, after a week in which several top emerging markets suffered steep losses, a former Bank of France deputy governor painted a grave picture of the problem.

"The main challenge will be to manage the consequences of monetary policies, and their evolutions, on cross-border liquidity movements," Jean-Pierre Landau concluded in a paper he presented to an audience that included top central bankers from advanced as well as emerging market economies.

"Amplifications, feedback loops and sensitivity to risk perceptions will complicate the task of exit and necessitate very close and constant dialogue and cooperation between central banks," said Landau, now a professor at Princeton.

But he lamented that the necessary coordination on monetary policy was unlikely, and warned of the potential for the "fragmentation" of global capital markets.

Stocks and currencies plunged in India, Indonesia, Brazil and Turkey this week as investors fretted over a looming reduction in the U.S. Federal Reserve's monthly bond purchases.

Turkish Central Bank Governor Erdem Basci was attending the conference, although his Brazilian counterpart, Alexandre Tombini, canceled to stay home and deal with the crisis.

The Fed's bond buying, or so-called quantitative easing, has been at the heart of its aggressive efforts to revive U.S. economic growth after it cut interest rates to nearly zero in 2008. Interest rates in Europe and Japan are also ultra-low.

However, the purchases have spurred massive capital inflows into faster growing emerging economies, which are now suffering as investors anticipate an end to the easy money.

COORDINATION

Landau acknowledged that central bankers dislike the idea of coordinating monetary policy because their job is to focus on domestic goals. But they worked well together during the 2007-2009 financial crisis, when the Fed, European Central Bank, Bank of Japan and other central banks coordinated rate cuts and currency swap lines.

As cross-border liquidity pressures build, they will find it productive to do so again, although cooperation is more likely through regulatory and financial structures aimed at preventing excessive leverage or harmful asset bubbles, he said.

In an ideal world, the cooperation would extend to monetary policy because policies in major economies such as the United States can have an international impact that amplifies their magnitude with domestic implications, Landau argued.

"The system itself is producing more accommodative monetary conditions than warranted by the situation," he said. "In a reverse environment, when monetary policies need tightening, the effects could be symmetrical and complicate the exit from non-conventional measures."

In addition, much could be gained through an international "lender of last resort," which would remove the motive for some nations to maintain massive foreign exchange reserves, he added.

"All countries have a common interest in finding ways to disconnect reserve accumulation from exchange-rate management," Landau said. "The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis."

That said, he freely admitted that this goal will be very hard to reach. Such an international agreement ultimately puts taxpayers in one country on the hook to bale out debtors in another, which would very hard to sell politically.

"It is hard to imagine that any government could bring the necessary fiscal backing to issuance of potentially unlimited liabilities to non-residents in times of crisis," Landau said.

As a result, the outlook for global capital markets is not encouraging, Landau said, warning of a "segmentation" between nations with surplus capital and others that will suffer from a dearth of investment due to a lack of access to capital.

"The most likely scenario is that of progressive fragmentation of the international financial system," he added.

(Reporting by Alister Bull. Editing by Andre Grenon)

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Central banks don't need to rush ultra-easy money exit: IMF's Lagarde

International Monetary Fund (IMF) managing director Christine Lagarde gestures as she speaks during the debate ''European Economic Integration: Challenges and Opportunities'' in Vilnius July 18, 2013.

Credit: Reuters/Ints Kalnins

By Alister Bull and Pedro da Costa

JACKSON HOLE, Wyoming | Fri Aug 23, 2013 4:05pm EDT

JACKSON HOLE, Wyoming (Reuters) - Central banks in Europe, the United States and Japan have no need to rush to exit the ultra-easy monetary policies they have put in place to spur growth, IMF Managing Director Christine Lagarde said on Friday.

But in prepared remarks at the U.S. Federal Reserve's annual Jackson Hole policy symposium, she also said that central banks must work with each other to minimize spillover from any withdrawal of policy accommodation that could stifle world growth.

"Policies and policy coordination are not yet where they need to be. Failing to act at the global level, with each country playing its part, could put the global recovery at risk," she said.

