Economics Commentary


CBDC and the future of payments integration in Latin America

The Rewiring of the Global Economy, Central Reserve Bank of Peru, 15th Annual Conference, Cusco 19 July 2024, prepared remarks

[...] In my brief introductory remarks, I would like to offer an idea about a regional payments initiative for Latin America based on central bank digital currencies (CBDC) following similar regional initiatives in Europe and in Asia. It could offer a new approach to assess possible trajectories towards greater use of local currencies and financial and economic integration in the region.[...]

From Bretton Woods to the Future: The role of digital money

UBS 30th Reserve Management Seminar 2024, Wolfsberg, 26 June 2024, prepared remarks

[...]I will focus on the international monetary system, its history and lessons learnt, where I think the system will be going and the role digital monies may play. In addressing you the reserve managers, I'm of course addressing the operators of the system. I hope I will be able to provide some insights about the changes I believe the system will see over the short to medium term. I shall argue that the system will become more diversified by currency and by mediums which will naturally be reflected in a shift in the composition of foreign exchange reserves. [...]

International developments around CBDC—The future as we are starting to know it

Austrian National Bank, Open Forum on the digital euro and payment system, Vienna, 25 June 2024

[...] My remarks shall focus on recent developments around central bank digital currencies (CBDC). I'd like to reflect on some fundamental aspects about CBDC, offer a brief history of CBDC projects, then cover on-going CBDC project mBridge, take a quick look at Switzerland on CBDC project Helvetia 3 and comment on new BIS projects Agora and Meridian FX. I hope this will provide you with some insights about the rationale for adopting CBDCs and possible expected impact on payments. I shall also offer some brief comments on the digital euro and why the Eurosystem should be pursuing it. [...]

International Monetary System—What would Triffin do today?

Conference—80 years after Bretton Woods: Relaunching Multilateralism through Regional Monetary Unions, Banco do Portugal, Robert Triffin International, Academia Das Ciências, Lisbon 7 May 2024

Panel discussion—80 years after Bretton Woods. Where do we go from here? What kind of initiative would Robert Triffin promote?

[...] The system as it was envisaged at Bretton Woods 80 years ago, has a rather mixed record. The most problematic one, I believe, is that only very few currencies serve today in international payments producing a high dependency on the so-called key currencies. Herein lies I think the biggest shortcoming that will need to be addressed going forward. I guess it is also what Triffin would lament the most and focus on as the most pressing issue. A new willingness to adopt unconventional approaches often in relation to central bank digital currencies (CBDC) seems to be pointing in the right direction.[...]

Bretton Woods—Why the dollar?

Bretton Woods Committee, blog post, 4 April 2024

The Bretton Woods Conference will celebrate its 80th anniversary this year. The conference can be seen to have formalised the role of the U.S. dollar as the dominant currency in the international monetary system. This remains so to this day as does the considerable controversy it produced. Yet at the time when the conference started on 1 July 1944, it was not at all clear that the dollar would be endowed witch such role. The spirit then was that multiple currencies should be used in international payments with the suggested rationale for this as valid today as it was then. [...]

Bretton Woods—A changed America

Bretton Woods Committee, blog post, 4 March 2024

The Bretton Woods Conference will celebrate its 80th anniversary this year. Driven by a United States keen to involve its partners in international problem-solving, the initial conference may have ultimately proved a high-water mark for multilateral economic policy coordination. The Senate passed the bill to ratify the conference outcomes with a vote of 61 to 16, a stark contrast to the prevailing sentiments in contemporary U.S. politics. Yet the arguments in favour of multilateralism seem as valid today as they were then. [...]

CBDC—New money for new purpose

10 December 2023

Central bank money remains at the heart of national payment systems. Today, central banks offer two formats of money, banknotes to the general public and reserves or scriptural money to banks. The former serves the cash infrastructure and the latter the large value payment system. Central bank money is often the preferred payment instrument. As alternative financial market infrastructures are emerging, central banks will need to consider offering alternatives formats to ensure equitable access to central bank money for eligible entities and that the financial system can benefit from the best possible payment instruments. This is why consideration is given to central bank digital currencies (CBDC). [...]

CBDC—What for and the Maria Theresa Thaler

Reinventing Bretton Woods Committee Conference, Derisiking the transition to a new globalisation, Vienna, 6 December 2023

[...] Professor Feldkircher asked me to answer a number of questions around central bank digital currencies (CBDC) that I will try to address in my short prepared remarks. I have now for about five years been researching CBDC and working on different CBDC projects including among others Jura with the central banks of France and Switzerland, mBridge with the BIS Innovation Hub. Today, most central banks are working on CBDC compared with just a handful when I started. CBDC has triggered a new debate about money, what it does and what it takes to make it successful. That may already have been its biggest contribution. [...]

SVB and stablecoins--Time to tighten regulations

Bretton Woods Committee, blog post, 17 March 2023

The collapse of Silicon Valley Bank and subsequent jitters at USDC shall serve as a reminder that stablecoin regulation remains far too lax. Circle, the U.S. company and issuer of USDC, a stablecoin denominated in U.S. dollar, is mostly regulated in the U.S. as a money transmitter. This is grossly insufficient for a company with US$40 billion in stablecoins outstanding. Regulation and supervision need to impose sufficient obligations for stablecoin issuers to adopt best industry practices. [...]

CBDCs are set to transform how payments are made

Financial Times, 26 January 2023

In the late 19th century, there was controversy in England over what some saw as a usurper to the established monetary order — paper banknotes. At the time, the use of paper currency to complement gold and silver coins was seen by opponents as unduly disruptive and prone to causing instability. [...] A similar debate is under way on the development of central bank digital currencies, which is gathering pace around the world. CBDCs are set to transform how payments can be conducted.[...]

Stable coins' messy communications

11 January 2023

Binance’s announcement of 10 January that its stable coin is actually backed 1:1 is indicative of the difficulties stable coins continue to expose in articulating what they are actually doing. The commitment of a stable coin is similar to a fixed exchange rate, that is, Binance commits to exchange 1 BUSD for 1 USD on demand. Central banks hold foreign exchange reserves to signal that they can uphold convertibility [until they cannot]. They do not explain how they do it nor is there any indication that the commitment spans all national currency denominated liabilities. Stable coin issuers should look at and learn more from central banks.

Currency concentration and cross-border payments

Reinventing Bretton Woods Committee, Dialogue of Continents, 28-29 November 2022, Paris, prepared remarks

[...] Cross-border payments have for some time been criticised for being slow, opaque and unduly costly. This has been attributed to many factors including the role of correspondent banks, time differences, onerous compliance, long payment chains and limited access. One aspect that has rarely been analysed as a possible cause for persistent cross-border payments deficiencies is the high concentration of currencies used in cross-border payments.[...]

CBDC design—What is needed for success?

Arab Monetary Fund, Eigth Meeting of the Arab Regional Fintech Working Group, 23-24 November 2022 (on-line)

[...] In my brief remarks I shall focus on international payments and the possible role of central bank digital currencies (CBDC). The Arab Monetary Fund has of course been a pioneer in seeking new approaches to international payments in particular with the Buna platform. CBDC offers an alternative approach. It aims to introduce new functionalities to enable new settlement processes. The success of CBDC will rest in large part on its ability to produce a more efficient and diversified payment system by mediums, actors and geographic distribution of central bank money. It is therefore the design of CBDC that will determine its success. [...]

Next generation of CBDC projects—Liquidity in an instant and atomic financial market environment

Bank Indonesia and De Nederlandsche Bank conference Payment system in the digital era, 26-27 October 2022, G20 side event, Yogyakarta, prepared abbreviated remarks

[...] Yogyakarta has of course a special place in the monetary history of Indonesia. In was here, at the time the Indonesian capital, in October 1946, when Vice President of the Republic of Indonesia Mohammad Hatta announced on radio the issuance of the first Indonesian currency, the Oeang Republik Indonesia (ORI) that was also printed first in Yogyakarta to replace the colonial currency by De Javasche Bank as an important expression of Indonesian sovereignty. Central bank digital currencies (CBDC) may not quite have the same historical significance as the introduction of a new currency, but they could define the continued utility of a currency. In my remarks I shall focus on the next generation of CBDC projects with a view on how a CBDC could transform liquidity in financial transactions and hereby support the very foundations of market stability and our understanding of liquidity itself. [ ...]

Cryptocurrencies: What added value?

Euro50 Group Conference, 16 October, Washington, D.C., prepared remarks

[...] The subject of this session, Cryptocurrencies: What added value? seems to have an ever so tiny hint of cynicism which however, I'm glad to report, I shall completely ignore. Cryptocurrencies have changed the debate about money and probably represent the most important source of financial innovation of the past 10 years. They have inspired many financial applications and given rise to consideration by central banks to introduce central bank digital currencies (CBDC). I have been working on a number of leading CBDC projects with Accenture over the past few years including among other E-krona, Jura, Khokha 2, mBridge. Money or better said currencies have rarely been subject to more interesting and transformative developments.[ ...]

Cross-border payments: A global public good?

Reinventing Bretton Woods Committee Conference, 15 October 2022, Washington, D.C., prepared remarks

[...] Persistent deficiencies in international payments and rising geopolitical tensions that will test the ability of existing systems to adapt are expected to increase strains to conduct international payments. This could reduce prospects for an orderly economic recovery and undermine opportunities for international trade and investments. International payments need to become more agile, be more resilient and respond faster to changing economic relationships. They also of course need to become much more efficient. It is still faster to get on a plane from London to Singapore to deliver a suitcase of banknotes than making an international wire transfer between the two cities. [...]

Blockchain-based financial applications could help increase the competitiveness of the City

LSE Business Review, 4 October 2022

[...] The new chancellor wants the City of London to become the world’s leading financial centre. He also seems in need of some good ideas. While regulation and overhaul thereof will play a role, the Treasury and the Bank of England could also proactively support such ambition. Most significant recent financial advances emerged with the adoption of blockchain. Financial centres will likely struggle to keep up without being close to key financial innovations. The government announced for some time that building an environment conducive to blockchain-based financial applications is a goal. So far progress has been lacklustre. A major initiative would be to bring forward the project of issuing government debt and the pound on blockchain. It would signal forcefully the government’s intent to support the future and competitiveness of the City. [...]

CBDC in international large value payments

FDF Lounge Accenture, presentation and panel discussion, 21 September 2022, Kronberg (Taunus), prepared remarks

[...] I will try to go one step deeper and outline objectives and content of several CBDC projects with a focus on international wholesale payments. Accenture has been involved in a number of leading CBDC projects including projects e-krona with the central bank of Sweden, Khokha 2 with the central bank of South Africa, project Jura with the central banks of France and Switzerland and the BIS Innovation Hub. E-krona is a retail CBDC project. Khokha 2 is a domestic wholesale CBDC project and Jura is a wholesale CBDC covering international payments and financial instrument settlement. Earlier project Jasper-Ubin with the central banks of Canada and Singapore had a similar objective. I shall focus on the latter and also make reference to project mBridge, an international payments wholesale CBDC project by the BIS Innovation Hub with the central banks of China, Hong Kong, Thailand and the UAE.

New financial challenges and central bank digital currencies

UBS Central Bank Reserve Management Seminar, 20-24 June 2022, Wolfsberg

[...] In my presentation, I will provide an overview of central bank digital currency (CBDC) projects against recent financial market challenges to highlight possible drivers of CBDC adoption. To start, I will cover some high level elements on blockchain and argue that recent geopolitical tensions may make introduction of blockchain-based capabilities even more urgent.

