MNIConnect Issue Number 51 25th October 2011 …connecting Central Banks to the market C See MNI Connect events schedule (by invitation only) – Page 2 (click here) For terms to subscribe to MNI Connect, contact: Kevin Woodfield +44 207 862 7400 or email firstname.lastname@example.org for London Mike Connor +1 212 669 6400 or email email@example.com for New York A mutli-dimensional chess game involving the Eurozone’s political leaders, the ECB, the IMF and the banks seems to be settling for a tougher burden share for bailing out Greece, from which it is hoped that other parts of the grand plan to avoid contagion risks among the debt-laden Eurozone peripheral members and the banks that service them will somehow fall into place via creative (but taxpayer-driven) financial architecture. Meantime the clock ticks and the costs rise inexorably, writers… Bernard Wolfson in Paris – Page 3 (click here) The BOE’s further tranche of QE may have surprised some with its timing and most with its larger size. But, coupled with the alarm bells clanging from Governor Mervyn King on down about a Eurozone-triggered return to financial-economic dislocation, watch out for an MPC pushing the deflation bogeyman to press still harder on the QE gas as it seeks to shore up UK-based banks, writes… David Thomas& David Robinson in London – Page 8 (click here) A majority on the FOMC remains firmly behind Ben Bernanke in emphasising the downside risks – even the deflationary threat – and that they are mandated to at least keep on trying to stimulate the economy. That mood is likely to point to more easing at some stage. The more immediate question is how to communicate a framework for Fed policymaking to make it clearer and, it is hoped, more effective, writes… Steve Beckner in Washington – Page 12 (click here) The BOJ’s policy board is set to downgrade its growth and inflation outlook through 2013 when it issues its next set of forecasts this week, and to stress downside risks at home and overseas. But indications that this could prompt yet more easing as the yen soars are confronted by doubts about the effectiveness of the central bank’s dwindling armoury, writes… Max Sato in Tokyo – Page 18 (click here) Beset by investor concerns about local government indebtedness and funding problems, Beijing has taken a modest step toward creating a municipal bond market. It’s only a pilot scheme, includes only a few areas and is subject to a centralised cap, but it is an important move, writes… David Wilder in Beijing – page 22 (click here) Contact – Kevin Woodfield MNIConnect 0207 862 7400 firstname.lastname@example.org Page |2 …connecting Central Banks to the market MNI Connect Policymaker Event Program: 2011 We are pleased to announce the current schedule of MNI Connect events for 2011. Attendance is by personal invitation to MNI Connect subscribers (in EMEA for events in London; in North America for events in New York); guests to be notified of precise venues: Adam Posen, Bank of England Monetary Policy Committee member Events: MNI Connect Policymaker Luncheon Date/Time: 12:30 pm to 2:00 pm, Wednesday, 2 November Venue: London Christophe Frankel, CFO of the European Financial Stability Facility (EFSF) Event: MNI Connect Policymaker Brunch Date/Time: 11:00 am to 12:30 pm, Thursday, 3 November Venue: London José Manuel González-Páramo, Member of the Executive Board, European Central Bank Event: MNI Connect Policymaker Luncheon Date/Time: 12:30 pm to 2:30pm, Friday, 25 November Venue: London Bernard Wolfson, Chief ECB Correspondent, MNI Event: MNI Connect Customer Seminars on the ECB policy outlook Date/Time: November; precise dates to be confirmed Venue: MNI Connect subscriber offices in London Giorgios Provopoulos, Bank of Greece Governor & ECB Governing Council member Event: MNI Connect Policymaker Luncheon Date/Time: 21 October date postponed; new date to be confirmed Venue: London Mike Connor Kevin Woodfield CEO European Managing Director Market News International Market News International Tel.: +1 212 669 6400 Tel: +44 (0)20 7862 7400 Email: email@example.com Email: firstname.lastname@example.org Page |3 …connecting Central Banks to the market Paying the piper By Bernard Wolfson, Chief ECB Correspondent There is one overriding question in this week of summit madness: will Europe's political class finally stand up and deliver, or will the sound and fury of recent days prove in the end to be merely July 21 redux? The deal hammered out in July -- a new Greece bailout worth E109 billion, a 21% haircut on privately held Greek bonds, and significant new powers for the Europe's bailout fund, the EFSF -- was billed as a breakthrough that would finally tame the Eurozone debt crisis. But the package unraveled in the days immediately following the July 21 EU summit and then imploded spectacularly in August, as markets saw that governments and banks were not implementing the promised measures, which were insufficient anyway. Here we are three months later, caught in a dizzying flurry of summits and high level financial meetings. Presidents, prime ministers and other senior officials are once again promising the mother of all anti-crisis packages. The new big deal was supposed to be sealed over the weekend, then the Eurozone's date with destiny was postponed until Wednesday because agreements on key aspects of the plan proved elusive.Germany's Chancellor Angela Merkel needed time for the Bundestag's Budget ”Because of the political Committee to sign off on any proposed changes to the EFSF, as dithering since July, the required by German law. Because of the political dithering price tag for rescuing since July, the price tag for rescuing Greece has mushroomed. A report Greece has mushroomed.” last week by Greece's international creditors showed that a new EU-IMF bailout for Athens would now require public funds of E252 billion if the banks holding sovereign Greek bonds stick with the original plan for a 21% haircut. Conversely, it would take a haircut of between 50% and 60% to hold the line on public – ie. taxpayer -- funding, the report said. Even with a haircut of 50%, which now appears to be the focus of negotiations between banks and political officials, the public sector bailout bill would still rise to about E138 billion from the E109 billion pledged in July, a senior EU source told Market News International. ARM TWISTING Eurozone leaders have been twisting the arms of bankers behind the scenes, and the EU source said the banks now appear prepared to compromise around a figure of 50% -- two and a half times the writeoff that was envisioned in July. The arm twisting has been hard, but it is not one-way. Banks want assurances in return, particularly on concrete steps that will return Greece to economic growth. The deal is far from concluded, since even once the outlines of a plan are agreed, individual banks will presumably need to evaluate it and decide, on an individual basis, whether to sign onto it. The reluctance of banks following the July 21 haircut agreement Page |4 …connecting Central Banks to the market became a major obstacle to implementation of that plan. And clearly, with the massive increase in the magnitude of the losses banks are being asked to absorb this time around, the stakes have risen considerably. Indeed, the optimism of the EU official cited above may represent wishful thinking -- or else certainty that the governments will get their 50% whether the private sector investors want it or not. Despite official insistence that any private sector contribution must still be voluntary – given fears of a credit event that could trigger heavy credit default swap losses - Eurozone politicians seem willing to make the haircuts virtually mandatory if necessary. Germany in particular, but also Finland and the Netherlands, have reached the political limits of what taxpayers will bear to bail out Greece. According to the same EU source, Eurozone leaders gave bankers in Brussels this weekend a "take it or leave it" message, implying that they would force the bigger haircut on them if need be. While the apparent coalescence around a