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Crisi finanziaria, crisi del debito sovrano

e guerra valutaria

Michele Fratianni Andrea F. Presbitero

Universita Politecnica delle Marcheand

Money and Finance Research group (MoFiR)

MOFA Master online di Finanza Ancona

ISTAO, 4 Dicembre 2010

Fratianni - Presbitero (Univpm MoFiR) Crisi e monete ISTAO, 4 Dicembre 2010 1 / 46
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Real policy rates and house prices in USA, 2001-May 2008

Bipartisan political responsibilities in increasing the housing demand (CRA, FannieMae and Freddie Mac).

Real interest rates at historical minimum made financing very cheap, boostingspeculation.


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Capital flow bonanzas (Reinhart e Rogoff 2008)

Capita l M obi l i ty and th e Inc idence o f Bank ing Cr i s i s : A l l Countr i e s ,1 8 0 0 - 2 0 0 8

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Index

0

5

10

15

20

25

30

35

Percent

1860

Capital Mobility

(left scale)

Share of Countries

in Banking Crisis, 3-year

Sum

(right scale)

1914

1945

19801825

1918

High

Low


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Monetary and fiscal policy during the crisis (WEO Oct 2009)

0

1

2

3

4

5

6

7

Euroarea

Nominal Short-Term Interest

Rates

Japan

UnitedStates

2000 02 04 06 Sep.09

Real Short-Term Interest Rates2

Jul.09

2000 0602 04

1

-2

-1

0

1

2

3

4

United States

Euro area

Japan

08 08

AUS

CAN

EUR

JPN

KOR

NOR

SWE

CHE

GBR

USA

ARG

BRA

CHN

HUN

IND

IDN

POL

RUS

SAU

TUR 50

100

150

200

250

300

350

400Evolution of Central Bank Balance Sheets(index, June 2007 = 100)

Jun. 2008Oct. 2008Latest

2

-10

-8

-6

-4

-2

0

2

Emerging anddeveloping economies

Advancedeconomies

1970 14200080 90

World

10

Fiscal Balance

0

5

10

15

20

25

30

35

Support for Financial and Other Sectors and Up-Front Financing Need(as of June 2009, in percent of 2008 GDP)

Capital injection by governments and other institutions

Advanced economies G20 emerging economies

Purchase of assets and lending by governments

Guarantees

Liquidity provision and other support by central banks

Up-front government financing


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From Financial Crash to Debt Crisis

There is a strong link between banking crises and sovereign default across the

economic history of great many countries, advanced and emerging alike.

1 Private debt surges are a recurring antecedent to banking crises;governments quite contribute to this stage of the borrowing boom.

2 Banking crises (both domestic ones and those emanating from internationalfinancial centers) often precede or accompany sovereign debt crises. Indeed,there is evidence they help predict them.

3 Public borrowing accelerates markedly ahead of a sovereign debt crisis;governments often have hidden debts that far exceed the better

documented levels of external debt. These (often undocumented) hiddendebts encompass domestic public debts.


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Sovereign External Default Cycles: 1800-2009 (Reinhart & Rogoff 2010)

1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 20100

10

20

30

40

50

60Years during which at least 20%

of sample countries are in default

(shaded)

Share of countries in default

(or rest ructuring)

Public debt follows a lengthy and repeated boom-bust cycle; the bust phase involves amarkedly higher incidence of sovereign debt crises.

Public sector borrowing surges as the crisis nears


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Sovereign Default on External Debt, Total (domestic plus external) Public

Debt, and Systemic Banking Crises: Advanced Economies, 1880-2010

Years during which 25% or more

of advanced economies

entered the first year of a

banking crisis (black bars)

1893

1907

1914

1931

2008

0

5

10

15

20

25

1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

20

30

40

50

60

70

80

90

Percent of advanced

economies in default

or restructuring

(shaded, left scale)

Advanced economies

Average public debt/GDP

(in percent, line, right scale)

Banking crises most often either precede or coincide with sovereign debt crises.

A causal chain from sovereign debt crisis to banking crisis, perhaps obscured in thesesimple graphs, cannot be dismissed lightly.


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The history on debt default (Reinhart and Rogoff 2008)

Country Year of Independence Share of years in default

or rescheduling since

independence or 18001

Total number of defaults

and/or reschedulings

Europe

Austria 1282 17.4 7Belgium 1830 0.0 0Denmark 980 0.0 0Finland 1917 0.0 0France 943 0.0 8

Germany 1618 13.0 8Greece 1829 50.6 5Hungary 1918 37.1 7Italy 1569 3.4 1Netherlands 1581 6.3 1Norway 1905 0.0 0

Poland 1918 32.6 3Portugal 1139 10.6 6Romania 1878 23.3 3Russia 1457 39.1 5Spain 1476 23.7 13

Sweden 1523 0.0 0Turkey 1453 15.5 6United Kingdom 1066 0.0 0Latin AmericaArgentina 1816 32.5 7Bolivia 1825 22.0 5Brazil 1822 25.4 9

Chile 1818 27.5 9Colombia 1819 36.2 7Costa Rica 1821 38.2 9Dominican Republic 1845 29.0 7Ecuador 1830 58.2 9El Salvador 1821 26.3 5

Guatemala 1821 34.4 7

Honduras 1821 64.0 3Mexico 1821 44.6 8Nicaragua 1821 45.2 6Panama 1903 27.9 3

Paraguay 1811 23.0 6Peru 1821 40.3 8Uruguay 1811 12.8 8Venezuela 1830 38.4 10

North AmericaCanada 1867 0.0 0

United States 1783 0.0 0Oceania

Australia 1901 0.0 0New Zealand 1903 0.0 0


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Debt and growth

Reinhart and Rogoff (2009, 2010) analysise newly compiled data on forty-fourcountries spanning about two hundred years and find that:

1 the relationship between government debt and real GDP growth is weak fordebt/GDP ratios below 90% of GDP. Above the threshold of 90%, mediangrowth rates fall by 1%, and average growth falls considerably more.