Central bankers from around the world are attending the annual conference hosted by the Kansas City Federal Reserve Bank in the mountainous splendor of Wyoming's Grand Teton National Park.

Lagarde, speaking during lunch on the first day of the two-day gathering, noted that concerns about the Fed withdrawing its support had knocked emerging markets in recent days. But she said the exit would proceed more slowly than "feared."

"I do not suggest a rush to the exit. UMP (unconventional monetary policy) is still needed in all places it is being used, albeit longer for some than for others. In Europe, for example, there is a good deal more mileage to be gained from UMP. In Japan too, exit is very likely some way off."

TAPER TANTRUM

The Fed expects to being scaling back monthly purchases of bonds later this year. But in June it set off violent swings in global financial markets by just talking about tapering its campaign of so-called quantitative easing.

However, Lagarde said there was no reason central banks could not manage this exit with the same success they had when they launched unconventional policies amid the financial crisis.

These include forward interest rate guidance and quantitative easing, adopted after banks lowered rates nearly to zero to shelter their economies from a severe recession sparked by the collapse of a bubble in the U.S. housing market.

The measures have been controversial, with critics, including some U.S. lawmakers, castigating the Fed for measures that could lead to further bubbles or future inflation.

But Lagarde said the steps had clearly worked for both the countries putting them in place and for other nations that benefited from the global recovery that these actions delivered.

That said, as the Fed, European Central Bank and Bank of Japan begin to normalize policies, emerging economies that have experienced massive capital inflows as a byproduct of their ultra-low interest rates will have to take steps to prepare.

"Exchange rate flexibility will help, but not at all cost. Some market intervention may help moderate exchange rate volatility or short-term liquidity pressures," she said.

Turkey and India have both announced foreign exchange measures after their currencies fell sharply this week, and there has been talk that the top emerging economies could set up currency swap lines to protect others from speculative attack.

Lagarde pointedly said that swap lines "can help" defend emerging markets from exit spillovers, and pledged that the IMF was ready to help with advice, and money, if needed.

"For the Fund's part, we stand ready to provide policy advice and financial support, including on a precautionary basis, through our various instruments," she said.

(Reporting by Alister Bull and Pedro da Costa; Editing by Dan Grebler)

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Central banks told to cooperate on managing global liquidity

The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013.

Credit: Reuters/Jonathan Ernst

JACKSON HOLE, Wyoming | Sat Aug 24, 2013 10:12am EDT

JACKSON HOLE, Wyoming (Reuters) - Central banks should coordinate to avoid unwanted side effects as they exit from ultra-easy monetary policies that have left the world awash in cheap money, top policymakers were told on Saturday.

Opening the second day of an annual monetary symposium in Jackson Hole, Wyoming, after a week in which several top emerging markets suffered steep losses, a former Bank of France deputy governor painted a grave picture of the problem.

"The main challenge will be to manage the consequences of monetary policies, and their evolutions, on cross-border liquidity movements," Jean-Pierre Landau concluded in a paper he presented to an audience that included top central bankers from advanced as well as emerging market economies.

"Amplifications, feedback loops and sensitivity to risk perceptions will complicate the task of exit and necessitate very close and constant dialogue and cooperation between central banks," said Landau, now a professor at Princeton.

But he lamented that the necessary coordination on monetary policy was unlikely, and warned of the potential for the "fragmentation" of global capital markets.

Stocks and currencies plunged in India, Indonesia, Brazil and Turkey this week as investors fretted over a looming reduction in the U.S. Federal Reserve's monthly bond purchases.

Turkish Central Bank Governor Erdem Basci was attending the conference, although his Brazilian counterpart, Alexandre Tombini, canceled to stay home and deal with the crisis.

The Fed's bond buying, or so-called quantitative easing, has been at the heart of its aggressive efforts to revive U.S. economic growth after it cut interest rates to nearly zero in 2008. Interest rates in Europe and Japan are also ultra-low.