specific haircut percentage might seem ”While the apparent like progress, there is a danger of backlash from banks and financial markets. coalescence around a The Institute of International Finance, a specific haircut global banking group that is representing the banks in the haircut negotiations, fired a shot across the bow late Monday percentage might seem in Brussels. "There are limits to what could be like progress, there is a considered as voluntary to the investor base and to broader market participants," IIF head Charles Dallara danger of backlash warned. from banks and "Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount financial markets.” to default, would isolate the Greek economy from international capital markets for many years, and would impose a harsh burden on the Greek people as well as European taxpayers who have already done a lot to support Greece," Dallara added. "It would also likely have severe contagion effects, which would cost the European and the world economy dearly in terms of employment and growth." In a research note also published on Monday, the Royal Bank of Scotland cautioned that: "a large haircut for Greece, and potentially not even the last one, will set a very bad precedent for expectations vis-a-vis other sovereigns." WRANGLNG The still-unfinished debt write off deal with the banks is only one of three major components of the crisis that leaders are seeking to address. They are seeking to agree on a recapitalization plan for Europe's banks to innoculate them against the potential fallout from a Greek default. And they are still wrangling over how best to optimize the limited funding of the EFSF, which at E440 billion is, according to Germany, immutable In another sign of progress over the weekend, EU leaders said they had drafted the broad outlines of a bank recapitalization agreement. It would require European banks to achieve the Basel III tier 1 capital ratio requirement of 9% by mid-2012, about seven years earlier than envisioned in the Basel III agreement itself. That would require about E108 billion in new capital, which leaders said should come first from private sources, then from the government, and only as a last resort from the EFSF. Page |5 …connecting Central Banks to the market Officials also announced that they had narrowed the list of EFSF leveraging options to two: (1) the use of the bailout fund to insure newly issued sovereign bonds up to a certain percentage; and (2) the creation of a special purpose vehicle -- with EFSF funds supplemented by financing from the IMF, other public agencies and private sources -- in order to buy sovereign debt in the secondary market, thus taking over or supplementing the interventions currently being made solely by the European Central Bank. Officials also said that a proposal to issue the EFSF a bank license so it could borrow from the ECB has been ruled out. If that decision holds, it would represent a victory for Germany and a retreat for France, which pushed the ECB-based solution in the face of stiff resistance from Berlin and from the central bank itself. But like the debt write off talks with private sector creditors, significant sticking points remain both on the subject of leveraging the EFSF and recapitalizing the banks. If Eurozone leaders are to unveil a detailed, definitive response to the crisis by this Wednesday, their underlings certainly have their work cut out for them. All the elements of the plan in progress are deeply intertwined. An increased haircut on Greek debt, especially of the magnitude being considered, could lead to big problems at banks, which are already under pressure in equity markets, significantly raising the bar for them to acquire new capital on their own. According to the recapitalization plan on the table, the banks' next port of call would be governments. But many governments are struggling to contain burgeoning deficits and debt, and this is “All elements of the plan particularly true in the Eurozone's periphery, where much of the need for fresh bank capital is likely to be in progress are deeply concentrated. intertwined.” That leaves the EFSF. But it is far from clear that the two leveraging plans on the table -- even in combination, which is an increasingly likely possibility -- would be sufficient to allow the bailout fund to recapitalize banks while simultaneously adopting the ECB's bond buying role, providing pre-cautionary financing to countries like Spain and Italy, and remaining on call for possible future bailouts. CUMBERSOME The idea of a special purpose vehicle (SPV) attached to the EFSF could provide some relief in bond markets. But with only E440 billion and so many other potential responsibilities, it is hard to see how the EFSF could put up a very large chunk of seed money compared with what the ECB can deploy. And it is difficult to know whether private investors or other public agencies would rush in to fill the empty space. One ray of hope is that the IMF would be prepared to invest in such a scheme, which explains why EMU leaders issued a call at their Sunday summit to bolster the Fund's financial resources. Even so, the rules governing EFSF operations -- including the German law requiring a Bundestag signoff for material actions of the fund -- are slow and cumbersome. They could make it difficult for the EFSF to work smoothly and efficiently, especially when intervening in bond markets. As for an IMF role, that too involves tricky issues about flexibility and conditionality. The idea of an EFSF guarantee, or "first loss," on newly-issued sovereign bonds could be even more problematic than the SPV idea, because it would put the Eurozone governments that backstop the bailout fund directly on the hook for an amount that some sources say could be as much as of 20% of new debt purchased. Such a potential liability could put additional stress on the triple-A countries, whose top rating is what allows the EFSF to maintain its own. Page |6 …connecting Central Banks to the market This could be particularly problematic for France, which is already under the threat of a downgrade and was forced this week to reveal that it would introduce additional austerity measures in the near future. Should the EFSF's rating be tainted by a downgrade of France or any other triple-A member, its guarantees on sovereign bonds would quickly lose value. The idea could also run into legal problems, because guarantees on new bonds would create a two-tier market vis-a-vis old securities that don't carry such an advantage for investors. It is entirely possible, should the leaders announce on Wednesday something similar to the details already unveiled over the weekend, that markets will revolt. One quick and reliable test of how the plan is being received will be whether private investors pile back into Italian bonds after the announcement. Jitters about the lack of progress towards a crisis solution sent investors fleeing last week, pushing Italian yields up sharply to the red-alert level of 6%. FIREWALL It is clear that as the Eurozone enters the treacherous waters of a possible endgame to the EMU crisis, the ECB will be forced to cling to its uncoveted role as firewall against a financial meltdown. As incoming ECB President Mario Draghi takes over the reins from current ECB President Jean-Claude Trichet on November 1, he will be likely to preside over ongoing bond market interventions, even as he comes under pressure -- largely because of his Italian nationality -- to prove his Bundesbank-like anti-inflation credentials. And as the economic picture in the Eurozone darkens, Draghi might also need to contemplate a cut in official interest rates sooner than would otherwise suit his political purposes. Indeed, recent indicators show the Eurozone economy clearly sliding towards, or perhaps already into, another ”…as the economic recession. The Eurozone's October Purchasing picture in the Managing Index made for grim reading, as the composite index lurched further into Eurozone darkens, recession territory, with declines in both manufacturing and services and both sectors below