2 emerging markets face lower thresholds for total external debt (public andprivate) which is usually denominated in a foreign currency. When totalexternal debt reaches 60% of GDP, annual growth declines about 2%; forhigher levels, growth rates are roughly cut in half.

3 there is no apparent contemporaneous link between inflation and public debtlevels for the advanced countries as a group (some countries, such as the US,

have experienced higher inflation when debt/GDP is high). The story isentirely different for emerging markets, where inflation rises sharply as debtincreases.

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Public debt, growth and inflation (Reinhart and Rogoff 2010)

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Debt and growth: the issue of causality

Growthtodebt

There is little room to doubt that severe economic downturns, irrespective whether

their origins was a financial crisis or not, will, in most instances, lead to higherdebt/GDP levels contemporaneously and or with a lag.

Banking crises weaken fiscal positions, with government revenues invariablycontracting. Three years after a crisis central government debt increases by about86%. The fiscal burden of banking crisis extends beyond the cost of the bailouts(Reinhart and Rogoff 2008).

Debttogrowth

Public debt surges are associated with a higher incidence of debt crises and lowerGDP growth.

At a very basic level, a high public debt burden implies higher future taxes(inflation is also a tax) or lower future government spending, if the government isexpected to repay its debts (debt overhang and crowding out effects).

The recent turmoil in Ireland, Greece and other European countries can beimportantly traced to the adverse impacts of high levels of government debt (orpotentially guaranteed debt) on county risk and economic outcomes.

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Banking crisis and public debt (Reinhart and Rogoff 2010)

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The crisis and the rise in public debt

The global financial crisis triggered a sharp increase in public debt levels, both inabsolute terms and relative to GDP.

The level of aggregate net government debt in the world rose from $23 trillion in2007 to an expected $34 trillion in 2010.

IMF forecasts indicate the level will reach $48 trillion in 2015. The ratio of world

debt to world GDP rose from 44% in 2007 to 59% in 2010, and is expected toclimb to 65% in 2015.

The consequences of rising public debts

1 Fiscal and macroeconomic instability lower investment and GDP growth.

2 Transfer of wealth across generations.

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Net debt to GDP in 2010 (Prasad 2010)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Source: IMF Fiscal Monitor, May 2010

Notes: The darker bars indicate G-20 countries, along with Spain and the Netherlands. The solid lines show medians for the advanced economies (blue) and emerging

markets (maroon). Gross debt data are used for the following countries that do not report net debt data: Advanced Economies -- Czech Rep, Finland, Greece, Korea,

Singapore, Slovak Rep and Slovenia; Emerging Market Economies -- Argentina, China, India, Indonesia, Malaysia, Pakistan, Peru, Philippines, Romania, Russia and Thailand

Norway, which has a large negative net debt position, is excluded from this figure.

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Greece

Japan

Italy

Belgium

Singapore

Portugal

Iceland

France

Israel

UK

Germany

US

Austria

Spain

Finland

Ireland

Netherlands

Switzerland

CzechRep

SlovakRep

Slovenia

Korea

Canada

Australia

NewZealand

Denmark

HongKong

Sweden

India

Hungary

Malaysia

Pakistan

Argentina

Philippines

Thailand

Brazil

Mexico

Turkey

Latvia

Ukraine

Romania

Lithuania

SouthAfrica

Indonesia

Colombia

Peru

Poland

Kenya

China

Nigeria

Russia

Estonia

Chile

Bulgaria

SaudiArabia

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Is the worst yet to come?

Advanced economies (AEs) account for much of the increase in world public debt,putting their own as well as global financial stability in jeopardy.

AEs account for the bulk of the increase in global public debt since the start of thecrisis. By contrast, debt ratios will shrink for emerging markets (EMs).

EMs contribute far more to growth in global GDP than to the growth in globalpublic debt, reflecting an improvement in their fiscal positions while AEsexperience a fiscal deterioration in both absolute and relative terms.

The average per capita debt in AEs was $19,400 in 2007, rises to $29,100 in 2010and will go up to $41,000 in 2015 (in EMs per capita debt will reach $1,500 in2015). The burden of debt for U.S. citizens will rise from $19,700 in 2007 to$31,600 in 2010 and then to $48,000 by 2015. The debt burden for Japanesecitizens will hit $75,900 in 2015, the highest level in the world.

AEs as a group:

1 are experiencing little population growth.2 they are facing rapidly aging populations.3 their economies are likely to register slow growth (relative to the EMs).4 entitlement spending on health care and pensions is likely to explode due to

unfavorable demographics.

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National monies

National currencies tend to dominate foreign currencies as means of exchangepartly because the bulk of transactions is local and partly because governmentsdiscriminate in favor of the currency they issue.

Legal tender laws and the fact that governments generally disburse funds andreceive tax collections in the government-issued currency raise the cost of usingother currencies as alternative means of payment in the domestic market.

Currency substitution the replacement of domestic money with a superiorforeign money tends to be a slow process.

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National monies: examples

An historical example of slow currency substitution occurred during the German

hyperinflation of the 1920s. It has been estimated that a monthly inflation rate of10% led to a currency substitution of only 5 per cent of the money stock.

In modern times, we have cases of partial and complete currency substitution:

Vietnam is the best example of partial currency substitution. The US dollaris a parallel currency to the Vietnamese dong. The Vietnamese authorities,naturally, tolerate the parallel currency even though the dong is the onlylegal-tender currency. There is a black and active local exchange marketdong-dollar and the rates often diverge from the official dong-exchange rate.