Why do we need central bank digital currencies?

22 June 2022

The debate about central bank digital currencies (CBDC) remains difficult. In part this seems due to resistance from the banking system, politicians and central bankers themselves amid a lack of conviction about the case for CBDC. CBDC is often viewed as a substitute of existing payment arrangements. Yet, CBDC matters because it aims to expand functionality of central bank money to serve across a wider range of use cases, signal support for financial innovation and act as catalyst for a more diversified and resilient payments infrastructure. It is also not only about central bank money innovation but the strengthening of the financial system at large. [...]

Stable coins and the cost of high grade money

22 June 2022

Stable coins are being increasingly integrated into the financial mainstream. The U.K. Treasury recently launched an open consultation reaffirming that stable coins are basically similar to other contractual monetary arrangements. Stable coins if done right could become high-grade monies of choice in particular where central bank money is not readily available or too expensive. Different stable coin denominations could also offer new possibilities to conduct international payments. There are already some solutions, but they maintain too close a dependence on existing systems. As central bank money in the U.K. alone is estimated to cost about GBP12 billion to hold, one third of the U.K. largest high street banks' annual profits, the quest, made more urgent by rising rates, for finding alternative high-grade monies is on. [...]

International payments: The silence of the Fund

3 June 2022

The International Monetary Fund (IMF) laments the risk of deglobalisation. At the IMF Spring Meetings in April, it warned about a fragmentation of the global economy. At Davos it did the same. Yet it remains vague and distant to possible remedies to arrest such trends. As the only multilateral institution with some though declining heft, the silence of the Fund is problematic. It has repeatedly failed to address the flagging governance of the institution and has not taken any visible measure to advance international payments reforms. Both are critical to avert deglobalisation. [...]

Stable coins: Just other monetary liabilities

20 May 2022

The recent pressure on some stable coins like tether seems to reveal underlying weaknesses in their specific set-ups. Similar events like bank runs, currency crises, “circuit breakers,” “breaking the buck” and “gating” are indicative that undue pressures may afflict any monetary and investment arrangement.1 Stable coins are no different than other monetary liabilities like bank deposits or money market fund units. They offer important additions to the range of available monies and form part of a broader trend towards increasing diversification and choice in payments. But there is room for improvement. [...]

International financial markets: How big is China?

14 May 2022

The financial sanctions by mostly Western countries against Russia, a welcome and needed measure, has served as a reminder that ownership of an external asset does not mean control of an asset. Owning external assets is similar to owning a car but then having to ask the car manufacturer for the key every time the car is driven. China now seems concerned that its external assets may be at risk too. One consequence could be that China will seek to reduce its exposure to Western assets. Calls for a new international financial order may encourage such move however undesirable it would be for the rest of the world. The net effect though would be relatively small. [...]

Gold at US$12,000 an ounce?

29 April 2022

The financial sanctions against the Central Bank of Russia, a necessary measure to weaken Russia’s war effort, served as a reminder that access to foreign assets depends on foreign entities. While not all central banks will feel threatened by financial sanctions amid the new geopolitical tensions, with more than US$13 trillion in central bank international reserves, some may want to revisit if existing reserve management practices remain valid. Yesterday, the Gold Council published its gold market trends highlighting strong gold demand amid a combination of the Ukraine war and surging inflation. If gold, traditionally an important international reserve asset, neutral and one that can be held locally, were to play a bigger role in international reserves, it would need a major upheaval in the gold market. [...]

Financial exit: time for a new Bretton Woods conference amid the Ukraine war?

LSE Business Review, 29 March 2022

The Ukraine war seems set to trigger a reorganisation of international economic and financial relations. New alliances are being revealed that may be incompatible with existing ones. Different economic spheres are highly likely to emerge amid significant political and ideological divergence. This new world may no longer rest on the premise of a single financial system and the ever-closer economic and financial integration from the Bretton Woods system and its successor arrangements. A new financial order is needed. [...]

(R)evolution of Money III

Accenture, 25 March 2022

Central bank digital currency (CBDC) has been catapulted from a remote concept to the core of the global economic policy agenda during the past twelve months. The debate about CBDC has advanced towards the adoption of CBDC and its implications for the financial system, in particular its impact on international payments. There has been consensus in the CBDC debate about issuance and distribution, and the focus is now on access policy, legislation, models for privacy and security, interoperability and integration. [...]

Russia: Financial sanctions impact

8 March 2022

Financial sanctions against Russia are a welcome and needed measure. Sanctions can exhibit important short-term effects producing financial isolation and subsequent financial and economic distress. Comprehensive sanctions against Russia’s financial system must lead to widespread default of Russia’s external obligations, freeze of Russia’s external assets and standstill of cross-border financial and commercial transactions. [...]

The $300bn question facing central banks

Financial Times, 2 March 2022

The sanctions imposed by Western authorities on the Central Bank of Russia were worth it. Yet they may also make other central banks rethink how and where their foreign exchange reserves are held. [...]

Tokenised bank deposits

19 February 2022

Bank deposits are usually the most important monies in any economy. They typically constitute claims of the non-bank public on the banking system and serve as store of value and to conduct payments in scriptural monies. Bank deposits are normally recorded in accounts and payments never incur an actual movement of funds giving rise to possibly long and slow payment chains, complex reconciliation of transactions in particular for cross-border payments. Tokenised bank deposits could be used directly to conduct payments by moving funds changing fundamentally the architecture of conducting digital payments. [...]

Stable coins as money market fund units

19 February 2022

Stable coins are a platform play to intermediate between conventional and alternative payment systems. The recent announcement by PayPal to consider issuing a stable coin seems to affirm that there is an increasing desire by incumbents to respond to demands for alternative settlement mediums. Stable coins normally convert national currencies into new currency mediums to serve as native payment instruments on DLT-based financial market infrastructures. There are currently no high-quality stable coins and while there are several stable coins denominated in U.S. dollar, no major stable coin exists in other currency denominations. In France, the provisions of the Ordonnance Blockchain seems to offer a favourable regulatory framework to issue stable coins as money market fund units. France also exhibits the highest incidence of money market funds in the Euro Area and hence familiarity with such investments. Stable coins issued as money market fund units would allow to offer a high-quality fully regulated settlement medium for inter-bank clearing and large value financial transactions and could become the missing link in the hierarchy of monies. [,,,]

Wholesale CBDC project Jura successfully concluded

Banque de France, BIS Innovation Hub, Swiss National Bank and Accenture, 8 December 20218 December 2021

The conclusion of wholesale central bank digital currency (CBDC) project Jura about settlement with the Banque de France, BIS Innovation Hub, Swiss National Bank and a private sector consortium led by Accenture, marks an important step forward towards the adoption of a CBDC. It has demonstrated in a near life setting a promising path towards a new architecture of international payments and settlement. CBDC is about equipping central bank money with new functionalities and utility and to serve across a broader range of financial market infrastructures. It has led to a new thinking about access to central bank money to non-resident institutions and as such extent the safety of central bank money to new use cases supporting diversification and choice in payments and settlement while ensuring central bank money can remain competitive. Project Jura has brought those considerations closer to implementation.

Stable coins' rise has echoes of Bretton Woods

Financial Times, 9 August 2021

[...] Fifty years ago, an embattled Richard Nixon dropped a monetary bombshell: the dollar would no longer be pegged to gold. The currency markets were thrown into chaos as the mechanism that underpinned fixed exchange rates was killed off overnight. The Bretton Woods era had ended and a new monetary order took shape. [...]

Les DTS: Une opportunité ratée

Interview with Radio Télévision Suisse (French), 5 August 2021

[...] The IMF approved an allocation of US$650 billion in Special Drawing Rights (SDR). SDRs have not been mobilised in the past and have been sitting mostly idle even in times of heightened distress. The share of emerging markets and developing countries including China of the US$650 billion will represent less than 3 percent of their central bank foreign exchange reserves. While it may be important for some, SDRs will remain insignificant for most. More importantly, the SDRs should have been reformed prior to a new allocation to serve as effective crisis instrument. A missed opportunity. [...]

CBDC—50 years after the end of Bretton Woods

Bretton Woods Committee Blog Post, 4 August 2021

[...] 50 years ago, the Bretton Woods system of fixed exchange rates came to a sudden stop. It seemed the end of an era of multilateral and rules-based monetary cooperation considered critical to facilitate international payments. Many international payment problems remain. There is now seemingly new economic policy momentum to address those. While Bretton Woods resulted in relying de facto on a single currency, recent attempts seem to be eying towards currency diversification. New efforts by the G20 to explore central bank digital currencies (CBDC) as part of a roadmap to enhance cross-border payments and its wider implications for the international monetary system represents a rare multilateral effort to recalibrate international monetary relations. Maybe CBDC can resume where Bretton Woods left.[...]

CBDC: The innovation are tokens and blockchain

UBS 27th Reserve Manager Seminar, 1 July 2021, prepared remarks (edited)

[...] I have been involved now for almost three years in a number of projects on central bank digital currencies (CBDC) with Accenture and currently work on CBDC projects with the central banks of France, South Africa, Sweden and Switzerland, and while debate and engagements around CBDC among central banks have advanced significantly, there remain many fundamental doubts about the utility of CBDC. In my brief prepared remarks, I shall make an attempt to address some of those. In essence, the point I will try to make is that CBDC is to expand not replicate existing central bank monies. [...]

CBDC: Changing the geography of central bank money

LSE Business Review, 17 May 2021

Central bank digital currencies (CBDC) have seen a significant increase in interest. But what contribution are they expected to make and what concerns could delay or prevent their introduction? The innovation with CBDC is the adoption of digital tokens as a new format of money akin to a digital bearer instrument to enable peer-to-peer transactions irrespective of space and time. It would be the same euro, peso, rand or won only in another representation. The use case for CBDC is naturally strongest where central bank money plays a special role and where existing arrangements impose undue limitations. This is the case especially in international payments. [...]

Libra's retreat

15 May 2021

The decision of the Diem Association, formerly Libra Association, to retreat from Switzerland seems to further affirm a scaling back of its original objective of offering global digital coins. However, it should not lead to the conclusion that private digital payment mediums do not have a role. The limitation of national currencies is that they are national in scope. Private currencies are meant to denationalise currencies and they can. [...]

Bitcoin and optimum currency areas

18 April 2021

Robert Mundell, a Nobel Laureate in Economics, passed away on 4 April 2021. Of his many critical contributions, one of his most famous is the optimum currency area theory where he argues basically that national currencies are not optimal and that currency areas should not be defined by political but by economic boundaries. The emergence of bitcoin and other private currencies seems to affirm that currency areas could be formed irrespective of countries. This has attracted some incipient comments to explain the advantages of private currencies and as an extension of currency competition. Mundell's theory, reviewed here only in its broadest terms, may offer a robust framework to explain why the proliferation of private currencies would be rational. [...]

CBDC in international payments

UBS and Reinventing Bretton Woods Committee conference
IMF 2021 Spring Meetings 6-8 April 2021

Prepared remarks, 8 April 2021

[...] CBDC will, I believe, have its greatest impact on international payments. International payments represent among the most urgent payment problems with broad-based implications for the distribution of international liquidity, capacity to conduct international transactions and scope for international economic integration. CBDC is set to produce two key outcomes: It will endow national currencies with new functionalities and utility; it will likely support the role of national currencies in international payments. CBDC may therefore alter the relative attractiveness of currencies and help recalibrate international payments relations and strengthen the international monetary system.

