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FT.com / Europe - Central Europe acts to bolster currencies
Central Europe's battered currencies rallied on Monday after four of the region's central banks issued co-ordinated statements calling recent currency weakness unjustified and raising the possibility of intervention on foreign exchange markets.

It was the first time that banks from the region's four ex-communist countries with floating currencies had co-ordinated policies, a testament to the seriousness with which falls in Poland's zloty, Hungary's forint, Czech Republic's koruna and the Romania's leu are being treated.
...
By midday in New York on Monday, the Polish zloty rose 2.2 per cent to 4.6390 zlotys against the euro, the Hungarian forint climbed 2.8 per cent to Ft295.28 and the Czech koruna gained 2.1 per cent to Kc28.2048. The leu was little changed.



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Feb 24th, 2009 at 02:47:12 AM EST
[ Parent ]
They need capital controls.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Carrie (migeru at eurotrib dot com) on Tue Feb 24th, 2009 at 03:14:43 AM EST
[ Parent ]
You are advocating against freedom, the fair market, the ability of a man to use a computer to hunt the deadly falling currency by remote...and daringly, not even using a webcam.  

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Tue Feb 24th, 2009 at 03:29:16 AM EST
[ Parent ]
No, just an exit tax.

They can chase arbitrage opportunities as long as the profit from doing so exceeds the tax.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Carrie (migeru at eurotrib dot com) on Tue Feb 24th, 2009 at 04:24:14 AM EST
[ Parent ]
If that is the only alternative, I agree.

But there is still enough game in the system that the clever person at the proper instant can ruin a lot of people's lives. That s/he gives some of it back as taxes (to a different government) is a small compensation to them.

This does flow into a whole essay on government though, doesn't it. I rely upon my government not to put us in that situation, but I voted for someone who I felt would have policies better for the long term. I am still ruled and ruined by the others.

It is part of the 'pissed it away' conversation from yesterday. Whether I live a life of quiet or loud desperation, I am still battered by the macro of the 'get rich quick' crowd.

Unfortunately, I have no other solution besides yours above, so tax the bastards.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Tue Feb 24th, 2009 at 06:29:43 AM EST
[ Parent ]
I understand your anger at the "speculator" bogeyman, but consider this.

Slate Magazine: Capital Control Freaks(Paul Krugman, Sept. 27, 1999)

What, then, are the lessons of Malaysia's recovery? In our staged "dialogue"--which was played out in semi-public, in front of a disturbingly obsequious audience of a hundred or so businessmen--Mahathir continued to sound a minor-key version of the conspiracy theme, insisting that capital controls were necessary to protect small countries against the evil designs of big speculators. That's an unfortunate emphasis: While there are big speculators, and they do sometimes make plays against vulnerable economies, they are not the main reason that controls sometimes make sense. In general, controls should be imposed to prevent panic rather than conspiracy, and the investors who panic are, if anything, more likely to be respectable bankers and wealthy domestic residents than nefarious rootless cosmopolitans. (Indeed, even the occasional market manipulation by big speculators wouldn't be possible if it weren't for the possibility of generating a panic among other investors; it is a familiar point in the academic literature that Hong Kong-type speculative plays can work only if the economy is vulnerable to self-fulfilling crisis in the first place.) And the emphasis on big foreign speculators may encourage Malaysia to control too much for too long. Panic is a sometime thing, but hedge funds ye will always have with you.
(my emphasis)

Capital exit taxes are advocated and explained in Stiglitz's Globalization and its discontents. They're not about "taxing the bastards".

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Carrie (migeru at eurotrib dot com) on Tue Feb 24th, 2009 at 06:35:04 AM EST
[ Parent ]
Yes; I remember that piece too.

But capital controls come after the hit of the speculator, usually after the crisis has developed. I'm not an expert in this except watching what business friends in Turkey and Mexico had to go through when currency values dove to nothing, while the big guys got their money out in advance.

In the end, I suppose that there is no way to close the door to the speculator in advance, especially when those gaming the system are picking the fruit that leaves the door open to having the currency get hit.