Ecuador is the best example of complete currency substitution. The localcurrency, sucre, was completely replaced by the US dollar after a Presidentialelection in Ecuador was won on this very issue.

The reason for the complete substitution was that the sucre was deemed ahigh-inflation currency and that it would have been too costly and long tohope for a disinflation of the local currency. The better alternative was theadoption of a low-inflation foreign currency, which translates into the factthat Ecuador willingly gave up its monetary policy and seigniorage.

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A reserve currency (Galati and Wooldridge 2008)

An international currency is one that is used by non-residents as a medium ofexchange, store of value and unit of account.

While in principle these roles can be fulfilled by different currencies, historically theinternational currency that has dominated as a medium of exchange has alsoserved as the main store of value

Table: Roles of an international currency

Role Private use Official use

Medium of

exchange

Vehicle currency (in foreign exchange

markets)

Foreign exchange

interventionStore of value Banking Reserve accumulationUnit of account Invoicing (for trade or financial

transactions)Monetary anchor

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International monies

At the international level legal restrictions matter much less than at the nationallevel; consequently, there is competition among national monies.

At least, two factors play in this competition:

1 the relative purchasing power of the national monies: people preferlow-inflation monies to high-inflation monies;

2 the transaction cost in the exchange from money to gods and goods to

money. These costs decline as the transaction domain of a currency expands.More simply, the value of using a given currency depends on how manyindividuals use it (same principle of a language).

First implication: an international currency gains from inertia. Newupcoming currencies, with similarly low transaction costs, may not be

able to quickly upstage the dominant currency. Second implication: an international currency, once established, withersaway slowly.


L d d hi i l l f i i l i
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Long-dated historical examples of international monies

The Roman silver denarius was the first world currency.

The Byzantine solidus was the unchallenged coin from the 5th to the 7th century;some economic historians have called it the dollar of the Middle Ages.

The international role of the solidus was successfully challenged by the Islamicdinar which became the dominant money until the 12th century.

In the 13th century, the Italian coins came to prominence: the Genoese genoino,the Florentine fiorino, and the Venetian ducato. All three coins circulated side byside (parallel monies) for quite some time.


M d l f i i l i
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Modern examples of international monies

In the 19th century, Britain was the leading industrial economy in the world and

the British pound became the leading international currency. Britains

economic preeminence came to an end after World War I, but the key status of the

pound lasted for more than four more decades. As late as 1965, 20 per cent of

official reserves were denominated in pound.

Once a network has been acquired, the decline occurs slowly.

The U.S. dollar emerged as the dominant international currency after World

War II, but lost some ground towards the end of the 20th century, first with

respect to the Deutsche mark and the Japanese yen and later to the euro.

Its decline appears also to be slow.


Diff t R l f I t ti l M
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Different Roles of an International Money

Used as a reference currency in defining fixed exchange rates

Used to invoice internationally traded goods and services

Used as a vehicle currency (that is as neither the exporters nor importerscurrency) in the foreign exchange markets

Used to denominate financial assets held by monetary authorities and the privatesector.


R f i d fi i fi d h t
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Reference currency in defining fixed exchange rates

During the international gold standard (1880-1914), exchange rates were

predominantly defined in terms of the British pound. London was the most important financial center and the Bank of England acted as

a director of the gold standard orchestra. Countries kept international reserves in the form of gold and sterling deposits

with the Bank of England. For example, when Mussolini in 1926 decided to implement an appreciation of the

Italian lira in the exchange markets, he made a speech in Pesaro stating that hisobjective was for the lira to reach Quota Novanta, that is an exchange rate of 90lire for each sterling (at the time, the lira-sterling exchange rate was much higher).

After WWII, the international gold standard evolved into a gold-dollar exchange

standard. The dollar was linked to gold at a fixed price of $35 an ounce and all other

currencies were linked to the dollar by a fixed exchange rate.

The gold-dollar exchange standard is now finished; yet, we tend to quote exchangerates predominantly in terms of US dollars.


Vehicle currency
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Vehicle currency

Most international commodities are priced in dollars: petroleum, gold, silver,antimonium, etc. Transparency and ease of comparing prices at different locations

are two advantages in using a common currency to price commodities.The traditional model of the trade balance postulates that exports are invoiced in

national currency and imports are invoiced in foreign currency. Under these

conditions, a depreciation of the national currency is likely to improve the trade

balance because:1

the foreign-currency price of exports declines and2 the national-currency price of imports rises.

The facts are different (see next table). The US dollar appears to be the primaryvehicle currency. Take Japan as an example. 48% of exports and 69% of importsare invoiced in dollars. For Germany and Italy, these percentages are much smallerbut still relevant. This means that if two countries have to choose a third currency

to trade, the dollar is the most likely vehicle currency.The US, on the other hand, uses the dollar almost exclusively for export and importinvoicing. The implication is that a depreciation of the dollar in the exchangemarkets makes US products more competitive in the world, while not affecting theprice of imports: the US has an advantage from the international role of the dollar.