However, the purchases have spurred massive capital inflows into faster growing emerging economies, which are now suffering as investors anticipate an end to the easy money.

COORDINATION

Landau acknowledged that central bankers dislike the idea of coordinating monetary policy because their job is to focus on domestic goals. But they worked well together during the 2007-2009 financial crisis, when the Fed, European Central Bank, Bank of Japan and other central banks coordinated rate cuts and currency swap lines.

As cross-border liquidity pressures build, they will find it productive to do so again, although cooperation is more likely through regulatory and financial structures aimed at preventing excessive leverage or harmful asset bubbles, he said.

In an ideal world, the cooperation would extend to monetary policy because policies in major economies such as the United States can have an international impact that amplifies their magnitude with domestic implications, Landau argued.

"The system itself is producing more accommodative monetary conditions than warranted by the situation," he said. "In a reverse environment, when monetary policies need tightening, the effects could be symmetrical and complicate the exit from non-conventional measures."

In addition, much could be gained through an international "lender of last resort," which would remove the motive for some nations to maintain massive foreign exchange reserves, he added.

"All countries have a common interest in finding ways to disconnect reserve accumulation from exchange-rate management," Landau said. "The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis."

That said, he freely admitted that this goal will be very hard to reach. Such an international agreement ultimately puts taxpayers in one country on the hook to bale out debtors in another, which would very hard to sell politically.

"It is hard to imagine that any government could bring the necessary fiscal backing to issuance of potentially unlimited liabilities to non-residents in times of crisis," Landau said.

As a result, the outlook for global capital markets is not encouraging, Landau said, warning of a "segmentation" between nations with surplus capital and others that will suffer from a dearth of investment due to a lack of access to capital.

"The most likely scenario is that of progressive fragmentation of the international financial system," he added.

(Reporting by Alister Bull. Editing by Andre Grenon)

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Central banks told to cooperate on managing global liquidity

JACKSON HOLE, Wyoming | Sat Aug 24, 2013 3:02pm BST

JACKSON HOLE, Wyoming (Reuters) - Central banks should coordinate to avoid unwanted side effects as they exit from ultra-easy monetary policies that have left the world awash in cheap money, top policymakers were told on Saturday.

Opening the second day of an annual monetary symposium in Jackson Hole, Wyoming, after a week in which several top emerging markets suffered steep losses, a former Bank of France deputy governor painted a grave picture of the problem.

"The main challenge will be to manage the consequences of monetary policies, and their evolutions, on cross-border liquidity movements," Jean-Pierre Landau concluded in a paper he presented to an audience that included top central bankers from advanced as well as emerging market economies.

"Amplifications, feedback loops and sensitivity to risk perceptions will complicate the task of exit and necessitate very close and constant dialogue and cooperation between central banks," said Landau, now a professor at Princeton.

But he lamented that the necessary coordination on monetary policy was unlikely, and warned of the potential for the "fragmentation" of global capital markets.

Stocks and currencies plunged in India, Indonesia, Brazil and Turkey this week as investors fretted over a looming reduction in the U.S. Federal Reserve's monthly bond purchases.

Turkish Central Bank Governor Erdem Basci was attending the conference, although his Brazilian counterpart, Alexandre Tombini, cancelled to stay home and deal with the crisis.

The Fed's bond buying, or so-called quantitative easing, has been at the heart of its aggressive efforts to revive U.S. economic growth after it cut interest rates to nearly zero in 2008. Interest rates in Europe and Japan are also ultra-low.

However, the purchases have spurred massive capital inflows into faster growing emerging economies, which are now suffering as investors anticipate an end to the easy money.

COORDINATION

Landau acknowledged that central bankers dislike the idea of coordinating monetary policy because their job is to focus on domestic goals. But they worked well together during the 2007-2009 financial crisis, when the Fed, European Central Bank, Bank of Japan and other central banks coordinated rate cuts and currency swap lines.

As cross-border liquidity pressures build, they will find it productive to do so again, although cooperation is more likely through regulatory and financial structures aimed at preventing excessive leverage or harmful asset bubbles, he said.

