B) Payment Systems

Public policy responsibility for the payment system usually rests with central banks. Central banks are naturally interested in the payment system because it is a key component of the operation of financial markets and has important implications for the trading efficiency of the real economy. Of particular concern to central banks is clearing and settlement in financial markets where trading results in large payment obligations, such as the securities, commodity, interbank funds, and foreign exchange markets.

The central bank also participates in the payment system as a provider of interbank payment services. The role of the central bank in operating the interbank system depends on the development of a nation's payment system.

The Central Bank of Russia, with the assistance of international experts, has taken steps to draft legislation and oversee the decentralized expansion of Russia's domestic payments system. Progress has included improvements in the Interbank Payments System, involving the use of computer-generated instructions with specialized software. An electronic payments system for cash settlement was installed in Moscow, where 65 per cent of total document turnover in Russia occurs. The so-called automatic payments system began with eight banks in September 1993. As of July 1994, about 60 banks and two cash settlement centers (all in the Moscow area) participated in the automatic payments system. Eventually, all banks will be part of this system. Efficiency at other cash settlement centers was improved, and growth was recorded in the number of both interbank settlement centers and networks of banks with cross-connecting correspondent accounts that act as settlements agents for associated groups of smaller banks.

Words you may need:

rest v (зд.) возлагаться (об обязательствах)

software n компьютерное программное обеспечение

document turnover документооборот

cash settlement center расчетно-кассовый центр

cross-connecting correspondent accounts перекрестные корреспондентские счета

Correspondent: Mr. President, your government austerity program has been painful and controversial but it has transformed the country's financies, hasn't it?

President of the Central Bank: Yes, two years ago we embarked on stabilization program. As a result, the forint was devalued and a gradual "crawling peg" exchange rate mechanism was introduced. At the same time, we imposed additional taxation. All this was not very popular, you know.

Cor.: I remember that your labour unions were outraged.

Pr.: Not only. Many government supporters joined the opposition. But judging by recent developments, exports are surging, imports are going down and industrial output is rising. Besides, we have negotiated a standby facility with the IMF and received credit ratings from international credit rating agencies.

Cor.: True, but despite the economic progress, analysts are worried that you may not succeed in reducing your current-account deficit this year as planned.

Pr.: The most recent data on the current-account deficit reflect considerable improvement. The figures are in line with the projected trend. So we have no doubt that we'll meet our target for the year as a whole.

Cor.: How was the first quarter current-account deficit financed?

Pr.: It was covered by foreign direct investment and privatization revenues.

Cor.: You got more than $13 billion. Such large capital inflows can cause problems. What have you done to neutralize their negative impact or, as financial specialists put it, to "sterilize" them?

Pr.: The revenues from privatization are mainly used to reduce our external-debt burden. So they are fully sterilized without any problem. The situation regarding FDI is more complicated, because the money does not come into the state's hands. But we reduced quite substantially the net REPO position of the banking community. Next, we became more active players on the open market, selling huge amounts of government securities, and then we increased the banks' minimum reserve requirements.

Cor.: Interest rates for short-term Treasury bills in late May were about 24 per cent, compared with 32 to 34 per cent a year ago. Aren't you worried that rates are coming down too quickly, given the need to curb inflation and support your exchange rate policy?

Pr.: We can comfortably live with that drop, because the offered yields on government securities are still higher than the expected rate of inflation.

Cor.: Now that you have joined the OECD, your securities look very attractive. Are there any other financial benefits that came with your OECD membership?

Pr.: I'm sure you know, don't you, that many investment funds aren't authorized to invest in countries that are riot OECD members. So our membership has expanded the number of investors interested in us. What's more, they are all high-quality investors.

Cor.: International investors have long had a soft spot for Hungary. Yields on government securities are high, the secondary market is liquid, you have never even breathed the word "rescheduling". You were also able to lengthen your maturities and reduce interest rate spreads last year. What are your plans on the funding front for the coming year?

Pr.: Our average maturity is now longer than seven years. We are confident that spreads will come down further. Since the beginning of the year they have already fallen quickly on the secondary market from about 200 basis points to 100 over LIBOR.

Cor.: Government finances may have improved, but funding the social security system is still a real problem, isn't it?

Pr.: It consumes about 14 or 15 per cent of the GDP, which is far too much. We can manage that for the time being. But it's obvious we need to deeply restructure the pension system, health care and other social security programs.

Cor.: You need a far-reaching reform because your government is unlikely to be able to contain the social security deficit. Given the precarious financial situation of many Hungarian companies, you will have problems collecting the social security arrears.