USD use in the export and import invoicing (Gilbert and Tllle 2008)
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USD use in the export and import invoicing (Gilbert and Tllle 2008)

Invoicing

observationbUS $ share in

export invoicing

US $ share in

import invoicing

Exporter currency share in

export invoicing

Exporter currency share in

import invoicing

United States 2003 99.8 92.8 99.8 92.8

Asia

Japan 2001 52.4 70.7 36.1 23.5

Korea 2001 84.9 82.2

Malaysia 1996 66.0 66.0 17.8 17.8

Thailand 1996 83.9 83.9 1.0 1.0

Australia 2002 67.9 50.1 27.6 30.6

European Union

Belgium a 2002 31.9 33.5 54.2 54.2

France a 2002 34.2 43.2 55.8 48.6

Germany a 2002 32.3 37.9 45.9 45.5Greece a 2002 71.0 62.0 24.1 30.7

Italy 2002 20.5 30.8 70.6 64.1

Luxembourga 2002 35.7 38.0 49.1 37.4

Portugal a 2002 33.4 34.5 48.1 57.8

Spain a 2002 32.8 39.5 58.1 54.7

United Kingdom 2002 26.0 37.0 51.0 33.0

EU accession

Bulgaria 2002 44.5 37.1

Cyprus 2002 44.7 34.9

Czech 2002 14.7 19.5 10.2 8.7

Estonia 2003 8.5 22.0

Hungary 2002 12.2 18.5

Latvia 2002 36.2 29.8 6.6 6.6

Poland 2002 29.9 28.6

Slovakia 2002 11.6 21.2

Slovenia 2002 9.6 13.3


Currency distribution of global foreign exchange market turnover
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y g g g

Percentage shares of average daily turnover in April (BIS 2010)

Currency 1998 2001 2004 2007 2010

US dollar 86.8 89.9 88.0 85.6 84.9

Euro ... 37.9 37.4 37.0 39.1Deutsche mark 30.5 ... ... ... ...

French franc 5.0 ... ... ... ...

ECU and other EMS currencies 16.8 ... ... ... ...

Slovak koruna2

... 0.0 0.0 0.1 ...

Japanese yen 21.7 23.5 20.8 17.2 19.0

Pound sterling 11.0 13.0 16.5 14.9 12.9

Australian dollar 3.0 4.3 6.0 6.6 7.6

Swiss franc 7.1 6.0 6.0 6.8 6.4

Canadian dollar 3.5 4.5 4.2 4.3 5.3

Hong Kong dollar3, 4

1.0 2.2 1.8 2.7 2.4

Swedish krona5

0.3 2.5 2.2 2.7 2.2

New Zealand dollar3, 4

0.2 0.6 1.1 1.9 1.6

Korean won3,4 0.2 0.8 1.1 1.2 1.5

Singapore dollar3

1.1 1.1 0.9 1.2 1.4

Norwegian krone3

0.2 1.5 1.4 2.1 1.3

Mexican peso3

0.5 0.8 1.1 1.3 1.3

Indian rupee3,4

0.1 0.2 0.3 0.7 0.9

Russian Rouble3

0.3 0.3 0.6 0.7 0.9

Polish zloty3

0.1 0.5 0.4 0.8 0.8

Turkish new lira2

... 0.0 0.1 0.2 0.7

South African rand3, 4

0.4 0.9 0.7 0.9 0.7

Brazilian real3, 4

0.2 0.5 0.3 0.4 0.7

Danish krone3

0.3 1.2 0.9 0.8 0.6

New Taiwan dollar3

0.1 0.3 0.4 0.4 0.5

Hungarian forint3

0.0 0.0 0.2 0.3 0.4Chinese renminbi

40.0 0.0 0.1 0.5 0.3

Malaysian ringgit2

0.0 0.1 0.1 0.1 0.3

Thai baht3

0.1 0.2 0.2 0.2 0.2

Czech koruna3

0.3 0.2 0.2 0.2 0.2

Philipine peso2

0.0 0.0 0.0 0.1 0.2

Chilean peso2

0.1 0.2 0.1 0.1 0.2

Indonesian rupiah2

0.1 0.0 0.1 0.1 0.2

Israeli new shekel2

... 0.1 0.1 0.2 0.2

Colombian peso2

... 0.0 0.0 0.1 0.1

Saudi Riyal2

0.1 0.1 0.0 0.1 0.1

Other currencies 8.9 6.5 6.6 7.6 5.3

All currencies 200.0 200.0 200.0 200.0 200.0

The asymmetric use of

currencies can be gleanedalso from the this table

The four most tradedcurrencies are, indescending order, thedollar, the euro, the

Japanese yen, and theBritish pound.

In terms of currency pairs,the largest and thickestFOREX markets is thedollar/euro, followed by

the dollar/yen, thedollar/pound anddollar/Swiss franc.

In all four cases, the dollaris the other currency inthe exchange.


Denomination of financial assets held by the private sector (1)
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Currencies Dec 2007 Dec 2008 Dec 2009 Mar 2010 2008 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010

Assets

All Currencies 33,440.6 31,193.3 30,023.5 29,731.1 1,435.1 1,903.0 422.4 278.4 397.2 647.5

A) Domestic currency 13,992.7 12,970.1 12,792.7 12,559.2 459.7 613.7 115.0 178.4 169.6 346.3

U.S. dollar 2,791.0 2,537.9 2,833.5 3,025.4 403.1 279.2 24.7 113.0 49.2 191.9

Euro 8,820.0 8,389.2 8,109.9 7,702.9 59.6 537.6 80.9 97.4 175.9 117.9

Yen 619.0 715.5 588.2 591.0 55.5 116.8 29.8 60.1 12.9 10.7

Pound sterling 1,212.5 846.0 777.7 757.5 49.0 170.0 72.4 121.0 0.5 26.1

Swiss f ranc 136.5 115.3 99.4 95.6 25.2 18.9 6.6 1.9 8.7 1.0

Other 413.5 366.2 384.0 386.7 13.5 49.6 9.6 11.0 20.8 0 .7

B) Foreign currency 17,924.5 16,667.9 15,752.9 15,676.0 963.9 1,199.8 297.6 73.3 224.8 260.8