In an ideal world, the cooperation would extend to monetary policy because policies in major economies such as the United States can have an international impact that amplifies their magnitude with domestic implications, Landau argued.

"The system itself is producing more accommodative monetary conditions than warranted by the situation," he said. "In a reverse environment, when monetary policies need tightening, the effects could be symmetrical and complicate the exit from non-conventional measures."

In addition, much could be gained through an international "lender of last resort," which would remove the motive for some nations to maintain massive foreign exchange reserves, he added.

"All countries have a common interest in finding ways to disconnect reserve accumulation from exchange-rate management," Landau said. "The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis."

That said, he freely admitted that this goal will be very hard to reach. Such an international agreement ultimately puts taxpayers in one country on the hook to bail debtors in another, which would very hard to sell politically.

"It is hard to imagine that any government could bring the necessary fiscal backing to issuance of potentially unlimited liabilities to non-residents in times of crisis," Landau said.

As a result, the outlook for global capital markets is not encouraging, Landau said, warning of a "segmentation" between nations with surplus capital and others that will suffer from a dearth of investment due to a lack of access to capital.

"The most likely scenario is that of progressive fragmentation of the international financial system," he added.

(Reporting by Alister Bull. Editing by Andre Grenon)

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This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.

Central banks don't need to rush ultra-easy money exit: IMF's Lagarde

International Monetary Fund (IMF) managing director Christine Lagarde gestures as she speaks during the debate ''European Economic Integration: Challenges and Opportunities'' in Vilnius July 18, 2013.

Credit: Reuters/Ints Kalnins

By Alister Bull and Pedro da Costa

JACKSON HOLE, Wyoming | Fri Aug 23, 2013 4:05pm EDT

JACKSON HOLE, Wyoming (Reuters) - Central banks in Europe, the United States and Japan have no need to rush to exit the ultra-easy monetary policies they have put in place to spur growth, IMF Managing Director Christine Lagarde said on Friday.

But in prepared remarks at the U.S. Federal Reserve's annual Jackson Hole policy symposium, she also said that central banks must work with each other to minimize spillover from any withdrawal of policy accommodation that could stifle world growth.

"Policies and policy coordination are not yet where they need to be. Failing to act at the global level, with each country playing its part, could put the global recovery at risk," she said.

Central bankers from around the world are attending the annual conference hosted by the Kansas City Federal Reserve Bank in the mountainous splendor of Wyoming's Grand Teton National Park.

Lagarde, speaking during lunch on the first day of the two-day gathering, noted that concerns about the Fed withdrawing its support had knocked emerging markets in recent days. But she said the exit would proceed more slowly than "feared."

"I do not suggest a rush to the exit. UMP (unconventional monetary policy) is still needed in all places it is being used, albeit longer for some than for others. In Europe, for example, there is a good deal more mileage to be gained from UMP. In Japan too, exit is very likely some way off."

TAPER TANTRUM

The Fed expects to being scaling back monthly purchases of bonds later this year. But in June it set off violent swings in global financial markets by just talking about tapering its campaign of so-called quantitative easing.

However, Lagarde said there was no reason central banks could not manage this exit with the same success they had when they launched unconventional policies amid the financial crisis.

These include forward interest rate guidance and quantitative easing, adopted after banks lowered rates nearly to zero to shelter their economies from a severe recession sparked by the collapse of a bubble in the U.S. housing market.

The measures have been controversial, with critics, including some U.S. lawmakers, castigating the Fed for measures that could lead to further bubbles or future inflation.

But Lagarde said the steps had clearly worked for both the countries putting them in place and for other nations that benefited from the global recovery that these actions delivered.

That said, as the Fed, European Central Bank and Bank of Japan begin to normalize policies, emerging economies that have experienced massive capital inflows as a byproduct of their ultra-low interest rates will have to take steps to prepare.

"Exchange rate flexibility will help, but not at all cost. Some market intervention may help moderate exchange rate volatility or short-term liquidity pressures," she said.

