By Emily Thompson (The Prague Post, 21.3.2012, page 9, Business)
Miroslav Singer says central banks need to intervene in crises
Last year was a bumpy ride of bailouts and blame for European institutions, culminating in a 489 billion euros offering of cheap money to the financial sector by the European Central Bank, a cash injection repeated in February this year that by most accounts has prevented a credit crunch. Czech banks and institutions on the other hand, have so far weathered the storm well. The Prague Post sat down with Czech National Bank Governor Miroslav Singer to talk about the eurozone, the changing role of central banks, and how the country's currency and banks are misunderstood.
* The Prague Post: You've said you don't expect the country to join the eurozone during your mandate, but aside from the debt problems in the bloc, isn't it wise for an export-driven country like the Czech Republic to hold off anyway?
Miroslav Singer: Even apart from the problems with the eurozone, we've so far reached the conclusion that we shouldn't hurry, and the reasons are the internal labor market inflexibility and the fiscal situation. We do not fit within the master criteria for the euro. The crown is still in an appreciation trend, which simply changes the equation. When a currency is in an appreciation trend, it's a sign we wouldn't go very smoothly into a fixed exchange rate system. But this is a political decision.
* TPP: We saw unprecedented intervention by the European Central Bank (ECB) last year when it began injecting liquidity into the banking system to prop it up. Has the role of the central bank changed as a result of the crisis?
MS: A proper central bank in a crisis always acts in some respect as a liquidity dispenser. The European problem is of an institutional framework that prevents the ECB from doing it directly. So it does it indirectly via the long-term repo facility and the International Monetary Fund, and that's a problem. We had two crises here with our currency, and since 2004 we've been supervising the whole financial system, so it's nothing new for us, but it might be new for central banks that have never had that kind of supervision.
* TPP: Has the ECB become a lender of last resort?
MS: The European financial system was quite close to really serious turmoil at the end of last year, and despite all of the moral hazards, it has obviously helped several governments by encouraging bond purchases. The more important thing that happened with the facility is that the market quit speculating about the fiscal position of several countries if they would have to prop up the liquidity of their banks. The worry was that the sovereign debt got added to how much they would need to save their banks if they got a run of their clients. And we were very close to this. With the long-term repo, it's clear this is not going to happen, at least Uquidity-wise. It's clear they are safe for the next two and a half years, and that was a game changer. At least it took one part from the total sum of bad things that could happen to France, Belgium and similar governments immediately. We were close to the brink, and I don't think we had too many other choices.
* TPP: Is this an argument for giving more power to central banks, the ECB in particular?
MS: We have been in a crisis for three years, and we are changing a lot of EU rules. It's an opportunity to change the mission of the ECB, but we haven't done that yet because it's not acceptable to Germany. If we want a single currency, we need a central bank that has all the tools in its toolbox. I'm not saying the ECB should break the rules, because, as my German colleague says, you won't give confidence to the market by breaking the rules, but we have been in crisis for three years, and we should have changed the rules by now.
* TPP: Czech banks have remained stable throughout the crisis, but ratings agencies periodically warn of a downgrade over the possibility that troubled West European parent banks might try to drain liquidity from their Czech subsidiaries if they get in a pinch. Is this realistic?
MS: It's not possible. We have rules. If somebody wants to break the rules, he would have to exchange Czech crowns in an absolutely dramatic way for the market because you cannot help yourself with crown liquidity if you need euros, and that would be very visible, and we can act very fast if need be. It's not just Moody's that has this misconception. The ratings agencies also say they are afraid the mother groups or governments of mother groups will not be able to help Czech subsidiaries, but quite frankly this is not their concern. Our state finances itself much more easily than some of the mother states and has a fiscal position that if worst comes to worst and some banks which we consider important for financial stability are in trouble, I will go see the finance minister and we will have to save the systematically important institutions. Of course their ownership at the end of the procedure may change, but we have all the laws that would enable us to do it relatively cheaply, and in the end the state would probably even have a nice profit selling the stake to somebody else who would be interested. This country doesn't need any other country to help it save its banks. It would be much easier than what happened here in the late '90s, and we were able to help ourselves then. This stream of thinking simply neglects the fact we are in fiscal shape, and that allows us to take care of subsidiaries.
* TPP: We seem to see similar misconceptions in the currency markets when investors lump the Czech crown in with the Hungarian forint whenever it slips. Why is that?
MS: There is still a lack of knowledge about the situation in different countries in this region. I meet investors and I'm amazed at this flop of thinking because they see that our Finance Ministry launched retail bonds last year that were hugely oversubscribed, so investors understand it, but the forex market is much more impulse-based, and that's why you see our movements going with the forint. Knowledge is spreading slowly. It takes time.
* TPP: Do you see interest rates staying low this year?
MS: The decision to go to 0.75 percent in 2010 was the best decision because of its durability. Barring some big surprise, the interest rates will be rather stable this year. There are dangers on both sides — probably more on the inflationary side — but a lot of this is caused by the increase in VAT, which we do not take into account in monetary policy because we cannot smooth inflation over the tax changes.