the 50-mark that separates expansion Draghi might…need to from contraction. contemplate a cut in France, the Eurozone's second largest economy, tumbled into the recession zone, with the composite index hitting a 29-month official interest rates low. Germany, the Eurozone's largest economy, fared better, clinging tenaciously to the expansion side of the line, but just sooner than would barely. Its manufacturing sector contracted, with a PMI reading below 50 -- a 27-month otherwise suit his low. Other indicators show confidence and demand slumping, and output likely to fall in the fourth quarter. political purposes.” With the economy obviously skidding and price pressures on the wane, it is likely the ECB will come under renewed pressure to consider a rate cut. It has the room, since it hiked rates two times earlier this year by a total of 50 basis points, and its key policy rate is now 1.5%, well above other major central banks. At the ECB's monetary policy meeting earlier this month, a significant minority argued for a rate cut, although they did not carry the debate. Their voices will be emboldened now. Page |7 …connecting Central Banks to the market As Mario Draghi embarks on his eight-year journey on stormy financial seas, it is clear that the ECB is very far from a safe port. Bernard Wolfson email@example.com Page |8 …connecting Central Banks to the market Underwriting inflation By David Thomas, Chief BOE Correspondent The decision earlier this month of the Bank of England's Monetary Policy Committee to launch an additional stg75bn of QE surprised markets both on the timing and on the size. Last week's publication of the minutes for the October MPC meeting also revealed that the committee had indeed been unanimous, underlining that this was emergency action taken to stave off the worst effects of a fast-intensifying financial crisis as well as its economic ramifications. Even so, the committee’s minutes have been careful to embed its QE2 narrative in the context of a constitutional mandate to keep inflation at 2%. This posed some tricky - almost tortuous - communications issues, given that inflation is presently over 5%. MPC members argued that there was a real risk of inflation falling below target and persisting there without further monetary loosening in the form of QE. Critics might be hard pressed to recall when this has ever happened, at least in the recent past. The QE gainsayers would add that UK QE1, and US QE1 and QE2 via higher commodity import prices, bear much of the blame for the present inflationary overshoot. DOOM But the MPC made clear during its response to the 2007-08 crisis that when faced with the strong threat of deflation versus inflation, it does not regard these as symmetric risks. Tipping into the former trap would leave the BOE rudderless whereas a bout of too- high inflation can always be post facto attacked by much tighter policy - however painful that might be. The minutes justified the drastic action by an almost Damocletian sense of doom. The debate on the timing of QE2 makes this crystal clear. Not for the first time in seeking to assess a BOE ”…the MPC made clear policy response, we can revert to Macbeth: 'If it were done when 'tis done, then t'were well it were done during its response to the quickly'. 2007-08 crisis that when In the more prosaic language of the MPC’s latest set of minutes: "In terms of the timing of further asset faced with the strong purchases, there were clear arguments for acting quickly and decisively now that the need for threat of deflation versus further monetary stimulus had become clear. The Committee inflation, it does not recognised that there could be some benefit in delaying a policy change until November, when the regard these as symmetric background could be explained in more detail in the Inflation Report. risks.” Page |9 …connecting Central Banks to the market But, on balance, any advantage to delay was thought insufficient to outweigh the arguments for acting immediately.” Showing its hand with QE2 of stg75bn shows that the BOE believes that it is certainly not yet without tools to combat some of the risks out there. But while the committee remains convinced that QE still works, what an effective scale of asset purchases might be is far from certain. Given the BOE's asymmetric assessment of the risks, this inability to calibrate the precise dosage of additional QE means that the committee had to err on the generous side. And given the seriousness of the threat from the Eurozone - it may well find itself erring in the same direction again. The MPC's newest member Ben Broadbent commented on BBC Radio Lancashire on October 19 that QE is not a precise science, saying it was: "designed to increase the amount of money circulating in the economy and to raise some asset prices and thereby raise spending and demand, and I am confident it will have some impact." Barely reassuring even if he was doing his best. If the tone was scarcely reassuring, Broadbent perhaps revealed why when he later told the Financial Times that no amount of 'money printing' (reserve creation) would help save the UK economy if the Eurozone crisis were to get much worse. VAGUE The October minutes too showed the committee thinking in expansive if vague terms: "The scale of the downward reassessment of the medium-term inflation outlook suggested that substantial further asset purchases were appropriate. In terms of the immediate decision, the Committee considered a range of asset purchases of between stg50 billion and stg100 billion. Committee members agreed that differences in the impact of asset purchases within this range were, in current conditions, likely to be outweighed by the degree of uncertainty about the outlook for inflation. Moreover, the size of ”…reading between the asset purchase programme would be kept under review in the light of subsequent analysis the lines (of the and events". That sounds neutral but reading between the BOE’s October lines makes it clear that the risks to QE go just one way - of doing more not less:"Depending on minutes) makes it developments in the euro area and financial markets, the size of the stimulus could be adjusted in either direction. For some members, clear that the risks the substantial downside risks pointed to injecting a larger monetary stimulus than to QE go just one otherwise in order to place the UK economy in a stronger position were those risks to materialise". way – of doing The use of the word “some” provides real food more not less.” for thought. First, who precisely would have joined QE-enthusiast Posen (we can guess that he at least was upping the ante by pushing for stg100bn already) in seeking more than stg75bn of asset purchases? BOE Executive Director Markets Paul Fisher has been reckoned a QE true believer while Governor Mervyn King himself has generally been on the dovish end of the MPC policy spectrum through the crisis. David Miles has also dissented from the rest of the Committee in the past in favour of doing more QE. Posen must now feel himself on a roll, with the debate having swung so squarely behind his long-advocated position of more asset purchases and the Treasury looking at some of his other ideas for so-called credit easing. While other MPC members did their utmost to P a g e | 10 …connecting Central Banks to the market dress up the decision in drab inflation targeting mufti - it is interesting that Posen framed the move in much more dramatic ”Any further bad terms. "It's (QE is) really just trying to do the normal news on the euro monetary policy job when rates are really zero per cent and the banking industry is in a front and the signs mess," Posen said in remarks reported 30 October in the Blackpool Gazette. "The whole committee came around to the idea - when are that we could get inflation is too low and growth is too low we need to act. We're looking five years ahead to stg100bn of QE and trying to make the right decisions." Posen is certainly a man who is pushing the before February.” envelope - the committee generally considers itself to be setting a policy which will