Turkey and India have both announced foreign exchange measures after their currencies fell sharply this week, and there has been talk that the top emerging economies could set up currency swap lines to protect others from speculative attack.

Lagarde pointedly said that swap lines "can help" defend emerging markets from exit spillovers, and pledged that the IMF was ready to help with advice, and money, if needed.

"For the Fund's part, we stand ready to provide policy advice and financial support, including on a precautionary basis, through our various instruments," she said.

(Reporting by Alister Bull and Pedro da Costa; Editing by Dan Grebler)

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.

Central banks told to cooperate on managing global liquidity

The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013.

Credit: Reuters/Jonathan Ernst

JACKSON HOLE, Wyoming | Sat Aug 24, 2013 10:12am EDT

JACKSON HOLE, Wyoming (Reuters) - Central banks should coordinate to avoid unwanted side effects as they exit from ultra-easy monetary policies that have left the world awash in cheap money, top policymakers were told on Saturday.

Opening the second day of an annual monetary symposium in Jackson Hole, Wyoming, after a week in which several top emerging markets suffered steep losses, a former Bank of France deputy governor painted a grave picture of the problem.

"The main challenge will be to manage the consequences of monetary policies, and their evolutions, on cross-border liquidity movements," Jean-Pierre Landau concluded in a paper he presented to an audience that included top central bankers from advanced as well as emerging market economies.

"Amplifications, feedback loops and sensitivity to risk perceptions will complicate the task of exit and necessitate very close and constant dialogue and cooperation between central banks," said Landau, now a professor at Princeton.

But he lamented that the necessary coordination on monetary policy was unlikely, and warned of the potential for the "fragmentation" of global capital markets.

Stocks and currencies plunged in India, Indonesia, Brazil and Turkey this week as investors fretted over a looming reduction in the U.S. Federal Reserve's monthly bond purchases.

Turkish Central Bank Governor Erdem Basci was attending the conference, although his Brazilian counterpart, Alexandre Tombini, canceled to stay home and deal with the crisis.

The Fed's bond buying, or so-called quantitative easing, has been at the heart of its aggressive efforts to revive U.S. economic growth after it cut interest rates to nearly zero in 2008. Interest rates in Europe and Japan are also ultra-low.

However, the purchases have spurred massive capital inflows into faster growing emerging economies, which are now suffering as investors anticipate an end to the easy money.

COORDINATION

Landau acknowledged that central bankers dislike the idea of coordinating monetary policy because their job is to focus on domestic goals. But they worked well together during the 2007-2009 financial crisis, when the Fed, European Central Bank, Bank of Japan and other central banks coordinated rate cuts and currency swap lines.

As cross-border liquidity pressures build, they will find it productive to do so again, although cooperation is more likely through regulatory and financial structures aimed at preventing excessive leverage or harmful asset bubbles, he said.

In an ideal world, the cooperation would extend to monetary policy because policies in major economies such as the United States can have an international impact that amplifies their magnitude with domestic implications, Landau argued.

"The system itself is producing more accommodative monetary conditions than warranted by the situation," he said. "In a reverse environment, when monetary policies need tightening, the effects could be symmetrical and complicate the exit from non-conventional measures."

In addition, much could be gained through an international "lender of last resort," which would remove the motive for some nations to maintain massive foreign exchange reserves, he added.

"All countries have a common interest in finding ways to disconnect reserve accumulation from exchange-rate management," Landau said. "The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis."

That said, he freely admitted that this goal will be very hard to reach. Such an international agreement ultimately puts taxpayers in one country on the hook to bale out debtors in another, which would very hard to sell politically.

"It is hard to imagine that any government could bring the necessary fiscal backing to issuance of potentially unlimited liabilities to non-residents in times of crisis," Landau said.

As a result, the outlook for global capital markets is not encouraging, Landau said, warning of a "segmentation" between nations with surplus capital and others that will suffer from a dearth of investment due to a lack of access to capital.

"The most likely scenario is that of progressive fragmentation of the international financial system," he added.