Has the IMF done enough during the pandemic?

LSE School of Public Policy, Dean's Dialogue

Prepared remarks, 31 March 2021

[...] I wanted to speak about the IMF and debate whether the IMF has done enough during the pandemic. With the IMF Spring Meetings on 5-11 April, there will probably be some debate about the role of the IMF and in particular whether the IMF should be given more resources. The IMF Board also held an informal meeting on the case for pushing for Special Drawing Rights (SDR) allocation of about US$650 billion. I argue that while the IMF matters greatly, before increasing IMF resources and issuing more SDRs, there should be sufficient confidence that the IMF can deploy its resources and that SDRs are actually being used. Prima facie evidence suggests that neither is the case.

The IMF no longers functions as the world's safety net

Financial Times

28 February 2021

The most severe economic crisis since the Depression should have been a moment for the IMF to shine. While the fund has approved a large number of borrowing arrangements since the start of the pandemic, these have amounted to less than 10 per cent of its $1tn resources. This is despite the fund saying that it has “substantial space” in its lending capacity and is “ready to help even more”. It begs the question, does the IMF provide help no one wants any more? [...]

CBDC and monetary sovereignty and privately issued stable coins

R3 CBDC online workshop series, 22 July-19 November 2020

Prepared remarks, 19 November 2020

[...] The topic of sovereignty may be surprising to some. For most, using the national currency to conduct payments seems the natural thing to do. Most monetary assets and liabilities are normally denominated in the national currency. There are of course important exceptions e.g. in countries with a high level of currency substitution or dollarization. The possibility that private currencies or settlement mediums compete with national currencies may therefore seems strange. But it could be the new normal when it comes to currencies. [...]

CBDC now at the centre of international economic policy making

26 October 2020

The debate around central bank digital currencies (CBDC) has received a significant boost during the past few weeks. Two issues now seem to dominate: CBDC as an instrument to improve international payments; CBDC as a vehicle to advance the international role of national currencies. The former came to the fore during the IMF Annual Meetings last week elevating CBDC to the core of international economic policy-making. The latter was reaffirmed with the ECB report on a digital euro . CBDC is now set to have significant implications for international payments and for that matter for the financial system as a whole. It is part of a broader debate about greater diversification in payments by mediums, actors and geography. [...]

ECB changes the geography of central bank money

11 October 2020

The IMF Annual Meetings kick off virtually this week with one key trending topic seemingly missing: What is the impact of central bank digital currencies (CBDC)? For the biggest gathering of central bankers, this seems odd. Most are actively exploring CBDC and it is hotly debated elsewhere. Also Covid-19 has served as a reminder that international monetary relations remain dysfunctional in many respects possibly undermining a sustained recovery of the world economy. Only the previous week, the ECB in a report on a digital euro proposes a fundamental change about access to central bank money that would enable international transactions to be settled in central bank money possibly greatly facilitating international exchange. It is aimed at making the euro a leading international currency. The IMF, guardian of international monetary relations, needs to take note. [...]

CBDC and the transformation of monies

Prepared and amended introductory remarks, UBS Reserve Management Seminar, panel Digital currencies: technological innovation in global payment systems and central banks, 30 Sep 2020

30 September 2020

[…] Accenture is involved in a number of CBDC projects, including with the Riksbank in the development for a technical solution for an e-krona as a retail CBDC, a series of CBDC experiments with the Banque de France to test different wholesale CBDC applications including in an international setting and supports the Digital Dollar Project to stimulate a public discussion about the case for a CBDC in the U.S. Several central banks consider introduction of a CBDC in earnest. I have no doubt CBDC will come soon. Covid-19 may also have accelerated that.[...]

Financial inclusion: A role for CBDC?

Prepared for R3 CBDC webinar Building CBDC: The race to reality

22 July 2020

Financial inclusion remains a major challenge in particular in low income countries. Central bank digital currencies (CBDC) have often been associated with a new approach to facilitating financial inclusion. However, digital central bank money for low value high volume transactions does not seem essential and many alternatives exist as suggested by the increase of digital payment means in many countries. Kenya is a leader for mobile payments and has seen a significant rise in the adoption of financial accounts associated with M-Pesa. On that basis, the case for CBDC for financial inclusion seems weak. [...]

How to improve the attractiveness of the SDR?

Prepared remarks for G-24 Virtual Roundtable Discussion on "Options to Enhance the Role of Special Drawing Rights (SDRs) in the Global Reserve System"

1 July 2020

The covid-19- induced crisis has reinvigorated calls for the IMF to mobilise more resources. Many IMF members want this to include another SDR allocation. I share the urgency of raising additional resources but I'm sceptical as to the utility of another SDR allocation in large part due to the fact that the value of SDRs used is simply very small. The risk is that a lot of scarce political capital will be spent with little if any practical effect. I will therefore focus on what changes are needed to make the SDR more attractive as a reserve asset and will argue that those should have priority over or at least accompany any new allocations. [...]

U.S. dollar: Not so international

25 June 2020

The U.S. dollar remains the dominant international currency. But is it really international? The dollar is the national currency of the U.S. and the availability of dollars is firmly determined by monetary conditions in the U.S. The rest of the world uses dollar funding but has no say in its issuance. It means that when the rest of the world needs more dollars it may not be able to get them. This problem has for some time been recognised but remains unsolved. Greater diversification in international payments would be the best answer. Both the Euro Area and China are taking aim. Private currencies could also offer a viable alternative. [...]

Foreign exchange trading with instant settlement in central bank money

Paper presented at the Technology and Finance Seminar, Swiss National Bank

2 June 2020

The foreign exchange market is the largest financial market and would likely be among the main beneficiaries of central bank digital currencies (CBDC). CBDC would facilitate instant payment versus payment transactions in central bank money and greatly mitigate settlement risks, offer new business models for foreign exchange and supersede existing arrangements for trading and settlement. It could enable and advance a more effective distribution of central bank liquidity including in international settings and reduce financial risks globally. CBDC may lower annual costs related to foreign exchange settlement by an estimated US$130 billion. The present paper provides a preliminary high level discussion of the possible implications of instant and atomic settlement in foreign exchange transactions using central bank money. [...]

Covid-19 propels private currencies

22 May 2020

The announcement of 14 May of Singapore's Temasek joining the Libra Association may signal that private currencies could benefit from weakened official actors. The expected permanent adverse impact of the covid-19 induced economic crises in particular on official solvency will raise questions about trust and stability of official currencies. Like other severe economic crises in the past, covid-19 may lead to a rethink of currency arrangements. Temasek may just have revealed that this should involve private currencies. [...]

CBDC: The time to upgrade central bank money is now

5 May 2020

The covid-19 crisis has revealed significant deficiencies in the effective distribution of central bank liquidity both domestically and internationally. Central banks are looking towards central bank digital currencies (CBDC) to improve functionality and utility of central bank money. CBDC is about recalibrating the attractiveness of monies and will likely redefine scope and reach of central banks in financial transactions. [...]

Boosting covid-19 assistance: IMF needs to be more inventive

16 April 2020

The debate about how best to increase resources for external financial assistance to countries has been accompanying every global financial crisis. With covid-19, the IMF is again under pressure as its firepower is not deemed sufficient to meaningfully instil confidence that a credible global backstop is available. So far the IMF's measures seem too conventional and timid. Recent suggestions that a considerable allocation of Special Drawing Rights (SDR) would do the trick may overestimate the role of SDRs and underestimate the efforts required for a meaningful allocation. More diversified and flexible mechanisms need to be found. New IMF borrowing ought to be part of the discussion both from central banks and as a novel approach from financial markets. [...]

IMF borrowing in renminbi

2 April 2020

The International Monetary Fund (IMF) has not nearly enough resources. With a residual lending capacity of about US$800 billion (less than 1 percent of world GDP), the Fund will struggle to be a credible back-stop in the impending covid-19-induced international crisis. Borrowing is the only way the IMF can increase resources fast. China is not helping the IMF much at the moment and could offer the Fund to create a renminbi facility. It would affirm China's economic heft and the designation of the renminbi as a freely usable currency. It would help advance needed diversification of international liquidity. [...]

Emergency dollar liquidity for non-residents

30 March 2020

The covid-19 induced crisis has revealed the difficulties of the rest of the world to obtain liquidity in dollars when needed. Dollars are the most important monies and used extensively in international transactions. When dollars dry up there is a risk of severe financial disruptions. Non-residents are particularly affected amid the lack of an external contingency mechanisms. Siloed access has complicated distribution of dollars. The extension of the Federal Reserve swap lines may heighten the dollar liquidity divide. [...]

IMF SDR allocation: Interesting in theory

20 March 2020

The International Monetary Fund (IMF) is meant to help in times of financial distress. The covid-19-induced crisis has brought forward calls for the IMF to mobilise new resources to support a tormented international economy. In response to the global economic and financial crisis, the IMF made an allocation of new Special Drawing Rights (SDRs). SDRs are viewed as an effective way to increase international liquidity. However, existing provisions for SDR allocations and more importantly the fact that countries do not use SDRs seem to make this a futile approach. The SDR would have to change significantly to serve as a meaningful response to a crisis. [...]

Private currencies: What are they, why they may make sense and how to regulate them

Prepared remarks, Workshop on regulatory issues of stablecoins, Financial Stability Board (FSB)

Monetary Authority of Singapore, Singapore, 6 February 2020

[...] The topic of how to regulate private currencies is a critical and timely one. Not because there is a meaningful proliferation of private currencies as yet but greater regulatory clarity would help guide an orderly development of the sector. Libra has brought consideration for private currencies into the mainstream. The economic case for private currencies seems to be a strong one. Private currencies may resolve long-held monetary problems official currencies have failed to address. Successful private currencies are therefore most likely just a matter of time. I shall divide my brief remarks into: What are private currencies, why they may make sense and how to regulate them. [...]

The (R)evolution of money—Broader access to central bank money

Remarks delivered at Blockchain Centre, Distributed Finance Roundtable

Vilnius, 25 November 2019

[... ] I was asked to focus today on Accenture's recent publication the (R)evolution of Money 2 and in particular on the notion of broadening access to central bank money and its potential effect on financial markets developments. My argument shall rest on the assumption that more equitable access to central bank money would support more diversified, resilient and deeper financial markets helping in particular start-ups and small and medium sized enterprises to raise needed resources. I will claim that the best solution to offer broader access to central bank money while fostering innovation and preserving the existing banking infrastructure is a central bank digital currency in token format. [...]

International currencies and governance: Lessons from the SDR

World Economic Forum Conference

OECD, Paris, 22 October 2019

[...] Libra serves as a reminder that the case for international currencies is a strong one. The euro remains the most important contemporary regional currency. The SDR may have been the most ambitious though failed attempt to establish an international currency. My remarks will focus on the SDR to draw some possible lessons for libra or any other international currency project. While creating an international currency is relatively simple, making it work in practice is complicated. The SDR has faltered in large part because the governance structure guiding its design and issuance was inadequate. [...]

Central bank digital currencies

Conference—Global imbalances and capital flows in the era of new technologies

Bank of Spain, Madrid, 10-11 September 2019

[...] Central bank money has not seen much change since the proliferation of paper currencies during the nineteenth century. CBDC now promises to bring needed innovation to central bank money. At the same time, central banks have a historical opportunity to set new standards for digital currencies. [...]

The SDR--A blueprint for libra?