Pr.: You see the picture darker than it is, I'm afraid. It's true that the austerity program has had a negative impact on living standards, more than that we'll have to have further spending cuts to bring the budget deficit below 4 per cent of the GDP. But at the same time we can't deny the fact that our companies are investing more now, their profitability is improving and the stock market is doing well.

Cor.: Despite all these improvements, however, inflation at 24 per cent remains a big problem, isn't if?

Pr.: Undoubtedly, but it is coming down because of market forces and not as a result of administrative measures. Our policies are working.

Words you may need:

austerity program программа жесткой экономии

controversial adj противоречивый

embark (on) v приступать (к чему-л.)

forint n форинт (денежная единица Венгрии)

devalue v девальвировать

"crawling peg" «ползущая привязка» (система фиксации уровня валютного курса с регулярным его изменением на определенную величину)

to be outraged быть возмущенным

surge v подниматься

standby facility резервный кредит

credit rating показатель кредитоспособности заемщика или уровня кредитного и инвестиционного риска по его обязательствам

succeed (in) v преуспевать (в чём-л.)

FDI (Foreign Direct Investments) прямые иностранные инвестиции

current-account deficit дефицит по текущим операциям

net REPO position нетто РЕПО позиция

yield n доход по ценным бумагам

OECD – Organization of Economic Cooperation and Development Организация экономического сотрудничества и развития

to lengthen maturities удлинить срок погашения ценной бумаги

interest rate spread процентный спред (разница между средними процентными ставками по активам и пассивам, приносящим проценты)

basis point базисный пункт

LIBOR – London Interbank Offered Rate ставка предложения (продавца) на лондонском межбанковском рынке депозитов

precarious adj ненадежный, сомнительный

arrears n pl задолженность

The number of countries experiencing significant banking problems has increased substantially in recent years. It should be stressed that the problems are hitting industrial and developing countries alike.

The problems arose from weaknesses and distortions in the banking systems and above all from the failure of the central banks to successfully fulfil their principal function of maintaining economic stability through a credible and responsible monetary policy.

Serious banking problems were almost inevitable in transition economies, because uncontrolled and unsupervised growth in commercial bank lending quickly unmasked hidden problems which brought about crises in many of the former centrally-planned economies.

Although the experiences of different countries differ according to each country's circumstances, the following general conclusions with regard to transition economies can be made:

• One of the most important conditions for avoiding serious banking crises is the pursuit of stable macroeconomic policies, which must be priority number one in transition economies.

• The transition process implies a dramatic change in the role and instruments of monetary policy. One cannot deny the fact that by the end of 1994, most countries in transition had shifted, to varying degrees, to market-oriented (indirect) instruments of monetary policy. For example, as a result of reforms in the monetary, exchange and banking areas, the CIS countries have achieved a market-based determination of interest rates.

• Competition in the banking system is important. Entry of foreign banks may offer a means to foster competition, but proliferation of banks is not necessarily a good thing in all countries. Some new banks may be weak and poorly managed. Systematic bank insolvencies have typically been a combination of poor lending decisions, inadequate licensing and supervision procedures. It is very costly and counterproductive to keep unhealthy banks alive. The lender-of-last-resort function involves net injections of liquidity into the economy and thus has a monetary impact that conflicts with the chief objective of monetary policy, that of maintaining stability and low inflation.

• Given the small size of the domestic monetary sector, the banking sector is highly sensitive to even minor changes in capital flows. Rapid and uncontrolled increases in banking assets should be discouraged. In some countries the cost of sterilizing capital inflows remains an issue.

Words you may need:

experience v испытывать, знать по опыту

hit v поражать, ударять

alike adv подобно, одинаково; в равной мере

credible adj заслуживающий доверия

responsible adj ответственный

inevitable adj неизбежный

unmask v (зд.) вскрывать

hidden adj скрытый

pursuit of stable macroeconomic policies проведение стабильной макроэкономической политики

one cannot deny нельзя отрицать

foster v поощрять, благоприятствовать

proliferation n распространение

insolvency n неплатежеспособность

licensing n лицензирование

conflict v входить в противоречие

sensitive adj восприимчивый, чувствительный

capital flows n финансовые потоки

sterilizing n стерилизация (предотвращение негативного воздействия притока капитала)

Exchange Rate Policy

Exchange rate policy involves choosing an exchange rate system and determining the particular rate at which foreign exchange transactions will take place. A country's exchange rate policy affects the overall level of domestic prices and its relative price structure in domestic currency terms between goods which are traded internationally (tradables) and goods which are produced for the domestic market (non-tradables or home goods).