U.S. dollar 9,940.1 9,657.0 9,015.6 9,068.9 299.5 666.5 303.4 37.8 50.0 53.9

Euro 4,132.3 3,741.2 3,511.8 3,405.3 242.2 351.7 28.6 87.3 99.7 106.5

Yen 671.1 654.1 451.2 446.0 186.0 196.4 56.6 25.7 90.7 0 .7

Pound sterling 1,257.1 919.0 924.0 864.7 0.5 101.8 63.4 65.5 26.5 0.3

Swiss franc 389.9 368.7 329.2 316.6 42.1 50.6 7.4 33.1 14.1 3.4

Other 1,534.0 1,327.8 1,521.1 1,574.5 193.5 167.1 48.6 100.4 56.3 102.9

C) Unallocated 1,523.4 1,555.3 1,477.9 1,495.9 11.4 89.4 9.8 26.6 2.8 40.5

Liabilities

All Currencies 31,418.1 29,067.4 28,093.5 27,836.3 1,390.8 1,714.4 451.7 215.8 299.2 524.0

A) Domestic currency 12,649.2 11,757.9 11,496.9 11,340.5 206.3 705.1 208.8 27.6 155.3 293.9

US dollar 3,454.0 3,298.3 3,178.5 3,258.4 393.3 119.8 105.7 157.2 75.1 79.8

Euro 6,834.8 6,429.7 6,246.3 6,091.4 124.7 398.8 42.7 110.4 158.0 253.8

Yen 252.6 381.3 334.8 303.9 61.0 41.5 18.9 17.9 10.7 27.4

Pound sterling 1,484.0 1,032.1 1,044.1 1,004.8 80.8 118.9 74.0 62.1 39.1 2.3

Swiss f ranc 91.8 91.4 92.6 90.1 4.6 2.3 4.8 17.6 4.4 0.1

Other 532.0 525.2 600.5 591.9 86.7 23.8 10.1 23.2 26.9 10.1

B) Foreign currency 17,527.5 16,042.7 15,398.4 15,261.3 1,226.5 928.7 227.1 175.1 154.5 171.7

U.S. dollar 10,021.5 9,261.0 9,070.6 9,021.0 756.6 211.9 111.1 31.6 11.0 49.6

Euro 3,475.0 3,262.2 3,158.1 3,074.7 78.2 229.1 80.1 84.3 22.6 107.3

Yen 824.2 825.8 578.5 585.9 203.2 239.3 39.8 44.7 102.5 15.2

Pound sterling 1,326.1 1,006.5 857.0 801.0 33.6 251.2 61.2 90.2 24.7 0.7

Swiss franc 395.2 405.6 371.0 359.6 20.8 49.6 21.9 29.8 11.6 1.0

Other 1,485.4 1,281.6 1,363.2 1,419.1 201.2 52.4 7.4 42.3 17.9 100.5

C) Unallocated 1,241.4 1,266.8 1,198.3 1,234.6 41.9 80.6 15.8 13.0 10.5 58.4

Table 5A: Currency BreakdownReporting banks' cross-border positions vis--vis all sectorsin billions of US dollars

Amounts outstanding Estimated exchange rate adjusted changes


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Type, sector and currency Dec 2009 Mar 2010 Jun 2010 Q1 2010 Q2 2010 2008 2009 Q4 2009 Q1 2010 Q2 2010

Total issues 932.2 945.0 877.1 705.4 634.0 81.0 237.5 140.6 49.1 27.0

Commercial paper 598.9 594.7 521.4 491.3 412.0 70.0 137.6 99.3 21.4 45.2

US dollar 174.7 182.6 159.1 144.7 125.6 20.4 37.8 6.3 7.8 23.5

Eur o 30 6. 5 2 94. 7 2 59 .3 247 .9 20 4. 6 7 1. 9 48. 1 67 .9 8 .1 9. 2Yen 3.9 5.2 4.7 4.5 2.2 13.4 2.0 1.8 1.4 0.8

Pound sterl ing 80.9 78.9 67.9 69.3 57.2 31.6 36.8 17.2 3.3 10.2

Swiss f ranc 14.7 13.2 12.9 10.2 8 .6 1 .9 4 .2 1 .2 1 .1 0 .1

Canadian dol lar 0.7 1.3 1.0 1.1 0.5 0.6 0.0 0.0 0.5 0.2

Other currencies 17.4 18.9 16.4 13.7 13.2 2.7 8.7 4.8 1.4 1.3

Financial institutions 526.4 521.3 450.7 426.9 358.2 32.0 48.6 63.1 18.2 45.6

Governments 32.1 35.7 28.4 31.4 17.3 72.6 48.3 24.4 4.3 6.5

International organisations 6.9 6.3 9.5 5.4 8.6 2.9 11.9 3.0 0.6 3.3

Corporate issuers 33.5 31.4 32.8 27.6 27.9 26.5 28.9 14.8 0.5 3.5

Other instruments 333.3 350.3 355.7 214.1 222.0 11.0 99.9 41.3 27.7 18.2

US dollar 14 5. 4 1 56. 5 1 59 .8 86 .0 9 8. 3 7 .4 12. 2 8 .0 11 .1 3. 3

Eur o 13 6. 5 1 38. 1 1 35 .9 94 .7 9 1. 9 3 .1 39. 4 32 .3 10 .7 1 0. 5

Yen 13.0 14.0 15.0 5.9 5.2 3.1 12.9 1.7 1.2 0.2

Pound sterl ing 18.2 20.9 24.4 16.3 16.5 9.2 27.7 15.0 4.0 3.7

Swi ss fr an c 6. 1 5 .1 5 .5 2 .4 2. 9 2. 2 0 .3 0 .8 0 .8 0. 5

Canadian dol lar 0.3 0.4 0.2 0.2 0.1 1.5 1.0 0.7 0.0 0.2

Other currencies 13.8 15.4 15.0 8.6 7.1 8.0 7.0 2.4 1.5 0.1Financial institutions 330.4 348.7 351.8 213.9 219.1 9.6 96.3 40.7 28.9 15.8