help it meet the inflation target in the medium term - generally defined as 18 months-to-two-years ahead. And he is certainly telling it like it is when he says we are here because the banking system is in a mess. "Things are moving that fast in a downward direction that we have to be one step ahead in terms of policy," Posen went on to tell the local newspaper. "While the worst risks had not crystallised, the threat of them doing so had resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy appeared to have already affected consumer and business confidence and could result in a further tightening of credit conditions, posing a threat to the recovery in the United Kingdom," he continued. EXTENSION Any further bad news on the euro front and the signs are that we could get to stg100bn of QE before February. Even should the situation remain just as bad as it presently is - an optimistic view - the MPC looks like having to at least signal an extension of QE ahead of the February MPC meeting just to ensure markets don't start speculating that the programme will end at stg75bn. The CPI forecast in next month's BOE Inflation Report (based on 0.5% Bank Rate and combined stg275bn of QE) ought to give some clue as to the scope for an extension of QE in the coming months. The latest comments from MPC members show most of them already resorting to what central bankers like to term 'the reassurance channel'. Put simply, the worst could be very bad indeed. At time of going to press on this article the outcome of the EU Summit on Wednesday is unclear as the protracted preamble points to a nasty game of hardball. France is pushing for a European Financial Stability Facility which will be able to draw on ECB leverage to bolster the capital of its own banks. If France has to find the money itself a downgrade surely beckons, but such a use of the ECB is as yet fiercely opposed by Germany and the Netherlands. And with the European Banking Authority pushing for a significant rise in capital at all systematically important EU banks, the UK may well face some of these problems itself and even tougher funding constraints. DERAILED Talk from UK politicians that UK banks are sufficiently well-padded with capital and/or immune to the spreading crisis should be taken with a heavy pinch of salt. The talk is that Greece has E80bn of CDSs out there and no-one knows where that risk lies. P a g e | 11 …connecting Central Banks to the market It is small wonder then that King ”The governor made it launched another jeremiad in Liverpool on Tuesday night (October 18) in which he warned that an already tentative UK clear that the crisis in recovery had been derailed by the Eurozone crisis. The governor made it clear that the crisis in the wholesale the wholesale funding funding markets heavily influenced the QE2 decision. Funding for many banks markets heavily had dried up over the summer and EU- based bank share prices were around 35% lower today than at the start of influenced the QE2 July, he noted. decision.” But while "a transparent recognition of losses and a substantial injection of additional capital are necessary to restore market confidence," King also sought to warn that this is no free lunch and raises "difficult political questions about the capacity of the weaker sovereigns to pay for any recapitalisation of their banks." The provision of liquidity measures by central banks and official lending by governments could only "buy time", he said, for more coherent solutions to the underlying problems of solvency of banks and sovereigns to be put in place. "But easy monetary policy, by bringing forward spending from the future to the present, means that the ultimate adjustment of borrowing and spending will be even greater. That is our dilemma and that of other deficit countries". The closer we get to it - the wider and deeper this abyss looks. David Thomas firstname.lastname@example.org P a g e | 12 …connecting Central Banks to the market Spooked by the downside By Steven K. Beckner, Chief Fed Correspondent Unless the U.S. economy puts on an unexpected surge, it may not take long, and it may not take much, to convince Federal Reserve policy-makers that they need to do still more to boost a struggling U.S. economy and to bring down stubbornly high unemployment. The Nov. 1-2 meeting of the Fed's policy-making Federal Open Market Committee is probably too soon to expect anything dramatic, though. Indeed, whether or not monetary policy can accomplish those objectives is a matter of intense debate within the Federal Reserve system. Having long since run out of room to cut short-term interest rates, the Fed has shown it can bring down long-term rates. The Fed contends that large-scale asset purchases reduce bond yields roughly 20 basis points, which it says is equivalent to a 50 basis point reduction in the federal funds rate. After the FOMC, on Sept. 21, announced $400 billion of long-term Treasury security purchases, financed by sale of short-term securities in its portfolio, yields did indeed plunge. But it's hard to say how much lasting effect the "maturity extension program" really had, given all of the other things affecting the market. The 10-year Treasury note yield fell from roughly 1.95% before the FOMC announced so-called "Operation Twist" to as low as low as 1.71% in ensuing days. But it has since bounced back to 2.20% or higher. Its proponents would contend that rates would be higher if not for Operation Twist. But even conceding that the Fed can, indeed, lower long-term rates through asset purchases, there is not a lot of evidence that they are having much real economic impact. There again, defenders of asset purchases would argue that things would have been worse otherwise. Even some of those who opposed Operation Twist and who have said they would be against unsterilized asset purchases (financed by creation of new money) would agree that QE2 was justified when it was launched. But now is a different story. Opponents say that further easing steps are not justified and will not be effective; indeed, they could be counterproductive. VOCAL All three Federal Reserve Bank presidents who dissented on Sept. 21, were vocal last week. Philadelphia Federal Reserve Bank President Charles Plosser told me that "even if (Operation Twist) worked as promised, I didn't think the effect would be very big." Plosser said it is impossible to know whether rates are lower than they otherwise would be thanks to the Fed's bond buying. Although Operation Twist's advocates thought the yield impact would be as much as 20 basis points, he pointed out that: "the daily standard deviation of bond yields is 10 basis points, so we're talking about having effects that are just swamped over time by other factors ...." P a g e | 13 …connecting Central Banks to the market What's more, "even if we believed the effect was going be 20 basis points and that turned ”Dallas Fed President out to be true ... the effect (on consumer and business borrowing rates) is much less than that," Plosser said, so "it's hard for me to Richard Fisher believe it's going to have much impetus to business borrowing, consumer spending or employment." declared that the Fed Dallas Fed President Richard Fisher declared is “exhausting the that the Fed is "exhausting the limits of prudent monetary policy. The programs popularly known as QE2 and Operation Twist limits of prudent are, to my way of thinking, of doubtful efficacy .... (E)ven if you believe ... that the benefits ofmonetary policy…” QE2 and Operation Twist outweigh their costs, you would be hard-pressed to now say that still more liquidity, or more fuel, is called for given the $1.5 trillion in excess bank reserves and the substantial liquid holdings businesses are hoarding above their normal working-capital needs." The real key to stronger growth and lower unemployment in the view of Fisher, among others, is to address fiscal and regulatory impediments to recovery: "At this juncture, I think it sufficient to say that, assuming the people we elect to tax us and spend our money and create the rules and regulations that