27 August 2019

Facebook's libra has reinvigorated the idea of a global currency and use of a currency basket for its valuation. The SDR shared similar ambitions and can serve as useful background to assess possible challenges and difficulties of designing an international currency. The SDR is not the outcome of a singular vision but rather the campaign of competing views among IMF member countries. Shifting country influences at the IMF may in the near future offer the possibility of a new direction for the SDR. The present paper provides a unique appraisal of the evolution of IMF views about objective and role of the SDR [...]

Central bank digital currencies and the international monetary system

25 August 2019

Mark Carney, Governor of the Bank of England, at his Jackson Hole address of 23 August 2019, outlined the idea of a synthetic hegemonic currency to be based on a basket of national currencies and issued by a network of central bank digital currencies (CBDC). Such synthetic currency is meant to offer a new international settlement medium and especially act as an alternative to the persistent dominance of the dollar addressing long-held grievances in the international monetary system. Financial technology could become the new determinant of monetary and in particular international monetary relations. [...]

Will CBDC bring renminbi internationalisation?

17 August 2019

The People’s Bank of China (PBoC) reiterated that it is 'almost'ready to launch a central bank digital currency (CBDC) confirming that central bank money is in for major upgrades. It is in line with earlier announcements by Facebook, JP Morgan, Walmart that digital currencies are on the rise. The intent to offer a digital renminbi will likely serve to recalibrate if not change fundamentally national and international payments relations. By equipping the renminbi with new functionalities and utilities, it is likely to be a key part of China's long-held ambition of renminbi internationalisation. [...]

The (R)evolution of money 2


11 July 2019

Accenture released a new paper on central bank digital currencies (CBDC). CBDC is seen as an essential evolution of central bank money against the new requirements of increasing digitalisation, internationalisation and automation of payments. Central bank money is adjusting to stay future-proof. CBDC is a different format of central bank money and forms integral part of the monetary base. The innovation rests in CBDC being blockchain-enabled or tokenised money. CBDC is about greater diversification of the payments infrastructure, resilience and offering choice of using central bank money. It is an enabler of change and to establish a level playing field between conventional and new payment systems. Central banks face a historic opportunity to set a new standard for money. [...]

Digital currencies: New technology and old monetary ideas

London School of Economics and Political Science, Institute of Global Affairs

19 June 2019

The success of digital currencies will likely depend on whether they can offer something existing currencies cannot. While the notion of digital currencies seems relatively novel, many have expanded on old monetary ideas for a winning formula. Economic history suggests that new currencies emerged largely in response to expanding settlement media and offering complementary usability. The paper reviews parallels between past monetary innovations and digital currencies including flexibility for paper currencies afforded by the gold standard and its international aspiration, the relevance of early international currencies like the eighteenth century Maria Theresa thaler, regional parallel currencies like the nineteenth century Vereinsmünzen and the SDR as an international asset. The paper aims to illustrate that looking at monetary history, the new currencies may be less controversial and the case for such currencies stronger than generally perceived.[...]

Central bank digital currencies: Reordering international monetary relations

Bretton Woods Committee blog post to the Bretton Woods@75 initiative

27 April 2019

Financial technology seems set to have a major impact on monetary relations. Several central banks are contemplating to offer central bank issued digital currencies (CBDC) as a medium of exchange for blockchain-enabled or token-based financial ecosystems. CBDC offers properties that could make the use of central bank money significantly easier in particular in cross-border but also off-shore transactions. It could transform the attractiveness of using CBDC relative to conventional currencies and thus alter the propensity to hold central bank money by non-residents. CBDC may therefore help address one the long held grievances about the international monetary system, namely the dependence on a very narrow set of currencies to conduct and settle international transactions and contribute to needed diversification in the international monetary system.[...]

Tokenised SDR

UBS and RBWC Conference-Managing the soft landing of the global economy

Washington, D.C., 12 April 2019

[...] I will focus on an idea that was advanced by IMF Managing Director Christine Lagarde in 2017, namely to offer a digital SDR. Yesterday, at the IMF Seminar Money and Payments in the Digital Age, Lagarde asked if a digital SDR would be possible and one discussant responded that it could become functional within 12 to 24 months. At Accenture, I'm working on a number of projects and proposals that involve digitalising or tokenising central bank money. Hence, a tokenised SDR seems very much in line with an incipient new openness to give considerations to tokenising national currencies. But given the difficulties of amending the existing SDR, a new approach is needed. [...]

Are social networks optimum currency areas?

7 April 2019

The recent emergence of private digital currencies, like bitcoin, has been met with considerable criticism. Yet, recent rumours that a large social network may issue a digital currency seem to affirm that new types of currencies are in demand. A social network digital coin could propel the notion of private currencies to new levels. Economic theory seems supportive of the idea. Adoption of a social network coin would rest in large part on whether a social network would constitute an optimum currency area. If so, it could change the very architecture of money. [...]

Central bank digital currencies and a new currency architecture

LSE Institute of Global Affairs and Financial Markets Group Conference—Financial resilience and systemic risk

London, 31 January 2019

[...] In my brief remarks, I shall first highlight the case for new currencies. I shall then focus on blockchain-enabled digital currencies issued by central banks. I consider blockchain-based technologies to offer new properties critical to ensuring central bank currencies remain future-proof while laying the foundations for a new currency architecture. [...]

New architecture for payments systems

OMFIF Bulletin January 2019

London, 17 January 2018 with John Velissarios, pp.34

Distributed ledger technology has made signifi cant advances over recent years, affi rming arguments that it is now beginning to challenge existing payments systems. DLT addresses ineffi ciencies and resiliency while allowing interoperability with existing and future payments systems. The case to implement this technology is among the strongest in cross-border payments, post-trade clearing and securities settlement. [...]

Financial innovation and the international monetary system

Bali and London, 14 October 2018

The impact of financial innovation on the functioning of the international economy has become an integral part of the multilateral policy agenda. The announcement at the IMF-World Bank Annual Meetings in Bali on 12-14 October of the Bali Fintech Agenda in combination with the IMF Managing Director's Global Policy Agenda indicate that fintech is set to play a more prominent role to address monetary policy and financial stability concerns. This reflects mounting dissatisfaction with prevailing international monetary relations. The positive role attributed to fintech may hint at a new readiness to integrate fintech in monetary and financial policies. [...]

International dimension of central bank digital currencies

IMF-World Bank 2018 Annual Meetings

Conference, Bali, 11 October 2018

[...] I shall focus on the international dimension of central bank issued digital currencies (CBDC) especially how CBDC could address one of the long standing grievances in the international economy, namely inadequate supply and distribution of international liquidity. CBDC could offer a new basis for international currency use and as such have a profound impact on international trade and investments. [...]

Do central banks need to issue currency?

Dialogue of Continents Forum

Conference, Paris, 5 September 2018

[...] Central banks have been considering to introduce digital currency for some time. Currency is the only central bank money available to the non-bank public and central bank issued digital currency or CBDC could transform the way the non-bank public thinks about currency and uses it. Plans for CBDC are well advanced among several central banks and some are expected to adopt CBDC in the near future. At the same time, other central banks are guarded or outright hostile to the idea. The case for CBDC should naturally rest on whether it supports central banks’ and the public's objectives. It seems strongest for the role of CBDC to preserve effective payments operations. [...]

Central bank issued digital currencies and financial inclusion

Tenth Annual Conference—Central Reserve Bank of Peru and Reinventing Bretton Woods Committee

Sacred Valley, Peru, 24 July 2018

[...] In my remarks I will focus on the session title to respond to the question: Should central banks issue digital currencies or CBDCs? My answer is an unambiguous yes. Physical cash is simply no longer the best technology to make available means of payment widely. The gains from greater monetary control, transparency in payments and scope for financial inclusion should in my view by far outweigh possible disadvantages of CBDCs. However, those gains remain highly contested. I shall focus on the seldom evoked but important special role CBDCs can play to advance financial inclusion. [...]

Trade war, fintech and the new exorbitant privilege

20 July 2018

The U.S.-China merchandise trade war exposes China’s persistent fundamental disadvantage in international exchange. It uses the dollar to conduct most of its trade. While China may retaliate, it remains highly dependent on the U.S. for using the dollar. In a world where the U.S. is a willing leader to support international exchange it may not matter. In a “U.S. first” world it matters a great deal. China’s aim for renminbi internationalisation has thus become far more urgent. New financial technologies may be the new “exorbitant privilege.” [...]

Is the dollar still international enough?

Conference—World Finance Forum

Beijing, 30 June 2018

[...] I would like to explore the nexus between uncertainty and the direction of the international monetary system to address the question: Is the dollar still international enough to serve the international economy? As you know, the dollar remains by far the dominant international currency and a great number of countries, including China, maintain monetary policy frameworks that rely on the dollar as anchor currency. New financial technologies may now allow to overcome the entrenched advantages of the dollar. Decentralisation may be the new approach to integration. [...]

Swiss sovereign money referendum and the architecture of money

11 June 2018

The referendum on the Swiss sovereign money initiative (Vollgeldinitiative) of 10 June served as an important reminder that the modalities of the production of money are not set in stone. Its failure should not be seen as confirmation that central banking and money do not require some fundamental rethink. The initiative’s objective to suspend fractional reserve banking and provide central bank money to everyone was not its most radical proposition. It was the legalisation of cryptocurrencies and envisaged money competition. The referendum offered a true change in the architecture of money with likely important broader impulses for the international monetary system. [...]

ECB looks very 19th century

4 June 2018

The European Central Bank (ECB) may long have decided to switch its main instrument from interest rate setting to direct lending. Its persistent low and unchanged interest rates and maintenance of net asset purchases brings the ECB close to the origins of central banking. While the ECB was seen as a successor to the Bundesbank, it may now look increasingly closer to its ancestor the German Imperial Bank (Reichsbank). [...]

Beggar-thy-neighbour and inter-RFA coordination

Second joint RFA research seminar

Cartagena, 17 May 2018

The importance of coordination among regional financing arrangements (RFAs) to strengthen the global financial safety net (GFSN) has been well established. The number of institutions offering adjustment lending requires some coordination to mitigate duplication and strengthen effectiveness. However, too little attention is given to the outcome of adjustment such that adjustment of one country does not unduly impair prospects of other countries or regions. This fundamental principle of avoiding a beggar-thy-neighbour approach represents one of the most important rationales for seeking close coordination of RFAs. Yet, it remains elusive. [...]

Emerging markets vulnerability to exchange rate shocks—A curative approach

3 May 2018

The U.S. Federal Reserve announced on 2 May that it will keep its policy rate at its current level. The Fed reiterated that it sees economic conditions warranting "further gradual increases in the federal funds rate." Emerging markets currencies have notoriously been vulnerable to U.S. interest rate rises and in particular a stronger dollar. The prospect of a sustained rate increase therefore causes some disquiet or worse. Yet, it is important to be reminded that emerging markets exchange rate vulnerability seems largely "self-inflicted." A curative approach is needed. [...]

The geography of money

OMFIF May Bulletin, 1 May 2018

The quest for international currencies is not new. The 18th-century Maria Theresa thaler was one of the first international currencies and may be considered something of a model for bitcoin. The denationalised properties of the cryptocurrency have highlighted the advantages of such currencies. [...]

Maria-Theresa thaler, bitcoin and capital flows

London School of Economics—Reinventing Bretton Woods Committee Conference: Innovations in global financial governance and the role of emerging economies

Buenos Aires, 20 March 2018

[...] I hope to leave you with some confidence that cryptocurrencies have a natural role to play in the international economy, that there is a case to change the geography of money, that there is a continuum of types of money and that adoption of cryptocurrencies should be highest where monetary experiences have been bleakest. [...]