Governments 0 .8 0 .5 2 .9 0 .1 2 .4 1 .4 1.8 0 .1 0.3 2 .4



Currency of issue

Argentine peso

Austral ian dol lar 10.0 10.7 11.0 8.0 9.2 1.9 2.5 2.3 0.4 1.1

Baht 0.0 0.0 0.0 0.0 0.0 0.0

Canadian dol lar 1.0 1.6 1.1 1.3 0.6 2.1 0.9 0.7 0.6 0.4

Cze ch k or un a 0. 0 0. 0 0 .0 0. 0 0. 2 0. 2 0. 0

Dan ish k rone 0 .2 0 .2 0 .2 0 .2 0 .2 1 .6 1.3 0.2 0 .0 0.0

Euro 443 .0 432 .8 395 .3 342 .6 296 .6 75.0 87 .5 100.2 18.8 1 .3

Hong Kong dol lar 9.2 9.0 6.7 5.1 3.8 5.9 3.6 2.5 0.2 2.2

New Taiwan dollar 0.2

New Zealand dol lar 2.4 2.9 2.8 2.5 2.4 1.4 0.7 0.6 0.5 0.0

Norwegian krone 0.8 1.2 0.7 1.2 0.6 2.5 2.2 0.4 0.4 0.5

Pound sterl ing 99.0 99.7 92.3 85.5 73.7 40.8 64.4 32.2 7.3 6.5

Rand 0.2 0.2 0.2 0.0 0.0 0.2 0.2 0.2 0.0 0.0

Russian rouble 1 .1 1 .0 1 .0 0 .0 0 .1 0.0 0.0 0.1 0.0

Singapore dol lar 1.8 1.5 1.6 1.0 1.1 2.1 0.5 0.0 0.3 0.1

Swedish k rona 1 .7 2 .9 2 .8 1 .6 1 .1 1 .5 1.9 1.2 1 .2 0 .1

Swiss franc 20.8 18.3 18.4 12.6 11.6 4.1 3.9 2.0 2.0 0.4

US dollar 320.1 339.0 318.9 230.7 223.9 13.0 50.0 1.7 18.9 20.2

Yen 16.9 19.3 19.7 10.4 7.3 10.3 14.9 0.1 2.7 0.5

Zloty 1.9 2.3 2.0 1.5 1.3 0.2 0.2 0.0 0.4 0.1

Memorandum item:

Domestic money

market instruments

Total issues 12,733.4 12,673.3 1,441.9 584.9 485.7 144.5

Comme rc ial pap er 1, 83 3. 0 1, 72 5. 9 27 4. 3 6 31. 3 31 .0 87 .2

Treasury bills 5,591.3 5,609.5 1,314.2 414.7 276.5 109.0

O ther in st rument s 5, 30 9. 1 5, 33 7. 9 40 2. 0 3 68. 2 1 78 .2 1 22 .7

Table 13A: International money market instruments

By type, sector and currencyIn billions of US dollars

Amounts outstanding Gross issuance Net issues


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Type, sector and currency Dec 2009 Mar 2010 Jun 2010 Q1 2010 Q2 2010 2008 2009 Q4 2009 Q1 2010 Q2 2010

Total issues 26,071.3 25,669.5 24,692.9 1,522.0 1,020.5 2,343.3 2,576.4 449.9 549.7 126.4

Floating rate 8,353.2 7,982.5 7,480.1 367.1 254.9 1,202.4 173.7 68.6 4.6 98.8

US dol lar 2,256.9 2,250.3 2,231.4 135.3 76.9 176.8 30.0 37.7 6.6 18.9

Euro 4 ,667.7 4 ,374.7 3 ,935.0 179.2 139.6 520.7 44.8 14.0 7 .5 48.9

Ye n 1 80 .7 1 73 .7 1 75 .7 4. 4 4 .0 1 7. 9 5 .0 1. 5 4.9 6.6

Pound sterl ing 993.0 930.1 897.0 31.8 19.1 474.0 83.2 13.6 1.3 24.3

Swiss f ranc 23.3 19.6 18.8 2 .1 1 .7 3 .1 6.2 2.3 3.1 0.4

Canadian dol lar 30.0 29.3 30.0 2.2 2.4 4.6 0.7 1.1 1.7 1.7


Financial institutions 7,993.5 7,625.9 7,147.2 335.9 230.3 1,213.0 166.8 57.2 17.2 95.0

Governments 113.9 116.9 115.0 11.7 16.0 10.2 11.4 0.4 9.4 7.5



Straight fixed rate 17,274.2 17,243.6 16,769.5 1,130.4 746.1 1,136.3 2,362.5 495.6 546.2 215.7

US dollar 6,974.6 7,260.7 7,418.4 524.5 407.2 505.3 1,146.0 288.4 286.0 157.8

Euro 7,591.5 7,323.9 6,691.8 476.0 226.3 446.0 1,021.5 178.0 229.0 27.7

Ye n 4 61 .7 4 48 .7 4 66 .2 1 1. 8 1 8. 6 1 .7 35 .9 10 .9 7.4 5.5

Pound sterling 1,144.0 1,089.2 1,097.3 43.1 36.3 85.8 157.6 14.8 19.8 17.6

Swiss f ranc 332.8 327.7 321.1 19.6 10.4 19.0 26.6 3.6 4.2 0.4

Canadian dollar 269.6 279.3 281.8 10.6 12.4 34.0 22.2 11.5 1.6 12.0


Financial institutions 11,807.7 11,678.8 11,274.9 710.7 502.5 767.0 1,316.1 284.5 262.0 54.7