govern our economic behavior can get their act together, confront their own denial of most rudimentary budgetary discipline, learn to shoot straight and remove the Damocles Sword of uncertainty that they have for too long wielded over our job-creating private sector, there is plenty of potential for confidence to be bolstered and propel the economy forward at an accelerating clip." INVIDIOUS Minneapolis Federal Reserve Bank President Narayana Kocherlakota, argued that the Fed should be tightening policy, not loosening it, and charged that the FOMC has changed the rules of the game in an invidious manner. Given the drop in unemployment and rise in inflation that has taken place since QE2 was launched last November, "the Committee should have lowered the level of monetary accommodation over the course of the year. Instead, the Committee chose to raise the level of monetary accommodation," he said. "The Committee's actions in the last two meetings are thus inconsistent with the evolution of the economy in 2011," said Kocherlakota, who left no doubt that he will dissent again if Fed Chairman Ben Bernanke seeks another round of quantitative easing or other stimulative actions. Kocherlakota charged that the FOMC is changing the way it makes the trade-off between reducing unemployment and increasing inflation risks: "The FOMC's actions in 2011 suggest that the Committee is resolving this key benefit-cost trade-off differently in 2011 from however it viewed the trade-off in 2010. In particular, it appears that the Committee is now more tolerant of the risk of higher-than-2-percent inflation than it was in 2010." Kocherlakota also alleged that the FOMC is changing its short-term/long-term monetary policy calculus. If Fed easing to reduce unemployment in the short-term drives up inflation expectations and in turn inflation itself, the Fed would eventually be forced to tighten in a way that would increase unemployment in the long term, he warned. But "the FOMC's actions in 2011 suggest that it is resolving this trade-off differently from however it viewed the trade-off in 2010...(I)t appears that the Committee has reduced the weight that it is putting on the long term and increased the weight that it is putting on the short term." P a g e | 14 …connecting Central Banks to the market But the FOMC majority just doesn't see it that way. Bernanke and most of his fellow policy-makers, while acknowledging that monetary policy is "not a panacea" and that the Fed needs help from fiscal and regulatory authorities, would not concede the point that further easing will be ineffective. MOOT But for them the question of efficacy is almost moot. The Fed has a dual mandate to pursue maximum employment and price stability, and that's all that matters. It must at least try to reduce unemployment and resist disinflation if it threatens to become excessive. That point of view was put forth by Fed Governor Daniel Tarullo last week. While better government policies in non-monetary areas could help, he said "the absence of such policies cannot be an excuse for the Federal Reserve to ignore its own statutory mandate." "The Federal Reserve Act requires that the FOMC promote the goals of maximum employment and stable prices," Tarullo said. "The statute does not qualify that mandate by saying that we should promote these goals only if all parts of the government -- or, for that matter, the private sector -- are acting just the way we think they should. In other words, we have to take the world as we find it and adjust our actions accordingly," he added. Tarullo conceded that "neither monetary nor fiscal policy will be able to fill the whole aggregate demand shortfall quickly," but said "appropriate policies could surely boost output and employment." And so, while there is a hard core of opposition to further monetary stimulus, others are in varying stages of readiness to do more. Chicago Fed President Charles Evans, an FOMC voter, has made it abundantly clear that he thinks the Fed should ease more aggressively. Fed Vice Chairman Janet Yellen warned last week of "significant downside risks" and said the FOMC is "prepared to employ our tools as appropriate to foster a stronger economic recovery in a context of price stability." Tarullo was more blunt. He said "there is need, ”…while there is a and ample room, for additional measures to increase aggregate demand in the near to medium term, particularly in light of the limited hard core of upside risks to inflation over the medium term...." opposition to Like other advocates of more easing, Tarullo rejects the argument that much joblessness is further monetary "structural" and hence not responsive to monetary stimulus. He maintains that the problem is a shortfall of aggregate demand stimulus, others are which the Fed can and must address. in varying stages of "The fact that these (unemployment) problems cannot be solved quickly does not mean there is nothing to be done," Tarullo said. "Without more readiness to do (Fed easing), the harm to the unemployed and their families continues, and the risks of longer- more.” term harm increase -- both to the unemployed and to the country as a whole ...." P a g e | 15 …connecting Central Banks to the market Not only would Tarullo favor QE3, he argued for a particular kind of QE. "I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS) ...." Rejecting arguments by some of his colleagues that buying MBS amounts to "credit allocation," Tarullo argued that the Fed could have more impact by purchasing MBS to narrow MBS-Treasury yield spreads and lower mortgage rates than by just buying Treasuries in any future large-scale asset purchase program. One can hear these kinds of comments echoed privately and at high levels. DEFINITION How much more the FOMC ultimately ends up doing depends on economic and financial conditions, including inflationary trends. It also depends on the definition of "more." Does "more" mean a third round of quantitative easing, or does it just mean some further tinkering with the FOMC's communications strategy -- its "forward guidance?" Some would be prepared to act if the economy does not improve from where it is now -- or if it fails to meet what are likely to be the downwardly-revised economic projections that the FOMC will produce at the Nov. 1-2 meeting. Thus, Tarullo said: "in the absence of favorable developments in the coming months, there will be a strong case for additional measures." Others would want to see some ”…(Fed Governor deterioration in the economy and the economic outlook, including the outlook for "price stability." Daniel) Tarullo argued It's important to understand what is meant that the Fed could by that last phrase. When officials like Yellen talk about wanting to "foster a stronger economic recovery in a context of have more impact by price stability," they are not just talking about the need for the Fed to avoid purchasing MBS…One increasing inflation as it injects stimulus. They are talking about the need to keep the inflation rate from falling too much relative can hear these kind of to the Fed's implicit target range of 1.7 to 2.0%. comments echoed To back QE3, some policy-makers would want to be able to point to, if not a rise in privately and at high unemployment, then a heightened risk of excessive disinflation, raising the spectre of deflation. levels.” But it might not be hard to convince some key officials of a deflationary threat. I can tell you that some already see it on the horizon. Bernanke and his lieutenants would want to be able to point to clear evidence that inflation is not only receding, as the FOMC has been predicting all year, but that it is lessening at a worrisome pace. It's not clear that they can make a strong case just yet. But I suspect we'll be hearing more and more about disinflation and/or deflation on the road to additional easing. It's probably too early to expect anything as dramatic as QE3 from the FOMC, although it is the only real policy option for providing significant stimulus. Operation Twist was essentially a one-shot deal because of the limited supply of short-term Treasuries in the Fed's portfolio. P a g e | 16 …connecting Central Banks to the market Cutting the rate of interest on excess reserves is an ”The next most option which Bernanke has mentioned from time to time, but few think it would accomplish very much, and there is mounting concern among Fed officials likely FOMC that it could do more harm than good. action is some The next most likely FOMC action is some further tinkering with its ‘forward guidance.’ further tinkering At the Aug. 9 meeting, the FOMC stopped saying it expected to keep the federal funds rate near zero with its ‘forward "for an extended period" and instead said it "currently anticipates that economic conditions -- including low rates of resource utilization and a guidance.’” subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013." But this may well prove to be just an interim step toward a more statistically precise delineation of the period of low rates. The change was seen as a form of easing. The somewhat controversial idea is that by advertising an intention to hold rates "exceptionally low" for a long period, market uncertainty about when the Fed would tighten credit would be removed and expectations that the Fed won't allow excessive disinflation would be cemented. But few are really happy with the current formulation and want to see "more clarity" in FOMC communication. Atlanta Fed President Dennis Lockhart told me recently the forward guidance needs to be more "state contingent," rather than "date contingent," arguing that "a date-specific forward guidance statement is sort of a depleting accommodative posture as the date approaches ...." As I've reported before, Yellen is chairing a task force on improving communication, which includes both Evans and Plosser. Last week, Yellen broached some possible changes. "One potentially promising way to clarify the dependence of policy on economic conditions would be for the FOMC to frame the forward guidance in terms of specific numerical thresholds for unemployment and inflation," she said, endorsing an approach which Evans had made. Evans has proposed that the FOMC spell out a commitment to keeping the funds rate near zero "until either the unemployment rate goes below 7% or the outlook for inflation over the medium term goes above 3%." Yellen said: "such an approach could be helpful in facilitating public understanding of how various possible shifts in the economic outlook would be likely to affect the anticipated timing of policy firming." "For example, if there were a further downward revision of the economic outlook, investors would recognize that the conditions for policy firming would not be reached until a later date and hence would have a more concrete basis for extending the time period during which they expect the federal funds rate to remain near zero," Yellen continued. SUPPORT The basic idea seems to have broad support. For example, Kocherlakota told me and other reporters last Friday that Evans has put forth "a good framework," even though the two have very different views about the direction monetary policy should take. P a g e | 17 …connecting Central Banks to the market The FOMC needs to put forth an "objective function that weights inflation versus unemployment" and defines "what's our goal ... what are we trying to do here?" Kocherlakota told us. "When rates are as low as they are an important part of (communication is saying) how long rates will be at zero .... How long the public expects them to be low is very important ...." But he said "more clarity" is needed on the parameters for holding rates near zero. Plosser told me that he too is amenable to changing the forward guidance, but was wary of the Evans approach. Rather than just announcing some level of unemployment and/or inflation at which the Fed would begin withdrawing accommodation, Plosser favors providing some "systematic," "rule-based" framework that gives guidance as to how the Fed will adjust interest rates on an on-going basis in response to the evolution in economic conditions. For instance, he would favor communicating to markets and the public that the Fed will raise rates based perhaps on how unemployment, GDP growth, inflation or inflation expectations, move within some rule-based framework -- possibly a kind of "Taylor Rule." So, for example, if and when the unemployment rate falls by a certain amount relative to the Fed's ”Regardless of the longer-term projection and/or when the inflation rate rises above the Fed's long-term, implicit target the motivation, the FOMC Fed would raise the funds rate. seems to be headed Plosser said one reason he dissented in August was that "we (the FOMC) created something that seemed to toward some sort of be more dependent on the calendar and less dependent on economic ‘trigger’ system, but it conditions." But Plosser said: "I don't think the trigger strategy of just using two points on a Phillips won’t be easy to reach a Curve is a particularly useful way of describing our behavior. I think there are better ways to do that ...." consensus.” And Plosser objected to using communication strategy as just another easing tool. "If someone were to say that 'I already believe that I want to keep rates lower longer, and I just have to figure out a way to convince people that's what I want to do ... that's the wrong way to conduct policy ...," he said. Those "who want a different set of communication strategies and frameworks so we can rationalize keeping rates lower longer" have it "backwards ...." Regardless of the motivation, the FOMC seems to be headed toward some sort of ‘trigger’ system, but it won't be easy to reach a consensus. Kocherlakota told us he "would be surprised" if it is announced on Nov. 2 when the FOMC makes its policy announcement and Bernanke gives his quarterly press conference. Needless to say, that press conference, which will take place after the FOMC's revised quarterly, three-year forecasts have been released, will give Bernanke an opportunity to communicate where he will lead U.S. monetary policy. Steven K. Beckner email@example.com P a g e | 18 …connecting Central Banks to the market Slipping back By Max Sato, Tokyo Bureau Chief This week Bank of Japan policy-makers will renew their pledge to fight stubborn deflation while clinging to their conviction that Japan's export-led economic recovery, although fragile, will lead to a more sustained growth track eventually. For them, the key is to assess how slowing global demand for semiconductors will translate into a damper on Japanese exports and how much persistent yen strength will erode profits at major carmakers and electronics firms and their small subcontractors. Both Ministry of Finance and BOJ officials are keeping a close watch on foreign exchange rates, with the MOF calling the shots on when to intervene to sell yen for dollars and how much. The BOJ for its part will decide on the need for a further credit easing based on the effects of currency and stock price action on business and consumer sentiment as well as corporate profits, not simply taking its cue from the day-to-day dollar/yen rate. HURTING The yen hit a fresh post-war high of Y75.78 against the dollar in New York trading on Friday amid heightened concerns about the European sovereign debt crisis. On Saturday, Japanses Finance Minister Jun Azumi warned that Japan's government is ready to "take decisive action against excessive and speculative moves" in foreign exchange rates, media reports said. This indicates Tokyo will intervene in the forex market, if necessary, to ”The yen hit a fresh post- stop the yen's rapid rise from hurting Japan's export-led recovery. war high of Y75.58 against On Monday, Azumi told visiting Inter-American Development Bank the dollar in New York President Luis Alberto Moreno that the lingering strong yen is having a negative impact on Japan's trading on Friday amid exporters and that US and Eurozone economic conditions remain the heightened concerns about major cause of concern. MOF data released on Monday the European sovereign showed that Japan's exports rose for the second