Cryptocurrencies challenge the status quo

VOX, with Piroska Nagy-Mohacsi, 15 March 2018

Cryptocurrencies have been the subject of recent attacks by official sector representatives, and the G20 finance ministers will consider regulatory proposals at their next meeting in Buenos Aires. This column argues that while cryptocurrencies present certain risks, they also represent an important innovation that promises to enhance choice and efficiency in monetary transactions. A proportionate, risk-based regulatory approach is required to accommodate differential attitudes and experiences and to avoid stifling innovation and competition. This implies having an open debate before sweeping regulatory action. [...]

Completing Europe's monetary union

OMFIF News and Commentary, 15 March 2018

The new German government may propose as one of its first European policy initiatives the establishment of a European Monetary Fund, a critical missing piece in the euro area monetary architecture. The coalition treaty between Chancellor Angela Merkel's Christian Democrat/Christian Social Union group and the Social Democratic Party states prominently that the 'existing European Stability Mechanism is to be developed into a European Monetary Fund'. The idea of an EMF is not new and failed a few times in the past to get off the ground, notably when the European Monetary System was set up in 1978 as the forerunner to economic and monetary union. Yet, in the light of continuous nervousness regarding prospects for the euro area, exacerbated by an unfavourable Italian election outcome, an EMF would signal that the bloc is willing to do what it takes to strengthen confidence. [...]

Venezuela’s petro digital currency

22 February 2018

Venezuela launched the pre-sale of its digital currency petro on 19 February. It is the first government to issue a digital currency and hopes to establish a new ecosystem around the token. Because the government of Venezuela is behind it, it raises naturally fundamental doubts about its credential as a currency. Its valuation makes it more an oil price-linked voucher. It does not reflect the underlying ideas and ideals of cryptocurrencies. [...]

Public trust and cryptocurrencies

21 February 2018

Bitcoin and other cryptocurrencies have recently been subject to severe attacks from the official sector denouncing them as a “bubble” and “Ponzi” scheme. Mark Carney, governor of the Bank of England, said on 19 February that bitcoin has failed as a currency amid its extreme volatility.1 The G20 is now called upon to offer some comprehensive regulation. Volatility though may be a poor guide to assess currencies. [...]

Cryptocurrencies, monetary stability and regulation: Germany’s nineteenth century private banks of issue

Institute of Global Affairs, London School of Economics and Political Science, 14 February 2018

The present paper classifies bitcoins and other cryptocurrencies as money, reviews their possible economic impact and proposes a regulatory approach based on Germany’s nineteenth century private banks of issue. Cryptocurrencies represent important monetary innovations and have reinvigorated interest in and debate about notion and meaning of money. They aim to disrupt and challenge existing monetary and financial arrangements. Their market valuations though highly volatile may become substantial quickly. Their impact on the financial system therefore causes disquiet. It has already led to various regulatory measures and calls for more. However, few discussions on regulation have focused in earnest on the possibility of a sustained significant expansion of cryptocurrencies as money. [...]

European Monetary Fund—A misnomer

23 January 2018

The prospects for a European Monetary Fund (EMF) are good. The agreement of last Sunday to initiate formal talks between the SPD and CDU to form a government in Germany made an EMF significantly more likely. An EMF has been promoted by the CDU and pushed by the SPD and may be one of the first European measures of the new government. However, an EMF is unlikely to address monetary issues or become a fund. The misnomer obfuscates what an EMF should and likely will be doing. European Fiscal and Financial Support Bank would be more fitting. [...]

Cryptocurrencies and tulipmania

28 December 2017

The spectacular price rises of many cryptocurrencies during the past 12 months have for some time been compared to the seventeenth century Dutch tulip mania. The comparison seems appropriate. Not because price rises are comparable. They are not as cryptocurrencies have seen price increases far greater than those seen for tulip bulbs. Tulips and cryptocurrencies share the same fundamental feature: They can be reproduced at will. As with tulip bulbs, with totally elastic supply, the substantial price increases for cryptocurrencies appear impossible to justify.[...]

International reserve diversification

6 December 2017

The composition of central banks’ international reserves has not changed much over the decades. Or has it? The latest IMF Coordinated Portfolio Investment Survey (CPIS) shows a significant increase in the number of countries in which assets are invested that are held as foreign exchange reserves. This seems indicative of some momentum towards greater diversification in international reserve holdings.[...]

International portfolio investments (update)

6 December 2017

International portfolio investments picked up in 2016 amid a push towards the United States and a modest recovery towards emerging markets. The latest IMF Coordinated Portfolio Investment Survey (CPIS) shows the total stock of cross-border portfolio investments in equity and debt securities, excluding securities held as international reserves, in December 2016 at 42.9 trillion (57 percent of world GDP) up from US$39.9 trillion in 2015 (54 percent of world GDP). The shifts in cross-border portfolio holding reveal a further decline of Euro Area securities and somewhat more concentrated portfolio holdings. Overall, total international portfolio investments have still not recovered from their 2007 peak relative to world GDP. [...]

Federal Reserve—Unwinding of securities holdings

1 December 2017

The Federal Reserve initiated in October2017 the unwinding of its securities holdings acquired as a result of its quantitative easing policy. It means channelling large amounts of credit and duration risk back into the market. At the same time, the collapse of money velocity highlights persistent strong liquidity preference by the market and likely wariness to absorb interest rate risk in an environment of targeted interest rate increases. The combination of low money velocity and long duration of the Fed's balance sheet means that unwinding of quantitative easing will be a complicated affair. At the end of targeted normalisation, the Fed will still retain unprecedented large amounts of rate and credit risks. The Fed could therefore become itself an important source of instability for monetary policy, the international monetary system and the dollar. [...]

Central banks and digital currencies

3 November 2017

Bitcoin closed at a record above US$7,000 on 2 November, up from US$702 12 months ago, serving as a stern reminder that digital currencies are on the rise. The advances of private cryptocurrencies have made central banks increasingly contemplate adopting official cryptocurrencies themselves in part also not to lose out against the digital currency rivals. While lately the Bundesbank argued that digital currencies are a long way off and the Bank of Estonia had to retreat from earlier hints it may support a digital currency, the Riksbank interim report on its e-krona project seems to conclude that adoption is possible in the near future and the People’s Bank of China announced that it completed key tests of its own digital currency. Yet, although the advantages of digital currencies in national transactions remain somewhat controversial hindering and possibly blocking prompt adoption, the benefits are clear in international payments. The adoption of any digital currency therefore will likely be driven in large part by perceived opportunities to make it big as a global digital currency on the nexus between technology and payments. [...]

IMF Annual Meetings——Exchange rates matter at last

17 October 2017

The IMF Annual Meetings on 14-15 October in Washington, D.C. offered plenty of optimism with the usual dose of caution. The world economy experiences the broadest upswing since the 2000s. Downside risks remain important including political risks, market frothiness, rising debt levels. Yet, one of the more intriguing aspects was the communiqué of the International Monetary and Financial Committee (IMFC), that was remarkable in its emphasis on exchange rates. Since 2000, the IMFC has only very rarely if ever mentioned exchange rates. This time, exchange rates and the international monetary system featured prominently. It is likely a sign that IMF member countries want a more assertive approach on international economic policy matters. [...]

ECB government financing and the IMF

1 October 2017

The Bundesbank on 25 September 2017 reiterated what many fear could lead to a sudden stop of the European Central Bank's (ECB) large scale asset purchases: "The problem of the public sector securities purchases is that the central banks have become the largest creditors of the [Euro Area] member countries. The boundary between monetary and fiscal policy increasingly blurs." The pending verdict by the German Federal Constitutional Court (GFCC) regarding the incompatibility of the asset purchases with German law has gotten new momentum with the referral for several questions, as announced on 15 August, to the European Court of Justice (ECJ) for a preliminary ruling. A verdict by the GFCC attesting the unconstitutionality of the PSPP is likely, the consequences of which would be severe but not only for the ECB. The Bundesbank has for years financed governments through the International Monetary Fund (IMF). The GFCC therefore risks upsetting the very foundations of the international financial architecture. [...]

New challenges for global economic integration

Conference——9th Annual Conference organised by the Central Reserve Bank of Peru and Reinventing Bretton Woods Committee, Cusco, 24-25 July

29 July 2017

The benefits of global economic integration are seen increasingly sceptically or so it appears. The conference with the participation of leading policy makers from Latin America and other countries, representatives from international organisations, academia and the private sector debated the future of globalisation. While there was recognition that globalisation may produce some adverse distributive outcomes, in Latin America support for openness seemed overwhelming. Herein is a summing-up of the discussions at the conference. [...]

Cryptocurrencies——Forward to the past

27 July 2017

Record valuations of Bitcoin suggest that cryptocurrencies are coming of age. The proliferation of cryptocurrencies or digital currencies seems to advertise a new era of money. In fact, their underlying ideas are rather old. Cryptocurrencies, herein referred to only as not having legal tender status, aim for a world—abstracting from their profound technological impact on recording, anonymising and administering monetary transactions—of rigid monetary rules and private monies and without central banks. There were many good reasons of why monetary systems moved forward. While this may not diminish the appeal of cryptocurrencies, to represent a monetary innovation they must look far beyond the traditional functions of money. [...]

Globalisation under threat

8 July 2017

The G20 summit in Hamburg on 7-8 July is to celebrate globalisation. Yet there is mounting concern that globalisation has peaked. Reinventing Bretton Woods Committee and Hamburg Institute of International Economics organised a conference ahead of the G20 with academics, private sector participants and G20 and other officials to reflect on the threat from de-globalisation. Herein is a summary of the views expressed during the conference [...]

European Monetary Fund (update): Beware of Germany

5 June 2017

The E.U. Commission announced on 31 May rather ambitious ideas about possible ways for deepening Europe's Economic and Monetary Union. Those reaffirm discussions about a European Monetary Fund (EMF) to help fighting Euro Area crises. Germany in particular seems eager most likely by transforming the existing European Stability Mechanism (ESM). The recent impasse on Greece's economic programme illustrates the dysfunctionality of the Euro Area's economic crisis management and urgency for institutional reforms. It would critically complement the financial architecture of the Euro Area and strengthen the euro. However, key lessons need to be learnt for the design of an EMF; above all from the International Monetary Fund (IMF). To be effective, an EMF will have to be insulated from undue German influences. [...]

International portfolio investment holdings update

26 April 2017

International portfolio investments continue to show signs of globalisation fatigue. The latest IMF Coordinated International Portfolio Survey (CPIS) of non-official cross-border portfolio investment holdings with data through June 2016 reveal that total international portfolio investments have continued to decline in percent of world GDP. Investments in the Euro Area have suffered the most. Emerging markets have been zigzagging and remain below their peak. [...]

Central bank reserves update

3 April 2017

Central bank foreign exchange reserves have continued to shrink but become more diversified. The latest IMF report on the composition of central bank foreign exchange reserves (COFER) through December 2016 shows that reserve holdings have maintained their downward trend. The composition by currency indicates broadly stable allocations but with a new high in the allocation to non-traditional reserve currencies. The allocation to renminbis is identified for the first time and shows a share of 1.1 percent in central banks’ foreign exchange reserves. [...]