(Reporting by Alister Bull. Editing by Andre Grenon)

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.

Central banks told to cooperate on managing global liquidity

JACKSON HOLE, Wyoming | Sat Aug 24, 2013 3:02pm BST

JACKSON HOLE, Wyoming (Reuters) - Central banks should coordinate to avoid unwanted side effects as they exit from ultra-easy monetary policies that have left the world awash in cheap money, top policymakers were told on Saturday.

Opening the second day of an annual monetary symposium in Jackson Hole, Wyoming, after a week in which several top emerging markets suffered steep losses, a former Bank of France deputy governor painted a grave picture of the problem.

"The main challenge will be to manage the consequences of monetary policies, and their evolutions, on cross-border liquidity movements," Jean-Pierre Landau concluded in a paper he presented to an audience that included top central bankers from advanced as well as emerging market economies.

"Amplifications, feedback loops and sensitivity to risk perceptions will complicate the task of exit and necessitate very close and constant dialogue and cooperation between central banks," said Landau, now a professor at Princeton.

But he lamented that the necessary coordination on monetary policy was unlikely, and warned of the potential for the "fragmentation" of global capital markets.

Stocks and currencies plunged in India, Indonesia, Brazil and Turkey this week as investors fretted over a looming reduction in the U.S. Federal Reserve's monthly bond purchases.

Turkish Central Bank Governor Erdem Basci was attending the conference, although his Brazilian counterpart, Alexandre Tombini, cancelled to stay home and deal with the crisis.

The Fed's bond buying, or so-called quantitative easing, has been at the heart of its aggressive efforts to revive U.S. economic growth after it cut interest rates to nearly zero in 2008. Interest rates in Europe and Japan are also ultra-low.

However, the purchases have spurred massive capital inflows into faster growing emerging economies, which are now suffering as investors anticipate an end to the easy money.

COORDINATION

Landau acknowledged that central bankers dislike the idea of coordinating monetary policy because their job is to focus on domestic goals. But they worked well together during the 2007-2009 financial crisis, when the Fed, European Central Bank, Bank of Japan and other central banks coordinated rate cuts and currency swap lines.

As cross-border liquidity pressures build, they will find it productive to do so again, although cooperation is more likely through regulatory and financial structures aimed at preventing excessive leverage or harmful asset bubbles, he said.

In an ideal world, the cooperation would extend to monetary policy because policies in major economies such as the United States can have an international impact that amplifies their magnitude with domestic implications, Landau argued.

"The system itself is producing more accommodative monetary conditions than warranted by the situation," he said. "In a reverse environment, when monetary policies need tightening, the effects could be symmetrical and complicate the exit from non-conventional measures."

In addition, much could be gained through an international "lender of last resort," which would remove the motive for some nations to maintain massive foreign exchange reserves, he added.

"All countries have a common interest in finding ways to disconnect reserve accumulation from exchange-rate management," Landau said. "The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis."

That said, he freely admitted that this goal will be very hard to reach. Such an international agreement ultimately puts taxpayers in one country on the hook to bail debtors in another, which would very hard to sell politically.

"It is hard to imagine that any government could bring the necessary fiscal backing to issuance of potentially unlimited liabilities to non-residents in times of crisis," Landau said.

As a result, the outlook for global capital markets is not encouraging, Landau said, warning of a "segmentation" between nations with surplus capital and others that will suffer from a dearth of investment due to a lack of access to capital.

"The most likely scenario is that of progressive fragmentation of the international financial system," he added.

(Reporting by Alister Bull. Editing by Andre Grenon)

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Analysis: Central Europe sheltered from emerging markets sell-off

The WIG20 index graph is seen on screen at the Warsaw Stock Exchange October 3, 2012.

Credit: Reuters/Kacper Pempel

By Marcin Goettig and Sujata Rao

WARSAW/LONDON | Thu Aug 22, 2013 10:38am EDT

WARSAW/LONDON (Reuters) - The currencies of emerging European countries such as Poland and Hungary have dodged the giant selloffs hitting other emerging markets, and their links to a steadily recovering euro zone are likely to keep them insulated.

