Monetary harmonisation right on TARGET

Date: 24/06/1999

By Tim Jones

EUROPE may lack a truly single financial market when companies want to borrow money or invest, but the euroland inter-bank capital market is already roaring.

Indeed, the speed with which the single 11-nation 'wholesale' money market was devised, created and bedded down strengthens the hand of those who believe harmonisation works best when it is forced.

Just a year ago, ten of the euro zone's members operated separate markets for the settlement of debt arising during the working day (intra-day debt) between banks. National central banks, whose monetary policy powers depended entirely on their ability to influence supply and demand in wholesale money markets, all used different instruments.

For seven years after the January 1999 deadline for creating a monetary union was set in 1991, there was much talk about

harmonising practices but little was done. But when the European Central Bank was created last spring, the theoretical work on a new cross-border intra-day debt settlement system and how best to influence monetary conditions was turned into practice.

Flesh was put on the bones of the Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) system devised by the European Monetary Institute.

The EMI had toyed with various instruments for influencing monetary conditions in the euro zone. By the autumn, the ECB had whittled these down to weekly open market operations: publishing a call to tender for short-term securities on the basis of sales and repurchase agreements (repos), longer-term repos and fixed deposits in the European System of Central Banks (Eurosystem).

Bank settlement errors and sudden drying-up of liquidity in the money markets in the euro's first weeks captured headlines. But, in fact, the process was remarkably glitch-free.

Spooked by early problems, commercial banks relied heavily on the ECB's overnight lending facility, EONIA. When this trend started to unwind in February-March, the ECB knew the market was finding its feet. Within four months of the euro's birth, it was as if purely national money markets had never existed.

ECB figures released this month show cross-border payments processed by TARGET accounted for 37% of the value of all domestic and international real-time payments by credit institutions in March-April.

Article forms part of a survey 'Financial Services'.