straight month in debt crisis.” September on the recovery of car shipments but the pace of their year-on-year increase decelerated to 2.4% from 2.8% in August amid slowing global growth and the yen's rise to record highs. P a g e | 19 …connecting Central Banks to the market Exports of automobiles, which were the hardest hit by the March 11 natural disaster, rose just 4.9% from a year earlier following a 5.3% rise the previous month. Semiconductor shipments fell 9.5% year-on-year in September after slumping 16.4% in August. REFINE The BOJ board, in its semi-annual Outlook Report due on Oct. 27.will be likely to maintain its practically zero interest rate policy through fiscal 2013 and will forecast only a slight CPI gain under 1% for that year. In line with forecasts by private-sector economists and the International Monetary Fund, the board is widely expected to revise down its GDP and CPI forecasts for fiscal 2012 from its projections made three months ago in the face of heightened global uncertainty. BOJ policy-makers are expected to refine their projection that core CPI (excluding perishables) will show a positive figure for fiscal 2013 around the latter half of a zero to 1% range (their initial forecast), which would in all likelihood be the first annual increase in five years (since the +1.2% recorded in fiscal 2008). That would be a small step forward from ”The economic downturn years of deflation but the BOJ board will need to be convinced that the year-on- year change in CPI will not slip back into caused by the March 11 negative territory before considering unwinding the monetary stimulus. The disaster and the slowing central bank has vowed to maintain its effectively zero interest rate policy until it can detect signs of price stability in global economy are the longer term, measured by the CPI annual rate in a range clearly above likely to prompt BOJ zero and under 2%, or centering around 1%. policy-makers to revise The board's median core CPI projections for both this fiscal year and next are down their previous GDP expected to be revised down to below 0.5% from the 0.7% forecasts made in July in an update to the April Outlook growth forecasts…” Report. The year-on-year change in CPI has been depressed by the new data formula adopted in August. The government has updated the CPI base year to 2010 from 2005 and reviewed the basket of goods and services used for calculating the main consumer price measure. Meanwhile, the latest monthly survey by the Cabinet Office's Economic Planning Association showed that economists expected deflation to continue through early 2013, with their average forecast for core CPI in fiscal 2013 at a slight 0.23% rise (the first forecast for the poll). Their average forecast for fiscal 2011 was revised up slightly to - 0.15% on year from -0.19% in the previous survey while the forecast for fiscal 2012 was unchanged at -0.20%. DOWNGRADES As for economic growth, the BOJ board is expected to see Japan's GDP to expand around the 1.0% level by fiscal 2013 (which compares with +1.4% projected by private economists), following fairly high growth of just below 2.5% in fiscal 2012 and around zero this fiscal year. The economic downturn caused by the March 11 disaster and the slowing global economy are likely to prompt BOJ policy-makers to revise down their previous forecasts for +2.9% for fiscal 2012 and +0.4% for fiscal 2011. P a g e | 20 …connecting Central Banks to the market Similarly, the average economist survey has been revised down to +0.22% for fiscal 2011 from +0.38% in the previous survey while that for fiscal 2012 has also been revised down to 2.3% from 2.4%. Last month the IMF revised up its forecast for Japan's GDP contraction this year to -0.5% from -0.7% projected three months ago while revising down its 2012 growth estimate to +2.3% from +2.9%. The IMF also expects deflation to continue in Japan at least through 2012, forecasting CPI declines by 0.4% this year and 0.5% next year. Despite downgrades, the BOJ board will probably repeat its outlook that Japan's economy will be supported by demand stemming from reconstruction of the earthquake-hit northeastern regions, primed by a third supplementary budget estimated to total Y12.1 trillion. In the new Outlook Report, the BOJ is expected to maintain the view presented in July that the economy should return to a moderate recovery path in the absence of decisive data to prove otherwise. The strong yen and sluggish share prices have not yet derailed Japan's export-led recovery. But the board will warn of continued downside risks, such as weaker U.S., European and emerging economies, fluctuations in global financial markets, domestic power supply constraints and a prolonged expectation for deflation. It will be likely to note that those risk factors will cast a shadow over the BOJ's baseline economic scenario. At the same time, the BOJ board will also judge that domestic financial and capital markets are relatively stable as the direct impact of the European sovereign debt crisis has been limited. UNIDENTIFIED Meanwhile, the recent warning against the side effects of the BOJ's extensive monetary easing that came from an unidentified BOJ policy board member is a common concern among central bankers and does not necessarily suggest that the board will be divided when voting on a further credit easing to counter a greater downside risk. Indeed, the warning, which was unveiled in the minutes of the BOJ's Sept. 6-7 policy meeting released earlier this month, might have come from Governor Masaaki Shirakawa himself, a career central banker who has often discussed the benefits and costs of keeping overnight lending rates practically at zero and buying large sums of various financial assets from banks. Or it might have come from Koji Ishida, a former commercial banker who joined the board in June. Ishida replaced Tadao Noda, who himself was a commercial banker and cautioned against too much monetary stimulus while he was in office. What is the case is that the board member who warned about the costs of the extremely easy monetary policy shares the view that the downside risks to Japan's export-led recovery have been heightened. The consensus among BOJ officials seems to be that any board members who are concerned about the side effects of such policy would still agree to a further easing if downside risks were growing at an alarming pace in coming months. The board member in question seems to be aware that higher downside risks may warrant a further easing, such as boosting the BOJ's financial asset-buying program from the current Y50 trillion or re-adopting an actual zero interest rate policy, according to sources familiar with the central bank's policy-making process. But at the same time, the board member pointed out at the September meeting that the BOJ's super-easy policy hasn't produced tangible effects in stimulating the economy and appeared to be calling on BOJ staff to look for more policy tools. P a g e | 21 …connecting Central Banks to the market Last month Shirakawa said central banks in advanced economies must review their monetary easing programs, weighing the benefit of continuing unconventional asset- buying and funding operations against its cost. In his speech to an annual meeting of the International Association of Insurance Supervisors in Seoul, Shirakawa repeated his earlier call on central bankers to consider whether their policy is "having its intended effect." For his part, Ishida, who comes from the ”…there was also a banking sector, may share the industry's concern that prolonged super-low interest cautious view among rates will decrease profit margins at lenders. The minutes of the September meeting the nine-member showed that a few board members agreed that: "further monetary easing might become board on easing necessary depending on future developments given that there remained heightened downside risks to economic activity, as seen what was already in, for example, uncertainty about the possible consequences of the sovereign debt very stimulatory problems in Europe." But there was also a