A country's economic structure and its institutional characteristics are important considerations in determining exchange rate policy.

The following characteristics are usually taken into account:

• reliance on primary commodity production and exports (minerals and agricultural crops);

• dependence on essential imports (capital equipment);

• use of direct investment and official and private lending;

• development of financial markets, availability of experienced personnel, foreign exchange dealers in particular.

Countries have quite a number of options for exchange rate policy:

a. Peg to a single currency.

By pegging the value of a currency to that of a single currency the country facilitates its trade with the country whose currency is used as the peg. Besides, capital flows related to investment may be positively affected by the stability of the exchange rate. Moreover, pegging to a stable currency, like the US dollar, enhances the confidence in the pegging country's currency.

b. Peg to a basket of currencies.

An alternative approach is to peg the currency to a weighted average of several currency values or a basket of currencies. It helps to avoid large swings in its exchange rate with respect to several trading partners' currencies and enables countries to avoid some import price fluctuations. There are several disadvantages, however, of a basket peg. They are connected with technical difficulties of implementing a peg which would in general change on a daily basis vis-a-vis all of the industrial countries. The pegging country may lose attractiveness to foreign investors because there might be more uncertainty about the future value of the country's currency, reflecting the possibility that a basket peg was more open to manipulation, particularly if details of the composition of the basket were not publicized.

c. Independent floating.

Independent floating means that an exchange rate of any currency is free to float to any level which supply and demand may determine.

Independent floating potentially provides a mechanism for an efficient foreign exchange market.

Most industrial countries and some developing countries have adopted floating or flexible exchange rate systems, because countries have found it expedient for both economic and political reasons to adopt a more flexible system.

Based on: Macroeconomic Adjustment:

Policy Instruments and Issues

IMF Institute, 1992

Words you may need:

peg n привязка

basket of currencies корзина валют

alternative approach альтернативный подход

weighted average взвешенное среднее значение

swing n колебание

vis-a-vis prep пo отношению к

independent floating свободный плавающий курс

expedient adj целесообразный

Words you may need:

Bank for International Settlements Банк международных расчетов

de jure де-юре

central bank papers векселя центрального банка

prevalent adj (широко) распространенный

settlement services услуги по расчетным операциям

streamline v совершенствовать, модернизировать

Money is as hard to measure and define as it is to control. Money is graded according to its LIQUIDITY – notes and coins being completely liquid, whereas some kinds of bank deposits become spendable only after notice to withdraw them has expired.

In Britain:

• M1 is notes and coins in circulation, plus sterling sight deposits (that is, those withdrawable without notice) held by the private sector.

• Sterling М3 (М3) is Ml plus sterling time deposits (those requiring notice of withdrawal) of the British private sector, plus all sterling deposits of the British public sector. To get M3, add the foreign currency deposits of all British residents.

• PSL2, short for private sector liquidity, is notes and coins in circulation; all sterling deposits (that is, including time deposits and certificates of deposit); other money market instruments (for example, treasury bills, bank bills and local authority debt held by the non-bank private sector); building societies' share and deposit accounts, and some national savings securities.

The United States uses three measures:

• M1 is defined as currency in circulation, travellers' cheques, demand deposits of the private sector at commercial banks, automatically withdrawable deposit accounts at banks and thrift institutions, credit union share draft accounts, and demand deposits at mutual savings banks.

• M2 is Ml plus savings and small-denomination time deposits, overnight deposits at commercial banks, overnight Eurodollars held by American residents (other than at Caribbean branches of Fed member banks) and balances of accounts with money market funds.

• M3 is M2 plus large denomination time deposits, companies term repurchase agreements at commercial banks and savings and loan associations, and money markets funds held by institutions.

Based on: The Pocket Economist

Words you may need:

measure v измерять

grade v (зд.) группировать, классифицировать

spendable adj могущий быть истраченным

notice to withdraw (the deposit) уведомление о снятии вклада

sterling sight deposit вклад до востребования в фунтах стерлингов

PSL-private sector liquidity ликвидность частного сектора Великобритании (широкий показатель денежной массы в обращении)

certificate of deposit депозитный сертификат

building society строительное общество

travellers' cheques дорожные чеки

share draft account чековый паевой счет

mutual savings bank взаимно-сберегательный банк

overnight Eurodollars суточные евродоллары

money market fund взаимный фонд денежного рынка

repurchase agreement (REPO) соглашение о продаже и обратной покупке (РЕПО)

savings and loan association ссудо-сберегательная ассоциация