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To: Alex who wrote (23146)	11/19/1998 7:44:00 PM
From: goldsnow	Respond to of 116762

FEATURE-Euro seen lacking a lender of last resort 01:02 a.m. Nov 19, 1998 Eastern By Henry Engler LONDON, Nov 19 (Reuters) - It's early March 1999 and the euro is barely standing on its hind legs when a financial crisis in Latin America gives the fledgling European Central Bank (ECB) its first major challenge. Rumours abound over the possible failure of one of Spain's largest banks whose lending exposure to Latin America is considered enormous. A major European hedge fund, with ties to the troubled bank, is also said to be near collapse because of leveraged trading in Brazil. The worst comes to pass within a few days as the troubled bank admits to losses wiping out nearly two-thirds of its capital base. Panic ensues on Europe's financial markets as fears of contagion send bank shares and confidence plummeting across the 11-nation euro bloc. With Spain's share markets in a freefall and the government's debt sliding to fresh daily lows, the Bank of Spain comes under enormous pressure to restore confidence. But the central bank finds itself in difficult circumstances as there is a lack of guidance over its role in bailing out the beleaguered bank. Under great stress, the Bank of Spain asks the ECB for help. A emergency meeting in Frankfurt is granted but ends with a news conference that offers no clear answer on who will foot the bill to shore up Spain's troubled financial sector. Too fantastic to be true? Maybe. But a growing number of observers are warning there are sufficient reasons to worry about how the ECB would handle a financial crisis that threatens the stability of the euro and Europe's financial system. ''Muddled authority will result in muddled decision making. Not exactly the right stuff to calm down jittery financial markets,'' Charles Wyplosz and Paul De Grauwe, fellows at the Centre for Economic Policy Research, said in a recent article. The primary question is who would be the lender of last resort -- the ECB or the national central banks who are full standing members in the euro club? COMPLEX REGULATORY STRUCTURE There are essentially two issues central to the debate over how to handle a future crisis in the euro area. One concerns structure, the other philosophy. Under the Maastricht treaty, no mandate was given to the ECB to act as lender of last resort should a financial crisis erupt. Responsibility has instead been left to each country and among the 11 euro nations banking supervision is roughly split between central banks and separate regulatory bodies. Such a hodgepodge of oversight has worked well so long as monetary policy was in the hands of each central bank. But with the birth of the European single currency on January 1 all this will obviously change -- national central banks can no longer print money at will. Whether they like it or not, national authorities and the ECB will be part of the vast safety net should events in one country spread quickly across national boundaries, analysts say. Recognition of this new reality has become evident with the creation of the ECB's ''Changeover Committee'' for the euro's conversion weekend in case of large financial disruptions. The ECB was at first reluctant to set up such a body, believing that any difficulties would be handled by national authorities. But after intense lobbying by international banks -- and outside central banks such as the Bank of England -- the ECB concluded it had to play a lead role in developing contingency plans. ''The lender of last resort issue is at a juncture of two problems which intellectually you can keep distinct but in practice are always intertwined,'' said Daniel Gros, an economist with the Brussels-based Centre for European Policy Studies. The key distinction a central bank must make in the event of a crisis is whether a troubled institution suffers from a liquidity shortage or is on the brink of insolvency. In a liquidity shortage, national central banks can and should be able to lend money to the bank to see it through. In the case of insolvency, the question becomes how best to close down the bank over a period of time, a process which inevitably involves public funds. As many analysts argue, the difficulty during a crisis is in deciding which is the true problem -- illiquidity or insolvency. ''In practice, if you have 10 minutes to decide whether to provide money, it is very difficult to distinguish between illiquid and insolvent banks,'' Gros said. Because of this critical dimension, the more information a central bank has on the individual health of its banks, the better it is able to decide. But because central bankers in Europe are not intimately involved in regulation, the risk of making a wrong choice becomes greater, analysts say. PHILOSOPHICAL DIFFERENCES The second problem is philosophical. European central bankers don't like the phrase ''lender of last resort.'' They see it as something that raises all sorts of uncomfortable questions about moral hazard -- a term used to describe the reliance of investors on implict government guarantees for their investments. In reply to their critics, central banks say they would know what to do if a major financial crisis occurred but they prefer not to spell out their game plan in advance. To do so would create the kind of behaviour they hope to avoid -- excessive confidence that some financial institutions are too big to fail. There is an important component to this line of reasoning, say analysts, in the idea that financial downturns or the failure of a big bank is often a healthy way of ''cleansing'' the system of excessive speculation or bubbles. This so-called ''liquidationist'' view argues that easier monetary policies would only postpone a necessary financial adjustment and ultimately make the pain much greater in the future. ''Elements of the liquidationist view can presently be found in the comments of some European central bankers who welcome the stock market declines of this summer as necessary corrections,'' economists at Goldmans Sachs said in a recent report. CRISIS NEEDED TO FORCE CHANGE Ultimately, the need for banking supervision to become more centralised in the euro area may only come about in the event of a full-blown crisis, analysts say. Few believe there is much desire to alter the current framework, particularly in an environment where the national central banks are unwilling to relinquish any of their powers. This was seen most clearly in recent comments by Bank of Italy chief Antonio Fazio, who said it was important to remember that the strength and credibility of the ECB derived from national central banks themselves. ''Everything that can be decentralised must be decentralised,'' Fazio said in a newspaper interview. Gros said he saw little impetus to move in that direction. ''Unfortunately, I don't see a movement to remove such ambiguities because for the moment the central bankers are in the denial mode, saying the problem really doesn't exist,'' Gros said. Copyright 1998 Reuters Limited.