A European Monetary Fund

7 March 2017

There have been repeated calls for a European Monetary Fund (EMF) for the Euro Area. The European Commission affirms the proposal of establishing an EMF on the basis of the European Stability Mechanism (ESM). It now also seems to become a core proposition as part of the 60th anniversary celebration of the Treaty of Rome this month. However, for an EMF to be effective it would have to be constituted quite differently from the ESM. It would only make sense if an EMF was based on borrowing directly from the European Central Bank (ECB). An EMF would also at last incorporate into the statutes of the European Union the notion that adjustment forms an integral part of monetary unions. [...]

Case for free trade

18 February 2017

The charge against international trade by President Donald Trump but also persistent opposition in the European Union to the free trade agreement between the EU and Canada (CETA) call for reiterating vigorously the case for free trade. Free trade remains the best option to foster economic growth and development all things considered. The alternative is often associated with more government intervention and market failures. The stock market rally on the basis of Trump's promises of increasing protectionism is inconsistent with past economic developments and likely to be only short-lived. [...]

Greece's shrinking

17 February 2017

The International Monetary Fund (IMF) and European Union (EU) quarrel once again about the sustainability of Greece’s government debt. Debt should not be the focus. The latest IMF Article IV consultation on Greece published on 7 February illustrates the considerable shrinking of the Greek economy. Naturally, an economy that represents less than 70 percent in size in 2016 than it was originally projected to be must attract a comprehensive rethink of how to tackle its problems. Greece needs a completely new approach. This will most certainly require more debt relief from private and official creditors. [...]

U.S. manufacturing employment and international integration

12 February 2017

President Donald Trump wants to put “America first” by changing the nature of U.S. international engagements. He proclaims that the U.S. has not benefitted equally from the international economic order. In 1945, President Franklin Roosevelt called "citizens of the United States, to use our influence in favour of a more united and cooperating world."1 This has laid the foundation for international integration and cooperation following economic decline during the inter-war period amid mounting economic protectionism and political radicalisation. Trump now seems willing to move the U.S. further away than ever from Roosevelt's economic policy ideals. Moreover, the President uses erroneous pretenses to do so. [...]

Fear gauge

12 January 2017

Forget the VIX. The often quoted indicator for capital market sentiment has been only a timid reflection of market turbulence in 2016. In the eventful 2016, the VIX was half down from its 2008-09 highs. In contrast, exchange rate volatility had the highest reading since 2008-09 representing more than three quarters of the 2008-09 levels. Exchange rate volatility seems by far the better fear gauge. [...]

International monetary dimension of sterling's decline

5 December 2016

The start of the hearing of the Supreme Court in the U.K. on 5 December on whether the U.K. Parliament’s consent is required to commence official Brexit negotiations, has been accompanied by a recent appreciation of sterling. Sterling’s upward move should not mask the fact that Brexit, assuming the Court will not alter the modalities of Brexit, is set to constitute a permanent significant realignment of sterling. The market expects Britain to be a poorer and less interesting place outside the E.U. Sterling’s decline has a domestic dimension. More importantly is its international impact. Sterling’s decline marks the international monetary dimension of Britain’s decision to leave the E.U. The decline of sterling serves as a reminder that the international monetary system is in urgent need of reform. [...]

The U.S. elections and the dollar

9 November 2016

The U.S. presidential election should serve as a reminder that it is very risky for the international economy to rely on a national currency. Donald Trump’s win surprised markets and it is unclear what it means for the continuity in U.S. economic policies and therefore the dollar. In Trump’s surprisingly conciliatory victory speech he indicated that he will work with all nations in partnership. That is positive. However, the potential downside or considerable uncertainty a Trump presidency may cause remains disconcerting. The dollar may just have become much more a national currency and this should greatly concern the international economy. [...]

The U.S. elections and emerging markets

9 November 2016

The U.S. presidential election outcome seems mildly negative to very negative for emerging markets economies. Presidential candidate Donald Trump indicated that he will break with the trend in traditional international economic affairs set by previous U.S. administrations. He announced a more adverse stance on free-trade, climate change and immigration pointing to a more inward-looking economic agenda that reduces greatly scope for international economic dialogue. President Trump’s effect on emerging markets may therefore depend on how important international trade, climate change and immigration will be in shaping international economic affairs. [...]

The Chinese money wall (update)

6 October 2016

The inclusion of the renminbi in the IMF’s SDR basket on 1 October signifies that China will have to maintain progress towards financial liberalisation to sustain the new reserve currency status of the renminbi. China’s massive stock of money may represent its biggest obstacle to pursue orderly liberalisation both domestic and international. The persistent significant expansion of China’s money supply serves as a reminder that the monetary dimension of China’s rise may be one of the most important factors in determining prospects of China’s international integration. [...]

The renminbi and the SDR

5 October 2016

The IMF included the renminbi in the Special Drawing Right (SDR) basket effective 1 October. This is only a small step towards needed reform of the international monetary system but potentially a giant leap to signal that change is on its way. While the international economy has changed dramatically with the increasing importance of China and emerging markets, the international monetary system has remained broadly the same. If the system changes it will likely cause considerable upset. [...]

G20 Hangzhou Summit

5 September 2016

The Hangzhou Summit of 4-5 September produced a rather long action plan but few concrete measures. It missed addressing in earnest important issues like the refugee crisis and international security. The Communiqué is remarkable for the number of initiatives, actions and working groups it endorses and commits to. There are 15 action themes and 73 measures. It may convey a lack of focus. Less likely, it may simply be a reflection of the complexity of managing the global economy. [...]

G20 and the SDR

26 July 2016

The G20 seems to find it increasingly difficult to reach common ground. The G20 communiqué of Chengdu of 24 July illustrates the blandness of commitments that have become commonplace. However, there is one interesting tangible measure. China is pushing the IMF's Special Drawing Right (SDR) and the G20 is seemingly obliging: "We support examination of the broader use of the SDR, such as […] the potential issuance of SDR-denominated bonds, as a way to enhance resilience." There has not been for decades probably more momentum around promoting the SDR. However, concrete options to aid SDR proliferation will remain highly contingent on actual IMF and private sector interests. [...]

International monetary dimension of Brexit

Conference—Reform of Global Financial Architecture: Short Term Measures and Long Term Goals

Chengdu, 22 July 2016

Brexit is a calamity. I believe it will diminish the U.K. This will lead to reducing further the role of sterling as an international currency. It will have adverse consequences for national policies but also for the international monetary system. Brexit therefore makes reforming the global financial architecture more urgent. [...]

Brexit, political risk and emerging markets

26 June 2016

Emerging markets have long suffered from a fundamental flaw. They do not offer sufficient political, institutional and constitutional continuity. That has made investing there to be perceived as more risky. Regime shifts, ad hoc changes to the rules of the game, coups all have contributed to the perception that emerging markets are unreliable and unpredictable. The U.K. now offers a similar treatment. Political risk is now greatest in Europe. [...]

Brexit and the dollar

26 June 2016

During the E.U. referendum election night when the voting area of Sunderland in the North East of England announced its voting results at 00:16 hours on 24 June, the pound started a mindboggling fall against the dollar. Sunderland was seen as a bellwether voting district and only the 4th out of 382 to declare. The predicted Leave district produced a 23 point lead over Remain. A 7-point lead was considered to predict a Leave win. The pound depreciated against the dollar between 00:10h and 05:30h by about 10 percent from USD1.4985 per pound prior to the announcement to USD1.3297 before stabilising and recovering somewhat. This was one of the biggest intra-day moves in the pound’s modern history. The precipitous decline of the pound serves as a reminder that the international monetary system does not work as intended. [...]

SDR Substitution Fund

International Monetary Review, April 2016,Vol.3, No.2

30 April 2016

The inclusion of the renminbi into the IMF Special Drawing Right (SDR) basket was an important but mostly symbolic step. The relevance of the renminbi inclusion will come with the proliferation of the SDR. This will rest largely on the amount of SDRs outstanding. While the IMF is unlikely to offer greater SDR allocations amid resistance from key IMF member countries, China could embark on promoting the SDR through an SDR substitution fund. It would likely define the actual future of the SDR, may address incipient concerns about reserve shortages and could help propel the renminbi.

Historic perspectives on the purposes of the SDR

27 February 2016

The inclusion of the renminbi into the IMF Special Drawing Right (SDR) basket may signal the revival of the SDR. There have been considerable fluctuations in interest in the SDR. The IMF has at times embraced but most of the times largely ignored it. The SDR is not the outcome of a singular vision but rather the campaign of competing views among IMF member countries. It offers a glimpse about countries’ perspectives on the purposes of the SDR. With renewed interest in the SDR and shifting country influences at the IMF, those may offer valuable insights into the possible future direction of the SDR.

IMF Managing Director selection

14 February 2016

The International Monetary Fund (IMF) closed the nomination period of the next IMF Managing Director on 10 February. Incumbent Christine Lagarde is the only candidate. Given the recent history of the selection of the IMF Managing Director, a single candidate seems odd. The lack of competition or interest in one of the most important international official positions risks undermining credibility and legitimacy of the selection process. [...]


UBS European Conference 2015, London, 10 November 2015

Politicians are eager to stress the need for disruptive policies to bring desired change. One area where disruption is overdue is the global financial architecture. It has remained largely unreformed despite the fact it does not function as intended amid persistent large external imbalances and high exchange rate volatility resulting in considerable welfare losses. It is the IMF Special Drawing Right (SDR) that could offer needed disruption. [...]

SDRs and international currency diversification

LSE IDEAS and Konrad Adenauer Stiftung Workshop—The Emergence of a Multipolar Currency Regime, London, 28 October 2015

Earlier this month, at the IMF Annual Meetings in Lima, it was almost bewildering to witness how universal concerns were about the effect on the international economy of an increase in the policy rate of the Federal Reserve. Those concerns serve as a critical reminder of the old and well known dilemma of using national currencies to manage international liquidity. In my brief remarks I will focus on the IMF Special Drawing Rights (SDRs) arguing that SDRs could usefully serve as a framework to promote greater international currency diversification.

Renminbi internationalisation: Need for a new gentlemen's agreement?

Brookings, Finance 40 Forum, Euro50 Group Conference—China's Financial Stability and Monetary Policy Outlook, Beijing, 29 August 2015

The impact of renminbi internationalisation on the global financial system will likely depend in large part on whether the renminbi will add or subtract stability to central banks' reserve allocation patterns. This will naturally be contingent on renminbi conversion pressure, that is, whether adoption of the renminbi as a reserve currency will be sustained. The threat of large-scale reserve currency conversions has been a concern for a long time and a cornerstone for managing international liquidity has remained tied to some understanding about limited reserve currency convertibility. Milton Friedman called it "the gentlemen's agreement among central banks not to press for conversion […]." [...]

IMF SDR valuation review: A test nobody can pass

9 August 2015

The IMF Executive Board deliberated on 29 July in informal session about next steps to conduct the 2015 quinquennial SDR valuation review. The IMF staff document guiding the review concentrates on determining whether the renminbi is a freely usable currency as necessary inclusion criterion. The review is conducted seemingly on technical considerations only on the basis of the existing inclusion criteria and does not propose revisiting those. This signals a bias against innovation. It seems to represent an extraordinary missed opportunity in light of actual and expected changes in the international monetary system. This may not be the IMF staff’s mistake.