cautious view among the financial conditions nine-member board on easing what were already very stimulatory financial conditions in Japan.” in Japan. "One member said that a further enhancement of monetary easing could instead lead to instability in the financial system or prevent monetary policy effects from spreading to the economy through a decline in market liquidity and a decrease in financial institutions' profit opportunities, and therefore careful consideration was required to ensure that such developments did not occur," the minutes disclosed. At the Sept. 6-7 and Oct. 6-7 meetings, the BOJ board voted unanimously to continue the central bank's very accommodative interest rate policy by maintaining the target for the overnight lending rate among commercial banks at zero to 0.1%, as widely expected. Max Sato firstname.lastname@example.org P a g e | 22 …connecting Central Banks to the market One small step… By David Wilder, Beijing Bureau Chief While European leaders struggle to come up with a strategy for tackling the eurozone's debt problems, Beijing has finally made a modest step toward addressing its own. The Ministry of Finance said last week that it will allow some local governments to start issuing bonds directly to raise funds, taking another step toward creating a municipal bond market. Under a new pilot program, the cities of Shanghai and Shenzhen and the provinces of Zhejiang and Guangdong will be allowed to sell three- and five-year bonds directly to the market. It's a key move down the road toward a functioning municipal bond market, and Moody's called it credit positive for the central government because it will increase transparency and reduce the reliance on the banking system to plug holes in local government budgets. As with all Chinese reform efforts, however, the devil lies in the details, and Beijing will need to do a lot more if it is to finally resolve the issue of local government debt which currently has investors so nervous. APPETITE That said, the pilot program does suggest that Beijing hasn't completely lost its appetite for reform. Political stasis ahead of a key government reshuffle next year had given rise to fears that reform was generally on hold. But the threat of crisis has pushed the central government to act and finally start addressing structural funding problems at the local level. Expect baby steps, but any movement forwards on capital market reform these days is a positive. Officials have been discussing the creation ”…the threat of crisis of a municipal bond market for several years now as a means of addressing problems with China's central-local fiscal has pushed the central transfer system. government to act and Reforms in 1994 centralized fiscal transfers in an effort to tackle rising central government budget deficits, finally start addressing leaving local governments reliant on Beijing for handouts (the revenue intake structural funding of local governments dropped from 78% of the total in 1993 to 48.9% at the end of last year). problems at the local Inadequate central-local transfers have level. Expect baby forced local government to find alternative sources of funding, not least through the sale of land, a trend that has steps…” entwined the interests of the real estate P a g e | 23 …connecting Central Banks to the market industry with government bureaucrats and fueled social unrest in rapidly-urbanizing areas. Guangxi province, for example, took in CNY223.89 billion last year, including a central government transfer of CNY141.16 billion. An item called "fund income" accounted for another CNY69.3 billion, the bulk of which is the result of land sales. The province -- among the poorest in China -- spent CNY200.19 billion. Local governments are prohibited by the 1994 budget law from directly raising funds through debt issuance. The central government has in recent years provided a fix through annual CNY200 billion in bond sales on behalf of local governments as part of Beijing's fiscal budget calculations. That was always a stop-gap, though internal negotiations about a municipal bond market were hobbled by an inability to reach consensus, and it was only the threat of crisis that forced the issue. CONSTRAINT It is increasingly apparent that China's response to the global financial crisis provided a much-needed shot in the arm for the domestic -- and world -- economy, but has also left Beijing with a massive clean-up bill. Unable to raise funds directly, local governments used financing vehicles under their control to borrow massive amounts to fuel investment and keep growth humming. China's National Audit Office reported earlier this year that local governments were sitting on CNY10.7 trillion ($1.65 trillion) in debt as of the end of last year, equivalent to just under 30% of GDP. Up to a quarter of that debt is at risk, the government has estimated. Despite more bearish forecasts, the local government debtload isn't large ”It is increasingly enough to endanger the Chinese growth story; mindful of the spendthrift ways of local officials, Beijing has been apparent that China’s maintaining Maastricht levels of fiscal constraint in its budgets for years now response to the global (it ran a surplus equivalent to 2.5% of GDP last year, while this year's deficit goal has been fixed at around 2%). financial crisis provided a The central government is likely to have much-needed shot in the adequate resources to tackle anticipated bad debts at the local level, and in the banking system. But it's only arm for the domestic – seven years since the government last bailed out the banks, in the form of and world – economy, recapitalizations, and it's with a view to running a more sustainable fiscal model that reformers have been pushing the but it has also left Beijing creation of a municipal market. with a massive clean-up So while last week's announcement is encouraging, it doesn't go nearly far enough -- China is still several years bill.” away from a liquid, functioning municipal bond market. If nothing else, the changes signalled by the Ministry of Finance announcement could be largely cosmetic; initially, at least, debt issuance will be subject to State Council quota, while interest and principal payments will still be paid by the state treasury on behalf of the issuers. P a g e | 24 …connecting Central Banks to the market The finance ministry said those governments participating in the pilot program should establish "debt repayment guarantee mechanisms," indicating that Beijing has anticipated questions about credit worthiness. But this is still a modest beginning. HEAVY-HANDED Further out, it remains to be seen how investors will assess the credit risk of Shenzhen, Shanghai, Zhejiang and Guangdong, never mind of poorer areas such as Guangxi province. And at a broader level, China's bond market remains shackled by a regime in which the government plays regulator, issuer and investor, by its heavy-handed controls of interest rates, by a barely-developed investor base and by an institutionalized culture of secrecy which cripples objective assessments of credit risk. China's fiscal authorities have finally taken an important step, but it is only a small one. David Wilder email@example.com P a g e | 25 …connecting Central Banks to the market MNIConnect Editorial Board MNI Connect Kevin Woodfield (editor-in-chief) Contact: John Carter Kevin Woodfield Tony Mace European Managing Director William Poole (Special Adviser) Market News International Tel. 0207 862 7400 Contributors Email: firstname.lastname@example.org www.marketnews.com Steven K. Beckner Max Sato David Thomas David Wilder Bernard Wolfson Market News Disclaimer THIS SERVICE AND THE INFORMATION CONTAINED IN IT ARE ONLY INTENDED FOR THE USE OF CURRENT SUBSCRIBERS TO THE MARKET NEWS INTERNATIONAL SERVICE. ALL NON-SUBSCRIBERS please take note: This service is not intended for your use. If you would like to use this service you must first enter into a subscription agreement with Market News International or a third party provider of the service. 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