Finally, to your last point, they are only bastards in my book because I see such bottom feeding as a classless solution to a country's problem.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Tue Feb 24th, 2009 at 03:21:07 PM EST
[ Parent ]
Or immediate membership of the Eurozone as Willem Buiter argues here

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Tue Feb 24th, 2009 at 07:44:15 AM EST
[ Parent ]
And Wolfgang Munchau in yesterday's ET
What are the policy options? Naturally, the EU could provide financial help - through the International Monetary Fund - but it is not clear that this would stop a contagious balance-of-payments crisis in the region. If exchange rates were to drop further, household defaults could rise dramatically. Would we bail out those households as well?

In my view, the smartest answer to the prospect of meltdown is the adoption of the euro as quickly as possible. There is no need to switch over tomorrow. All we need tomorrow is a credible and firm accession strategy - one for each country - which would include a firm membership date and a conversion rate, backed up by credible policies.

Obviously, this would require the long overdue abandonment of the eurozone's defunct entry criteria. Of those, the most nonsensical is the reference rate for inflation, calculated as the average of the lowest three national rates. Soon, this will be a deflation rate. So an aspiring member state would be in the absurd position of having to deflate as a precondition for euro entry.



Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Carrie (migeru at eurotrib dot com) on Tue Feb 24th, 2009 at 08:40:01 AM EST
[ Parent ]
LOL, I mean yesterday's FT, not ET :-P

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Carrie (migeru at eurotrib dot com) on Tue Feb 24th, 2009 at 09:30:51 AM EST
[ Parent ]
Thanks for the link. Is it possible that we linked to it last week in the Salon?

That's a good piece. For one thing, it provides an explanation for the rationale for capital controls which doesn't require people to go fetch Stiglitz's book as I suggested in my parallel comment.

When Iceland's banking system and currency collapsed last September, a key component of the emergency package that was introduced under the auspices of the IMF were controls on capital outflows, implemented through rigorous foreign exchange controls.  This made sense.  The currency was in free fall.  The foreign exchange markets had seized up.  There was no level of domestic interest rates the Central Bank of Iceland (which had zero credibility at this stage) could set that would induce domestic and foreign investors to hold on to their Icelandic kroner rather than converting them into euro, US dollars, sterling or any other serious convertible currency.
(my emphasis)

The prospect for Central-Eastern Europe is a similar capital flight to the Eurozone. In fact, the "bomb" has been "primed" (at least in Hungary) by several years of retail bank lending in foreign currencies (Euro and Swiss Franc, primarily but allegedly also Yen???). A sort of carry trade executed by EU15 (mostly Austrian, also German) banking groups who own CEE banks.

The following (my emphasis) comes as a surprise to me but obviously I was assuming more rigidity in the treaties than their language probably requires:

The imposition of capital controls on a temporary basis to deal with a foreign exchange crisis/balance of payments emergency is compatible with the EU Treaties.  Indeed, de-facto informal foreign exchange rationing has been taken place for quite a while in some countries.  When I was in Latvia a year ago, local commercial bankers told me that if someone wished to borrow lat (the local currency), they would not lend it to him if the bank thought he was likely to use it to speculate against the currency peg of the lat with the euro.  This is against the rules - indeed against the law -- but it happened.  Where could the frustrated would-be short seller of the Lat go to complain?  To the Latvian central bank?

He argues that capital controls will be necessary in former Soviet Republics and the former Yugoslavia in addition to EU/EEA countries. Not all countries have Eurozone membership available to them, though they could adopt the Euro as a currency. Although the article seems to be mostly about predicting capital controls and arguing for their necessity he does advocate Eurozone membership for EU member states:

Of course, an EU country that imposes capital controls could forget about joining the Eurozone in the foreseeable future, unless the Maastricht criteria for EMU membership were waved or scrapped.  Although the unconditional offer of immediate full EMU membership to all EU members would be a wise and wonderful contribution to the stabilisation of the region, I consider it unlikely that such wisdom will indeed be found in Frankfurt, Brussels and the national capitals of the EU - inhabited as these locations are by bears of very little brain.  With Eurozone membership years away, the cost of imposing capital controls, in terms of further delays in EMU accession, would be minor.
The criticism of the EU economic elite would be delicious if they were not tasked with steering us away from depression...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Carrie (migeru at eurotrib dot com) on Tue Feb 24th, 2009 at 09:29:07 AM EST
[ Parent ]

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