The Troika was a mistake (in German)

Süddeutsche Zeitung, 29 July 2015

Germany's self-proclaimed role as chief negotiator for the Greece arrangement has severely upset the multilateral framework.[…]

Central bank asymmetric reserve allocation and capital markets volatility

Global Financial Stability Conference, Seoul, 22-23 June 2015

Central bank capital markets interventions through foreign exchange reserve allocations have become critical determinants of national and international capital markets developments. However, many economies, including in particular most emerging markets economies largely lack central bank capital markets participation. The asymmetry in central banks' reserve allocations may induce undue biases in the distribution of international capital markets volatility.[...]

Time to transform the world's currency system

Financial Times, 22 June 2015

The pending IMF review of the SDR is much more than a rejigging of a currency basket. It is about serious steps towards the transformation of the international monetary system. […]

BBC News, 15 June 2015

Ousmene Mandeng conference images
Why does Germany take the lead on Greece?

BBC Business Daily interview, radio podcast, 15 June 2015

The negotiations for the continuation of Greece's IMF arrangement are a muddle. It is no longer clear who is negotiating with whom and who sets the terms for the negotiations significantly undermining the multilateral framework on which basis the arrangement was established. [...]

Why IMF must reform the SDR

OMFIF May Bulletin, 13 May 2015

The Special Drawing Righ has failed as a reserve asset, and never gained ground as a financial instrument. However, it may succeed as a framework for international currency diversification. […]

Europe's historic lack of economic engagement with Russia

BNE Intellinews, 27 April 2015

The alienation felt between the EU and Russia has seemingly deepened to a post-Soviet Union low. This may in large part be due to the fact that Europe has never fully engaged with Russia economically in the first place. [...]

Greece, SDR and the need for a new multilateralism

BNE Intellinews, 20 April 2015

The International Monetary Fund/World Bank Spring Meetings in Washington DC over an April weekend felt mostly like a routine affair. Persistent concerns about a "mediocre" global economic outlook were voiced and duly corresponding policy recommendations made. Somewhat ambitious was a call for "a new multilateralism for a sustainable future." At least two issues though were more unusual: the quinquennial special drawing rights (SDR) valuation review and a possible default of Greece to the IMF. Both have caused considerable background tussles. [...]

Why Wimp label sticks to emerging nations

Financial Times, 16 March 2015

[Emerging markets] suffer from the fact that they are without international monetary power: they are Wimps.
International monetary power is the ability to conduct economic policy without immediate regard to external constraints. […]

A proposal for an enlarged SDR basket

B20 Istanbul, 13 February 2015

The present note offers a proposal for consideration by the G20 to support a significant enlargement of the IMF SDR basket. The proposal is seen to constitute an important addition to the B20 Australia recommendation of achieving greater recognition of emerging markets economies. The SDR also represents an integral part for strengthening the international financial architecture. The measure is in addition considered an important element towards meeting the objectives of the delayed IMF governance reform. The IMF is due to undertake a review of the SDR basket during 2015 to be concluded towards end-2015. [...]

International governance and the BRICS

Boao Review, 14 January 2015

The international financial architecture and its governance model are under pressure to change. One of the most contested issues is the influence of countries at the International Monetary Fund (IMF) and other international financial institutions. The recent establishment of the BRICS Development Bank (DB) and Contingent Reserve Arrangement (CRA) have been seen, at least in part, as a response to the perceived slow progress in reforming the international financial architecture. However, while governance is mostly portrayed as a conflict between advanced economies and emerging markets, the main challenge may well be one between the BRICS and the other emerging markets. The BRICS may need to focus as much on how to share influence with other emerging markets than on how to have their say with advanced economies.[...]

Fed has built a thorny central bank divide

Financial Times, 6 November 2014

Top Federal Reserve officials […] underlined the divide between central banks that have access to the Fed’s dollar swap facility and those that do not [have] a Fed backstop . [...]

International illiquidity and a BRICS payments union

BRICS Economic Think Tank Forum, Beijing 6 November 2014

Ladies and Gentlemen

It is a great pleasure to participate in this timely initiative to reflect on the international financial architecture through the prism of the BRICS countries. The considerable advances BRICS countries have made in the world economy remain in stark contrast to their role in the international financial system. There are few areas where this is more pronounced that in the international monetary sphere. The world economy has remained highly dependent on a narrow set of national currencies to conduct cross border financial transactions. This constitutes a critical vulnerability and disadvantage for BRICS countries. Commemorating the 70-year anniversary of the Bretton Woods Conference this year, it is an opportune moment to think about needed reforms of the international financial architecture. I will try to make the case for a BRICS payments union.[...]

The Chinese money wall

Milken Institute London Summit, 28 October 2014

The adoption of unconventional monetary policies by several leading central banks has raised widespread concerns about undue monetary expansion, possible asset price distortions and exchange rate manipulations and related adverse external spillovers. However, the biggest monetary threat may be quite a different one. China dominates monetary issuance today by far. The world broad money supply has nearly doubled since the beginning of the global economic and financial crisis mostly due to China. Unless money is entirely neutral, the significant shift in relative inter-country monetary balances is likely to have some real and relative price implications. It is similarly likely to be a key determinant for the further integration of China into the international financial system.[...]

Why does the international monetary system matter?

Johns Hopkins School of Advanced International Studies (SAIS), Washington, D.C. 9 October 2014

Ladies and Gentlemen

It is a great pleasure to be here at U.S. Korea Institute at SAIS. I’m most grateful to the organisers for the opportunity to moderate this outstanding panel. Before we start the discussion, I would like to offer some short introductory remarks focusing on what the Bretton Woods Conference was about, why it should matter to the public and why it offers critical insights for international investors. [...]

International portfolio investment holdings—2013 update

2 October 2014

International portfolio investment holdings increased significantly in 2013. The increase was driven largely by investments in debt securities and a significant allocation to the U.S. The share of investments in the Euro area has also increased while investments in emerging markets declined. Portfolio country and securities allocation patterns continue to differ between all countries and emerging markets. International portfolio investments have continued to progress with the level of total holdings in 2013 being more than four times as high as in the early 2000s.[...]

Banking Union, asset managers and financial integration

Banco de Portugal, Lisbon, 14 September 2014

The establishment of the European Banking Union is seen as essential to foster a reintegration of the European banking system. This is viewed also to support restoring the effectiveness of the ECB’s monetary policy amid the adverse relationship between financial fragmentation and the workings of the monetary transmission channels. However, the financial disintermediation of the European banking system may diminish considerably the importance of the banking sector relative to other financial sector participants. By simple conjecture, the increasing heterogeneity of financial sector participants in euro area financial markets suggests that the actual impact for a single monetary policy of a successful Banking Union may be more limited than generally assumed. [...]

BRICS development bank and contingency reserve arrangement

24 July 2014

The establishments of a BRICS development bank (DB) and a contingency reserve arrangement (CRA) seem to indicate new momentum for change in intergovernmental finance and cooperation. It may mark a rebuttal of the existing framework dominated by the main multilateral institutions but also increasing confidence that China and leading emerging markets can do it on their own. It is only a modest start though. [...]

Argentina and sovereign debt restructuring

21 July 2014

The decision of 16 June by the U.S. Supreme Court to deny a petition filed by Argentina in relation to holdout claims serves as an important reminder of persistent major uncertainties in the principles guiding sovereign debt workouts. The petition was to review a decision of the U.S. Courts of Appeals affirming district court orders of 7 December 2011 for full payout to holdouts of Argentina’s 2005 and 2010 debt restructurings. The decision affirms ambiguity of at least five key aspects of sovereign debt restructuring: What equitable distribution or pari passu means, what rateable payments are, the relevance of collective action clauses (CACs), the seniority in distribution of the International Monetary Fund (IMF) and the role of payment agents in dispute cases. Noting that the relevant U.S. court maintains that there are very limited broader implications of its ruling amid the extraordinary circumstances of Argentina, the decision is deemed here to have major adverse repercussions on the incentives for participating in sovereign debt restructurings. This risks unduly inflating the costs of sovereign default.[...]

Internationalisation of currencies, capital account opening and the SDR basket

China Society for Finance and Banking, Hangzhou, 17 May 2014

Ladies and Gentlemen,

My remarks will focus on the SDR basket to reflect on the role it plays today and more importantly could play. The internationalisation of currencies, capital account opening and the SDR basket are naturally linked to one another. Capital account opening constitutes to some extent a necessary condition for currency internationalisation and major international currencies should normally be eligible as constituents of the SDR basket. Yet, one of the most salient features of the international economy is the fact that very few currencies have become truly international despite important and widespread capital account openings.[...]

What next for the IMF?

G20 Australia, Washington, D.C., 9 April 2014

The IMF was widely applauded for being the only entity capable of putting together at short notice a sizeable financial support package for Ukraine. It is indeed the very strength of the IMF. Yet, the IMF merely lends by borrowing money. The IMF moves international liquidity around but for all practical reasons cannot create international liquidity. Ukraine thus serves as a good reminder that the IMF remains highly constrained in supporting countries in distress. To remedy this sustainably the IMF should not principally look at its own resources to be able to offer more countries more financial support actual and contingent, as has been normally the case in the past, but rather based on one of its main purposes prioritise broadening the usability and convertibility of currencies in international financial transactions. This would address one of the key causes of emerging markets distress rather than the remedy.[...]

Middle income trap and international portfolio allocation

Austrian National Bank, Vienna, Workshop 18, 27-28 February 2014

The present note links the middle income trap to the EU convergence methodology and aims to offer by simple conjecture several discussion points on immediate and intermediate consequences of the middle income trap for portfolio investments in emerging markets. The note affirms prima facie evidence of the existence of the middle income trap between 1992 and 2012 highlighting differences between EU and emerging markets economies. Nominal and real convergence patterns are reviewed showing significant differences in the duration of nominal and real convergence cycles. Fixed income appears to offer attractive investment opportunities amid short convergence cycles. The long duration of real convergence cycles seems to indicate that emerging markets stock market outperformance may remain elusive over normal investment horizons. The relationship between portfolio flows and economic growth may establish self-fulfilling expectations for generating conditions for the middle income trap.[...]

Countries’ economic vulnerabilities (update)

22 October 2013

The recent IMF World Economic Outlook (WEO) seems to affirm the notion that the international economy has become more fragile. The vulnerability indicator on the basis of the revised October 2013 data compared with the April 2013 data shows that the composition of the 20 most vulnerable countries remains broadly unchanged while economic fundamentals on average have slightly deteriorated with some exceptions. India has replaced the UK as the most vulnerable country and Argentina is now among the 20 most vulnerable countries while Poland dropped out (Chart 1). Italy, Ireland, Canada and Brazil show some notable increases in vulnerability.[...]

IMF economic forecasts

14 October 2013

The International Monetary Fund’s (IMF) economic forecast is a serious matter. It is the most authoritative of economic projections. The IMF also gives policy advice on the basis of those projections. No institution employs more resources and a greater number of highly qualified economists—a gross budget of US$1.1 billion and 2061 professional and managerial staff—to follow countries’ economic developments in detail. It seems therefore safe to assume that the IMF should know best. Yet, the IMF has recently been exceedingly optimistic or pessimistic in its economic projections and more importantly appears to exhibit important projection biases.[...]

Dollar-based system is inherently unstable

Financial Times, 2 October 2013

The international monetary system does not work as intended. An international economy relying predominantly on one currency is inherently unstable. This is amply demonstrated by the recent turbulence in foreign [...].

