Learn from pain, says ECB chief
ECB chief Jean-Claude Trichet says it’s time to improve the functioning of rating agencies, sophisticated structured finance products & i-banks.
By TNN |
There has been a growing debate world over on the independence of central banks. To many in the financial world, the European Central Bank epitomises that. The man who heads the bank- Jean-Claude Trichet - is considered to be second most powerful central banker in the world after Fed’s Ben Bernanke. Mr Trichet hasn’t hesitated when it comes to taking on even someone like French President Nicolas Sarkozy, with whom he has had public spats over policy measures. In a rare interview to an Indian publication the ECB president, who was in India on a short trip, spoke to ET on a range of issues relating to the global financial markets and economy. Excerpts:
Subprime woes have surfaced. There is a perception that it can get worse. What’s your view? And how vulnerable do you think is the European and global financial system to such shocks?
First of all, I would say that we are observing an ongoing significant market correction with episodes of turbulence, high levels of volatility and episodes of overshooting of number of markets. We should not be too surprised to observe this significant market correction because central banks in particular have said in the past that we were observing the levels of underpricing in the economy in general - in global finance signalled by volatility and very low levels of risk premia in general.
We went public on that. In the present circumstances, all parties have to be up to their responsibilities, whether public authorities, banking surveillance authorities, central banks certainly and all the more of course private financial institutions whether commercial banks or other financial institutions. I wouldn’t comment particularly on the duration of the pain.
Central banks have come under attack often for giving institutions a long rope and on issues of moral hazard. Do you feel that rate cuts and giving credit lines to banks while it provides confidence temporarily to market participants creates a bigger damage?
In our own understanding, all central banks I know have done their job. There we are receiving various signals. They are all not in the same circumstances and they have a connection to the global financial markets. They also have various instruments at their disposal.
All said and done, they have done their job. I would be very positive on the role of central banks in the present circumstances. I was myself public on the concept which is important in the eyes of the governing council of the ECB. We have a primary goal which is price stability, delivery of price stability and anchoring of inflation expectations.
Subprime woes have surfaced. There is a perception that it can get worse. What’s your view? And how vulnerable do you think is the European and global financial system to such shocks?
First of all, I would say that we are observing an ongoing significant market correction with episodes of turbulence, high levels of volatility and episodes of overshooting of number of markets. We should not be too surprised to observe this significant market correction because central banks in particular have said in the past that we were observing the levels of underpricing in the economy in general - in global finance signalled by volatility and very low levels of risk premia in general.
We went public on that. In the present circumstances, all parties have to be up to their responsibilities, whether public authorities, banking surveillance authorities, central banks certainly and all the more of course private financial institutions whether commercial banks or other financial institutions. I wouldn’t comment particularly on the duration of the pain.
Central banks have come under attack often for giving institutions a long rope and on issues of moral hazard. Do you feel that rate cuts and giving credit lines to banks while it provides confidence temporarily to market participants creates a bigger damage?
In our own understanding, all central banks I know have done their job. There we are receiving various signals. They are all not in the same circumstances and they have a connection to the global financial markets. They also have various instruments at their disposal.
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All said and done, they have done their job. I would be very positive on the role of central banks in the present circumstances. I was myself public on the concept which is important in the eyes of the governing council of the ECB. We have a primary goal which is price stability, delivery of price stability and anchoring of inflation expectations.
This is all the more important in a period of significant market correction. This calls for certain levels of interest rates and certain monetary policy stance. We have major responsibilities to pave the way for the correct functioning of the money markets. In a period of challenges and trouble undoubtedly, the very sold anchoring of inflation expectations on the one hand and the solid functioning of the money markets on the other hand have been in our opinion of essence. But, we don’t mix the two.
There are trade offs which you have to handle in such a scenario, of handling the money markets and managing inflation. There are no trade offs in our opinion. You have to do both. You have to see that your monetary policy stance delivers price stability and again that taken into account at the level of interest rate again which is required by your medium term orientation. Then you care for the functioning of the money markets.
Central banks have come under attack that markets and economies are paying for the loose monetary policy that has been pursued for years leading to underpricing of risks. How do you sensitise the markets now to take a relook at pricing risks?