Governments 2,116.9 2,138.7 2,048.1 173.8 71.0 36.7 361.7 80.3 120.9 38.4

International organisations 743.9 759.5 757.9 62.7 50.8 55.2 89.5 0.9 35.3 25.6Corporate issuers 2,605.6 2,666.6 2,688.6 183.2 121.8 277.4 595.3 129.9 128.0 97.0

Equity-related 443.9 443.4 443.3 24.5 19.5 4.7 40.2 22.9 8.0 9.6

U S dol la r 196.7 209.9 221.3 16.1 15.7 2 .5 38.7 14.3 13.2 11.4

Eu ro 1 23 .3 1 10 .8 1 00 .2 3 .2 1 .3 15 .3 7 .0 2 .9 4.6 0.6

Yen 51.2 47.5 48.7 0.7 0.5 1.0 10.4 0.2 3.1 1.2

Pound s terl ing 7 .7 8 .3 8 .8 1 .3 0 .6 2 .0 0.6 0.2 1 .1 0 .6

Swiss f ranc 9 .4 8 .4 7 .2 0 .3 0 .2 2.5 0 .6 1 .1 0.7 1.0

C anad ian dol la r 7 .4 8 . 7 9 .2 1 .1 1 .1 1 .6 2 .9 1 .4 1 .1 0 .9


Financial institutions 211.5 211.5 205.3 10.5 7.4 7.3 0.5 8.0 4.9 0.9

G ove rn me nts 1 .4 1 .1 1 .0 0. 1 0. 3 0.2

International organisat ions


Convertibles 439.7 439.9 440.3 24.5 19.5 6.0 41.2 22.9 8.6 9.9

Warrants 4.2 3.5 3.1 1.4 1.1 0.6 0.3

Currency of issue

Argenti ne pes o 0 .7 0.7 0 .6 0.2 0 .1 0.1

Australian dollar 266.5 283.7 265.9 25.4 13.5 11.7 15.0 14.5 11.4 2.2

Baht 3.6 3.8 3.8 0.1 0.4 0.4 Canadian dollar 307.0 317.3 321.0 14.0 15.9 30.9 24.4 11.8 1.0 14.5

Czech koruna 18.4 16.9 14.3 0.2 0.3 0.1 1.8 0.5 1.0 0.9

D an is h k rone 5 .2 4 .7 4.0 0 .1 2.6 0.3 0.2 0.3

Euro 12,382.5 11,809.4 10,727.0 658.4 367.3 951.4 1,073.3 166.8 231.8 21.8

Hong Kong dol lar 60.6 61.4 60.0 3.7 2.5 6.9 0.4 1.8 0.9 1.2

New Taiwan dol lar 1.6 1.5 1.5 0.5 0.1 0.1

New Zealand dollar 41.9 38.6 36.1 2.7 1.5 1.5 5.8 0.0 2.6 1.5

Norwegian krone 53.7 55.4 53.9 5.8 5.3 7.1 17.9 2.6 3.6 3.0

Pound sterling 2,144.6 2,027.6 2,003.1 76.3 56.0 561.7 240.1 1.1 22.2 6.2

Ra nd 3 7. 7 3 7. 1 3 4. 7 2 .6 2 .1 8 .9 1. 8 0. 8 0.8 1.0

Russian rouble 13.3 13.9 12.5 1.6 0.4 4.9 1.4 0.4 0.2 0.6

Singapore dol lar 29.3 30.3 29.2 1.8 0.6 6.3 2.5 0.4 1.0 1.2

Swedish krona 69.1 70.3 66.9 5.1 8.1 11.7 14.0 0.5 2.0 1.6

Swiss f ranc 365.6 355.7 347.1 22.0 12.3 13.4 21.0 2.4 0.4 1.0

US dollar 9,428.3 9,720.9 9,871.1 675.9 499.9 684.6 1,214.8 264.9 292.6 150.2

Yen 693.6 669.9 690.6 16.8 23.1 20.6 41.3 12.6 15.4 13.4

Z lot y 1 2. 6 1 2. 1 1 0. 3 0 .4 0 .4 3 .1 0. 5 0. 2 0.4 0 .0

-

, , , ,

Table 13B: International bonds and notes

By type, sector and currencyIn billions of US dollars

Amount s out standing Announced issues Net issues


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Currency Dec 2007 Jun 2008 Dec 2008 Jun 2009 Dec 2009 Dec 2007 Jun 2008 Dec 2008 Jun 2009 Dec 2009

All currencies 56,238 62,983 44,200 48,775 49,196 1,807 2,262 3,591 2,470 2,069

Austral ian dollar 2,227 2,396 1,360 1,741 2,325 76 105 135 110 97

Canadian dollar 2,404 2,226 1,568 1,735 1,858 134 93 123 95 78Danish krone 241 224 195 203 213 5 6 10 5 5

Euro 21,806 25,963 18,583 20,653 20,364 790 1,010 1,409 1,032 864

Hong Kong dollar 988 857 608 422 297 5 13 4 3 3

Japanese yen 12,857 13,616 11,292 11,438 11,238 371 433 884 531 538

New Zealand dollar 60 58 28 15 11 2 1 3 1 1

Norwegian krone 420 478 369 223 238 10 14 38 10 7

Pound sterl ing 7,979 8,377 4,732 6,213 5,929 260 280 633 435 282

Swedish krona 1,525 1,589 1,178 1,255 1,309 29 30 88 54 39

Swiss franc 3,662 3,964 3,034 3,072 3,106 91 119 194 103 98

Thai baht 3 6 3 2 2 0 0 0 0 0US dollar 46,947 52,152 37,516 40,737 40,921 1,471 1,838 2,846 1,961 1,662

Other 11,358 14,060 7,932 9,840 10,582 370 582 817 600 465

Table 20B: Amounts outstanding of OTC foreign exchange derivativesBy currencyIn billions of US dollars

Notional amounts outstanding Gross market values


Denomination of financial assets held by monetary authorities
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y y

The dollar has lost shares and euro has gained.