To: Alex who wrote (23146)	11/19/1998 7:47:00 PM
From: goldsnow	Respond to of 116762

Euro lacks political unity to take on dlr -bankers 11:26 a.m. Nov 19, 1998 Eastern By Mark Thompson VIENNA, Nov 19 (Reuters) - Lack of political union in Europe will be a key factor in preventing the euro from displacing the dollar as the world's reserve currency of choice for the foreseeable future, senior bankers said on Thursday. From its launch in just six weeks' time, the euro will be one of the two leading international currencies due to the size of the euro-zone economy, its well developed financial markets and a credible central bank, the fourth International Finance and Economics Forum in Vienna heard. But most of the bankers said several factors should combine to defend the dollar's dominance, at least for another decade. ''There are good reasons for the euro to join the dollar as a top international currency,'' said Craig Hakkio, director of research at the Federal Reserve Bank of Kansas City. ''European monetary union is enough to put the euro on the top but not enough to displace the dollar.'' He said to gain the kind of acceptance the dollar has, the euro would require not only stability and low inflation but also a credible macro-economic environment which would be determined to a large extent by Europe's political leadership. High unemployment could lead to increasing pressure from euro-zone governments for the ECB to pursue an expansionary monetary policy, and there was also potential for conflicts between member states facing different policy challenges. ''Clearly politics plays an important role in determining the economic outcome,'' Hakkio said, adding that the lack of a single central state was the biggest obstacle to the euro challenging the dollar just yet. Merrill Lynch Executive Vice President Thomas Davis agreed. ''It is likely to take quite some time, maybe as long as a decade,'' he told delegates. ''European governments and the new central bank must develop a way of coordinating the unified monetary policy with diverse fiscal policies.'' Industrial and labour market reform and growth in euro-denominated capital markets would also be required for the euro to fulfil its full potential as a world currency, he said. ECB board member Tommaso Padoa-Schioppa agreed that as a reserve currency, the euro would be more important than the 11 currencies it replaces, but added that ''the dollar will remain for the foreseeable future the leading international currency.'' He said the euro would, however, rapidly become the reference unit of choice in the European time zone, and play an anchor role for EU candidate states and countries in the Middle East and North Africa. ((-- Vienna Newsroom 43-1-531 12274, vienna.newsroom+reuters.com)) Copyright 1998 Reuters Limited