For years, Europe's slump and cautious monetary rules have dragged down economic growth in the region, making these countries less exciting for investors than destinations in Asia and Latin America. Now that curse is turning into a blessing.

Former investor darlings such as Brazil and India have seen currencies tumble as investors flee their stocks and bond markets in fear of a sharp growth slowdown. Their peers in central Europe, however, are largely holding steady.

Hit by the U.S. Federal Reserve's plans to reduce the flow of cheap money it pumps into the global economy, currencies such as South Africa's rand, India's rupee and Brazil's real have fallen 15-18 percent against the dollar this year.

By contrast, Poland's zloty has eased 3 percent against the dollar since January, while Hungary's forint, considered the riskiest regional bet because of Prime Minister Victor Orban's unorthodox policies, is down 2 percent

"This is due to a combination of a better outlook for core Europe, where the economy seems to be recovering, and an improvement in the underlying fundamentals of most of these countries," said Thanasis Petronikolos, head of emerging debt at Baring Asset Management in London.

He said his investment portfolio was factoring in that central Europe would perform better than emerging markets in Asia and some in Latin America.

No doubt, there are some clouds on central Europe's horizon - uncertainty about the impact of upcoming Fed measures and political instability ahead of elections next year.

But barring surprises and as long as the euro recovery stays on course, the region could stay stable for currency investors.

"We expect CEE currencies to continue to outperform other emerging markets until the end of next year," says Commerzbank currency strategist Lutz Karpowitz.

EURO ZONE ORBIT

Germany, the powerhouse of the euro zone and the source of most of emerging Europe's investment, posted forecast-beating business sentiment data on Thursday, leading improvements across the single currency bloc.

As the euro zone starts to emerge from recession, that translates into more growth for its central European neighbors, and therefore stable currencies.

Carmaker Daimler's (DAIGn.DE) plant in Hungary, which makes the Mercedes CLA coupe, illustrates the link: it is estimated to account for nearly one percent of Hungary's economic output, and its sales helped pull the country out of recession.

As European Union members, Poland, Hungary and the Czech Republic are bound by the bloc's rules on fiscal consolidation. For the past several years, that has constrained their governments from running big deficits to boost growth.

But it also means countries in the region have small current account deficits, and some, like Hungary, even run a surplus. That spares their currencies the risk of a sharp decline if flows of foreign capital needed to fund a trade imbalance were to dry up.

An example of a currency hit by a current account deficit is the Indian rupee: with a gap equal to almost 5 percent of its economic output, the currency has fallen 15 percent this year, marking successive record lows in the past three months.

By comparison, Poland's current account deficit has shrunk to 1.9 percent of gross domestic product (GDP) from 5 percent in less than three years.

Hungary's current account surplus acts as a counter-weight to the perceived risks of Orban's policies, which include slapping heavy taxes on foreign banks.

"Countries with relatively good growth and few funding issues will do fine," said Carlin Doyle, emerging markets strategist at State Street Global Investments.

"Countries like South Africa and Turkey look a bit vulnerable, but Hungary does not have funding issues."

RISKS

Central Europe is not entirely without risk, however. Economic recovery could be hit if foreign banks, under pressure to fix their balance sheets, keep cutting lending to the region. Many banks in these countries are fully or partly owned by western parents [ID:nL6N0G04NQ].

Poland faces elections in 2015 and opinion polls show Prime Minister Donald Tusk will lose. Investors see him as a guarantor of stability and predictable policies.

And while the zloty and forint have not been as sensitive to the Fed signals so far, they would not withstand a widespread market panic, analysts say, noting that even relatively "safe" assets such as the Mexican peso and Korean won have fallen prey to the storm in recent days.

Poland, with its large and liquid financial markets would be most at risk if redemptions from emerging market funds spiral.

"If the wave spreads, these countries will also get hit," said Societe Generale strategist Guillaume Salomon. "The difference is they will sell off less than other markets."

(Additional reporting by Carolyn Cohn in London)

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