| Author (Person) | Jones, Tim |
|---|---|
| Series Title | European Voice |
| Series Details | Vol.5, No.6, 11.2.99, p29 |
| Publication Date | 11/02/1999 |
| Content Type | News |
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Date: 11/02/1999 By TO A foreign exchange dealer, three days is a year and five weeks a lifetime. This gives them and the people who monitor their day-to-day business a chronic lack of perspective. So, when the euro found itself trading at close to $1.12 last week, compared with its starting position 29 trading days ago of $1.18, all you could hear in the markets was: "The euro is in trouble." In the first week of January, these same people's 'europhoria' could hardly be contained. Yet it is undeniable that some of the gilt-edge has been chipped off the single European currency. Although most of the 3% slide in its value since its inception can be ascribed to the persistent strength of the dollar, the sell-offs, when they came, were often triggered by niggling worries over the efficiency of the market for euro. Hiccups are inevitable when a virgin currency covering 11 developed countries is created from scratch; but some of these teething troubles have been enough to send investors scurrying off to the dollar markets they know. That speaks volumes about how far the euro area still has to go to make the markets trust its institutions. Within three days of the euro's birth, rumours spread through the New York and Chicago currency and options markets that some big banks had been unable to settle euro-denominated debts they had run up with each other during the day. This process, known as intra-day settlement, is the lifeblood of efficient, modern markets for currency and short-term debt. Even hints of inklings of rumours suggesting that a trade cannot be closed will unsettle the most reckless of traders. Risk-averse investors will run for the hills. In the euro zone, daily cross-border business between banks and their central banks has topped €300 billion and most of this has been carried out within the European Central Bank's TARGET (Trans-European Automated Real-time Gross settlement Express Transfer) structure. By integrating the national systems for 30-minute settlement of intra-day debts, TARGET has become the key method of settlement within the EU. Depending how you look at it, TARGET's debut has either been remarkably trouble-free or troublingly remarkable. On its first day, the system had to close 90 minutes late and these delays continued throughout its inaugural week. Although TARGET ran smoothly for most of the day, bottlenecks appeared towards the close of business as huge payments flooded the system. Since TARGET is a hub for all the national settlement systems, it only takes a glitch in one country to trip up the whole system. On day two, for example, problems in the Portuguese payments system forced the euro-zone settlement to be extended. As the problems continued, the ECB took the decision to extend trading hours from 6pm to 7pm every day until 29 January, but actively discouraged late settlement by charging a penalty of €15 per transaction, well above the standard charge of €1.75 for each of the first 100 trades per month, falling to 80 cents for anything over 1,000 transactions. When ECB executive board members Sirkka Hämäläinen and Tommaso Padoa-Schioppa presented their report on the early performance of the euro-money market to the last meeting of the governing council, they made it clear that the settlement problems originated in the markets. Most of the teething troubles came from wrongly routed and mishandled orders, subsequently rejected by TARGET, which were not noticed by banks until the system has closed. For example, some finance houses sent payments to the Frankfurt offices of recipient banks rather than to their offices outside Germany. SWIFT, the company whose financial messaging system underpins TARGET, felt obliged to send out a notice to its members clarifying how payment orders should be completed. Padoa-Schioppa, who revealed at a recent meeting organised by the Brussels-based Centre for European Policy Studies that eight glitches had occurred in the euro-zone payments system even before it opened, was nevertheless surprised by the new money market's success. Until 4 January, commercial banks in the 11 constituent countries of the euro area were only able to offer funds to meet claims (liquidity) to eligible domestic customers (counterparties). Suddenly, they can do the same for counterparties outside their country: a cultural sea change. This was one of the key reasons for the excessive use of the ECB's standing facilities to provide or absorb liquidity overnight, since banks were reluctant to do such business with private sector counterparties in other parts of the euro zone. The overnight rate for these transactions was 3.2%, but credit institutions were happier to pay above the odds at the safe-as-houses ECB rather than dip their toes into the cross-border market. "For every bank, it is just a question of training their people to work and operate in a single money market," said Padoa-Schioppa. Errors have a price, although so far this has been cheap. Two weeks ago, hardware problems in France meant that the ECB's daily data on deposits were highly distorted. The bank promised to provide more reliable figures later in the day, but the damage was already done. Markets need information to be complete if they are to work properly and they exacted their price. The following Monday, overnight interest rates inched up to 3.18% from 3.13% three days earlier. Despite these early problems, the European System of Central Banks (Eurosystem) is convinced that the market is maturing and improving its efficiency. The use of the ECB's standing facilities has tailed off as banks have dared to enter the open market and deal in sales and repurchase agreements (repos). The gaps between money market interest rates in different member states, which persist despite the creation of a single market, have narrowed to virtually undetectable levels. For this reason, it is easy to understand Hämäläinen's despairing remarks last week about some of the "totally irrational" swings in the dollar-euro rate since the new currency came to life. However, until the US asset-price-led economic bubble is pricked and the euro's money market is seen to be beyond reproach, she will have to sit through a lot more market irrationality. Main refinancing rate: 3.0% (confirmed 4 February) Deposit rate: 2.0% Marginal lending rate: 4.5% ECB WATCH Calendar (12 February - 25 February) 12 February
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| Subject Categories | Economic and Financial Affairs |