All this is connected. I would say to the lessons to be drawn and observations from the present market correction. And in this respect, I would say that the it certainly too early to draw definitive conclusions. We are observing and we can consider a number of avenues - things that will have to be improved and provisional lessons which we could draw from this present situation. It is my opinion that we should not let any particular area or piece of overall global finance and all that influence global finance apart.
We must look at and improve the overall functioning of rating agencies, the highly sophisticated structured finance products, core intermediaries, commercial and investment banks and in particular how to assess the model of originate and distribute. At the global level we should also take advantage of all elements which are pro-cyclical in the functioning of global finance.
What is your assessment of growth prospects in the US and the Eurozone? How badly do you think that Asia and emerging economies such as India would be affected by a possible recession in the US?
It is striking to see that emerging markets are very resilient and not touched by the recent crisis, India in particular. I think it is an additional argument to say that when you have an issue which is important , you candidly look at all possible improvements. After the Asian crisis, a lot of good work was done by emerging markets, India specially, and that is why we have the present resilience and so it is a good example of doing the job.
Thanks to a weakening dollar and the appreciation in the euro and the yen, the market is once again putting a question mark on the supremacy of the dollar. Would you sense this to be more a permanent shift rather than a temporary currency play?
My position is that I appreciate very much what the authorities in the US are saying, mainly that a strong dollar is in the interests of the US. This is our message if I may. Abrupt or sharp rises are not good for economic growth and I do not welcome brutal currency moves.
A related question that crops up is the heavy buying of non-dollar assets by oil producing countries. The spurt in oil price, dropping the dollar peg by West Asian countries like Kuwait could only reinforce the slide in the dollar. What are your views on this?
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I would not comment on the investment of this money. But I would say that the price of oil is very high. It has two consequences. One, it exerts a depressing influence on the global economy which in the present circumstances is not certainly welcome. Second, it puts upward pressure on inflation at the global level and in each particular economy and is equally not welcome. The successive rise of the price of oil and commodities have contributed to the ex ante excess of savings at the global level compared to ex-ante investment. That has contributed to capital chasing investment and not investment chasing capital. It is a multi-dimensional phenomenon.
Large inflows from many of the oil producing countries have further fuelled asset price bubbles in emerging markets. This is a situation where having sold the growth story, the economy here doesn’t have the capacity to absorb such flows. What do you think should be the policy approach?
I have no particular strong advice for emerging economies. Free movement of capital has played a very important role in the global prosperity which we are experiencing. That should never be forgotten when judging a particular case. What counts overall above all considerations is that is you run wise and sound domestic policies yourself - If you have a sound budget policy, if you have a sound monetary policy and wisdom in the two domains and on top of that if you embark upon structural reforms which en-able your economy to be flexible it seems to me that you are in the best position to protect your own prosperity in various circumstances.
Volatile markets, clamour for rate cuts, underlying inflationary expectations in many economies and fears of a recession in the US have made a central banker’s job more difficult. Is there a risk that central banks would have to grapple with greater influence from their respective governments?
Some are interpreting it as that our jobs are becoming more difficult. I hear that permanently. It is true for India, it is true for the US and the ECB. The situation is always multi dimensional and you always have to balance the risks. It is not a new phenomenon. Eventually, you have to make a judgement which is in the best of appreciation on the basis of multi dimensional inputs.
We have to deliver price stability, care for inflation expectations and care for appropriate functioning of the money markets. The ECB is independent from all pressures according to our own treaty and everybody knows the world over that we are fiercely independent. The credibility of the ECB depends very much on that. But let me say that the credibility of all central banks is associated with their independence.
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Governments and regulators have largely failed to put in place a regulatory framework for hedge funds and private equity players. Are they too big to control? What is the way ahead? Besides, what should be the regulatory approach to sovereign wealth funds?I would only say that we are watching with great interest the study which has been started at the request of the international community on benchmark best practices and best behaviour that we have asked the private sector in this domain of private equity funds and hedge funds that we have asked to produce. And we will see which kind of principles and benchmark for best practices will be produced by the industry itself.
(Interviewed by Sugata Ghosh, Shaji Vikraman & Gayatri Nayak)
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