Public financial corporations: Investment performance valuation and the exchange rate

20 September 2013

The recent exchange rate jitters serve as an important reminder that exchange rates matter for investment performance attribution and consequently exhibit important wealth implications. This is of particular significance to government entities that perform international investment functions given the importance for government finance sustainability. Public financial corporations (PFCs), of which stabilisation funds and sovereign wealth funds constitute important subsets, generally aim to provide support for government finances through international financial investments. Investment performance of PFCs therefore constitutes a critical component of governments’ fiscal policies. Different practices co-exist internationally of performance valuations of PFCs in particular with regard to the exchange rate.[...]

The IMF must quit the Troika to survive

Financial Times, 17 April 2013

There are many victims of the eurozone crisis but one loser is seldom mentioned: the IMF has suffered considerable collateral damage. It has been dragged along in an unprecedented set-up [...].

Conference: Adjusting the World to the new Realities of the International Financial System

Asian Development Bank Institute, Tokyo, 12 October 2012

The conference focused on the likely permanent effects of the Eurozone crisis discussing the consequences for international financial cooperation and pending institutional deepening in the Eurozone. The Eurozone made significant advances in establishing a financial safety net with the European Stability Mechanism (ESM) but at the same time raising concerns about the relationship between regional and multilateral financial cooperation possibly undermining international economic integration. Increasing reliance on regional financial safety nets contrasts with earlier considerable opposition to establish an Asian Monetary Fund (AMF) during the Asian crisis.[...]

Central bank reserves composition: Swiss effect

30 September 2012

The latest IMF survey on the currency composition of central bank foreign exchange reserves for Q2 2012 seems to affirm the effect of significant reserve accumulation by the Swiss National Bank (SNB).1 SNB reserve accumulation represented significantly more than total reserve  accumulation  during  Q2  2012; during the last 12 months and 6 months, SNB reserve increases represented about one third of total accumulated foreign exchange reserves. [...]

40 years after the end of the dollar standard

27 September 2012

The upcoming 2012 IMF Annual Meetings are unlikely to produce much excitement. Even though persistent talks about currency wars and renewed fears of protectionism may cause severe disruptions to international trade and investments and are normally the sorts of issues that raise alarm bells with policy makers. Exactly 40 years ago at the 1972 IMF Annual Meetings, then U.S. treasury secretary George Shultz did shock the international community with a bold plan to reform the international monetary system and end the special role of the dollar as a reserve currency.[...]

Republican gold

3 September 2012

The recently aired proposal by the Republican Party to establish a Gold Commission to assess a return of the U.S. to the gold standard may seem weird—and it is—but does serve as a most useful reminder that current monetary and exchange rate policy arrangements are indeed increasingly perceived as deeply dissatisfactory. Unprecedented monetary expansion, the blurring divisions between monetary and fiscal policies, persistent large global imbalances suggest considerable scope for policy improvements. It also recalls that monetary policy autonomy is not a birthright and that we may enter a renewed period of decreasing central bank independence. However, at probably no point in recent economic history would a  return  to  the  gold standard appear more far-fetched and policies more unsupportive. Sadly rather than looking forward a debate about gold is strictly backward. [...]

Euro vision: Less than clear

Euro50 Group and Reinventing Bretton Woods Committee, Florence, 3-4 July 2012

I participated in the Reinventing Bretton Woods Committee/Euro50 Group meeting in Florence, Italy on 3-4 July “The Eurozone of yesterday, today and tomorrow.” The meeting brought together the strongest minds from academia and policy circles on Eurozone issues. My main takeaway of the proceedings is the utter disarray of what went wrong and should or could be done to stabilize the Eurozone. This appears all the more remarkable as we are in the fifth year of the global financial and economic crisis. The conclusion must be then that if a gathering of top technocrats cannot reach agreement on steps towards a resolution it seems inconceivable policy makers can. [...]

Next IMF Managing Director

19 May 2011

The IMF needs a new boss. Dominique Strauss-Kahn resigned as IMF Managing Director amid his pending indictment on criminal charges. Any new MD needs to be apolitical, provide credible leadership to ensure the IMF remains influential yet be seen as impartial, deal with governance and reputational concerns of the institution and be visionary and effective in enforcing its man- date especially also in a post-crisis environment. [...]

2010 SDR basket review

16 November 2010

The IMF is working on a new SDR basket to take effect on January 1, 2011 with a decision on the new basket probably around mid- November. There are rumours that a revised SDR basket may comprise emerging markets currencies for the first time again since 1980. This would provide a strong signal that emerging markets currencies are on the rise and need to be taken seriously. It would also be illustrative of what the IMF aims to achieve with the SDRs. Following the recent promotion of SDRs through the large allocation of August 2009 and more importantly interest in the role of SDRs voiced by key emerging markets notably China and Russia, SDRs seem back from the wilderness. [...]

"Currency wars"

29 September 2010

Brazilian finance minister Mantega’s warning on September 27 of a global currency war is only another indication that exchange rates are seriously out of whack. The foreign exchange market intervention by the ministry of finance of Japan on September 15 earlier hinted that exchange rates have moved to the top of policy makers’ concerns but could also be interpreted as an act of desperation or frustration that there is no common position on exchange rates.[...]

Trade redirection

20 September 2010

Emerging markets are set to continue to grow significantly faster than advanced economies. This rests in part on increasing reliance on domestic consumption. It reflects above all growing exports to other fast growing emerging markets. The increasing progression towards inter-emerging markets international trade is naturally a reflection of the increasing economic weight of emerging markets in the international economy. Yet, it could be the key driver of and basis for sustained higher overall economic growth. [...]

Eurodollar jitters and emerging markets

11 August 2010

The most important price of the international economy has become increasingly jittery. The dollar/euro exchange rate volatility has reached its highest level since the final collapse of Bretton Woods of fixed exchange rates. Previous episodes of heightened eurodollar volatility have coincided with or an- nounced a major turning point in the eurodollar exchange rate. The importance of eurodollar suggests that there is sub- stantial uncertainty at the core of the international economy including but not limited to growth, fiscal policy and monetary policies. Its significance for the exchange market also suggests that it may risk contaminating other currency crosses. [...]

The case for reserve currency competition

Central Banking Journal, May 2010

In January 2010, the French president, Nicolas Sarkozy, said: “We need a new Bretton Woods, we cannot put finance and the economy back in order if we let the disorder of currencies persist.” He is right. The international monetary system needs change. His call follows earlier proposals by the Chinese and Russian authorities to foster international currency diversification. Why is change needed? [...]

Is QE dollar supportive?

28 February 2010

Some emerging markets policy makers and others have been protesting repeatedly that the U.S. Federal Reserve’s policy of quantitative easing (QE)—or credit easing—causes a weaker dollar and channels unwanted hot money flows into emerging markets. Actually, the opposite may be true. [...]

South-south investments

8 February 2010

Emerging markets are increasingly seeking investments in other emerging markets. The latest IMF portfolio investment data (CPIS) show that emerging markets continue to allocate an increasing proportion of their cross-border portfolio investments to other emerging markets. This contrasts with persistent sluggish portfolio investments in emerging markets by advanced economies. The asymmetry in allocation behaviour seems to reveal significant differences in views about the international economy and where it is heading, namely emerging markets seem increasingly confident about themselves. [...]

"Putting money where the G20's mouth is?"

11 November 2009

The steady depreciation of the dollar has fuelled renewed doubts about the dollar’s status as the dominant reserve currency. Mean- while, central banks have continued to purchase U.S. treasury secu- rities in droves. While they may no longer have full confidence in the dollar as the dominant anchor of the international monetary system, their net purchases appear to signal otherwise. [...]

Case for multiple reserve currencies

9 September 2009

The debate about the future of the international monetary system is taking shape. It has been driven in large part by increasing concerns about the U.S. dollar as a credible anchor for the international economy. It also emerged amid mounting dissatisfaction that the current international monetary system is prone to instability and potential collapse. Consensus now seems to have formed on moving towards adopting a multi-reserve currency system. This would potentially have widespread implications for the international economy and be the clearest sign that the status quo centered around the U.S. dollar is bound for change. [...]

Rise and fall of reserve currencies

26 August 2009

Reserve currencies move around more than meets the eye. The fall of the British pound and coincident rise of the dollar during the interwar and immediate post-war period is often portrayed as the only historic precedent of a change in international currency hegemony. Yet, the rises of the German mark and Japanese yen during the1970s and 1980s suggest that central banks are willing to undertake significant adjustments to their reserve portfolios. [...]

What role can the SDR play today?

15 May 2009

The IMF’s Special Drawing Right (SDR) is seeing an unexpected revival. Only in 2006, the Managing Director of the IMF concluded that there was not the necessary support from IMF member countries to seek issuance of SDRs, reflective of what had been a steady decline in the relevance of the SDR since the 1980s. [...]

Need for a new international monetary system?

28 April 2009

The global financial crisis has caused significant interest and exchange rate volatility. Both can be deemed failures to manage global liquidity. This risks causing commercial and trade disruptions, lead to competitive devaluations and fuel protectionism thus undermining prospects of a sustained recovery. Many commentators have attributed those market dislocations to a failure of the international monetary system, the set of rules that govern cross-border monetary transactions. [...]

Reserve currencies and solving the new Triffin dilemma

Central Banking Journal, February 2009

One of the most puzzling aspects of the present global crisis is the fact that despite the vast accumulation of central bank reserves, mostly denominated in dollars, the international economy had been subject to a severe and sudden shortage of dollar liquidity. The increasing share of the official sector in US Treasury securities has raised repeated concerns – in particular with regard to its effect on interest rates, the dollar and valuation of central banks’ balance sheets.


Near zero U.S. Treasury yields

14 January 2009

The current global financial crisis brought short-dated U.S. treasury securities yields down to close to zero. Current U.S. Federal Reserve policy suggests that yields are going to stay low. This poses a dilemma for most investors but in particular for central banks that have remained disproportionately exposed to U.S. Treasury securities. As the financial crisis has undoubtedly shifted priorities from real returns to nominal capital preservation, most investors will be excused for not making money for some time. [...]

Fear of intervening

16 November 2008

One of the most puzzling phenomena of the current financial crisis is the fact that despite the very large accumulation of international reserves mostly denominated in dollars, the international economy has suffered a severe shortage of dollar liquidity. The unexpected acute dollar shortage has led to significant downward pressure on many currencies. Such sudden dollar shortages can normally be accommodated by selling international reserves. Yet, central banks have seemingly not been able to fully mobilise their reserve assets. [...]

U.S. Federal Reserve swap lines

10 November 2008

The U.S. Federal Reserves has extended swap lines to several central banks including to Brazil, Singapore and Korea. The Fed swap network has been in place for decades but its revival has been the clearest indication yet that the Fed is concerned about global dollar liquidity and its potentially disruptive effect for the global financial system. [...]

Central banks and emerging markets liquidity

27 July 2008

Central banks have traditionally attached a high priority to market liquidity for the investment of their foreign exchange reserves. This is due in part to criteria governing the definition of central bank reserves. While many central banks have tiered their reserves to allow differential allocation criteria and investment horizons, liquidity considerations have remained important. Very large central banks contemplating building sizeable portfolios in emerging markets assets, generally in excess of US$10 billion, are concerned that they would have to overly compromise on liquidity and that significant allocations may cause unwanted price movements. [...]

Foreign reserves carry costs

5 March 2008

Holding international reserves can be quite costly. The financial implication of holding reserves of course only represents one aspect of reserve holding and many central banks would argue that the benefits far outweigh the costs. However, reserves affect central banks’ profit and loss account and as such do have an immediate incidence on the financial soundness of central banks and as such on the effectiveness of central banks. [...]