The US have lost relative economic weight (GDP)

Adjusted for GDP shares, the dollar has remained stable. This is because the UShas less economic (and political) muscle in the world, a phenomenon that has beenroughly mimicked by the decline of the international role of the dollar.

The euro has gained relative to the dollar as an international currency.

Two economic explanations:

Ascendancy of the euro as an international store of value coincides withthe increased degree of efficiency, liquidity and integration of the eurofinancial markets.

Decline of the market share of the dollar results from its depreciation in theforeign exchange market. There is little evidence in favor of the second explanation Chinn and Frankel (2007) regress currency shares on lagged dependent

variable, GDP ratios, inflation differences, forex turnover, and forex volatility.Lagged term explains most of the variance. May reflect incumbency power ofnetwork effects. This interpretation is consistent with the historical accounton the slow decline of the pound after WWI).


Denomination of financial assets held by monetary authorities (1)
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y y ( )


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y y ( )


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( )


Empire and The International Economic Order
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There is an alternative explanation for the fact that the dollar has been holding up:political hegemony:

The United States political leadership in security, commercial and evencultural affairs globally has a critical impact on the usage of the dollar in themonetary realm [. . . ] Private decisions to invest in the United States [. . . ]are supported by the desire to gain insider access to key decision-makingprocesses and to membership in transnational elites; in fact, it is this desirefor membership and access that is a major source [. . . ] of the United Statesexorbitant privilege to pay for its current account deficits in its own currency.

The European Union, let alone the eurozone itself, is unable or unwilling tooffer these systemic or security benefits beyond a very limited area, and thusis fundamentally limited in its ability to attract currency adherents, despitethe success of the euro on its own terms as a currency and store of value.

Adam Posen (2008, p. 80)

The value in having a political hegemon is that this country enforces integration inthe world and an international monetary order (Empire).

For this service, the hegemon imposes its money as the international money andobtains the very special benefit of issuing debt in its own currency.


The financial crisis and dollar hegemony
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The financial crisis has evolved into a sovereign debt crisis.

At the moment, the sovereign debt crisis is affecting primarily countries in theEMU. This event is raising the probability of a euro break-up and consequently isfavoring the relative valuation of the dollar in the exchange markets.

But US budget deficits are large, US debt is growing rapidly and US monetarypolicy is extremely expansionary.

The interesting question is: What might happen if the sovereign debt crisis were to

move onto the other side of the Atlantic? The dollar may lose the current international currency status US would have to borrow in foreign currency US interest rates would rise and US would no longer play the role of buyer of last

resort World-wide deflation. The demise of sterling and the slow rise of the dollar has been blamed as a reason

for the poor economic performance between the two world wars. What currencies may replace the dollar? The euro is not ready to play Empire. The

yuan has a long way to go. Cocktail currencies like the SDRs have failed.


The European crisis: Greece, 2010
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Euro zone credit ratings
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Cumulative Probability of Default and the cost of Greek funding
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At mid-November 2010 the USA are making a few top ten lists (CMA data)

The probability of Greek default has surged in recent weeks as pressures in Europe havereemerged.

The key differentiating factor between the USA and EU is the lack of true unity in EU.

Persistent rise in Greek funding costs, despite an ECB claiming to have everything undercontrol.


The European crisis: Ireland, 2010
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Governance. If you merge 16 small open economies, you get a large closedeconomy. But here is the catch. If you assemble the leaders of the 16 small openeconomies, you get a roomful of 16 small-economy politicians.

Contagion. UK and German banks have loans outstanding of $149bn and $139bn.A second channel of contagion is via the capital markets, to Portugal. The biggestcreditor to Portugal is Spain, itself in a precarious position.

Bail out. The EFSF has managed to find a way to offer loans with relatively lowinterest rates. But the EFSF is not large enough to handle any problems that

might arise in Spain. In that sense, it is not an umbrella for the eurozone.

Solvency. Having already implemented structural reforms, at a time of extreme

fiscal tightening, moderate monetary tightening and weak global demand, how can

Ireland grow? Does Dublin really think to attract FDI by low corporate tax rates, given the current

uncertainties? Can Ireland really produce a devaluation to create an export boom?

Intra-eurozone imbalances. Germanys current account surplus will head backtowards 7% of GDP by 2012. We are planting the seeds for the next crisis, forwhich the EU has no institution, no facility and no task force.


Bailout or contagion?
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The future of the euro
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Your debt, your problem?
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Maastricht Treaty

Art. 103 states the no bail-out clause, meaning that neither the Communitynor any Member State is liable for or can assume the commitments of any otherMember State.

But, Art. 100 introduces solidarity:. . . Where a Member State is in difficulties or is seriously threatened with severedifficulties caused by natural disasters or exceptional occurrences beyond its

control, the Council . . . may grant, under certain conditions, Community financial

assistance to the Member State concerned . . .


EU and ECB response
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Following severe dislocations in Euro-zone peripherals sovereign debt market:

the EU announced a e750bn loan facility for Euro-zone governments facingfinancing problems;

extraordinary measures from the ECB to purchases selected sovereign

securities; the European Commission published proposal for tighter fiscal policy

coordination;

Are we on the verge of fiscal union in the EU to avert a large sovereign debt crisis?

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