By Luija Lin, John Kicklighter, Currency Strategist CENTRAL BANKS
GENERAL Basel III – The newest set of capital requirements for banks, which requires that institutions maintain a minimum Core Tier 1 Capital Ratio – equity as a percentage of risky assets – of 7 percent. The EBA has mandated that European banks achieve a ratio of 9 percent by June 2012. More… BIS – Bank for International Settlements A multinational organization that serves as a global forum for national central banks. Most notable for setting required minimum capital ratios. Also, the group that releases the most reliable FX market depth figures. CDS – Credit Default Swap A n “insurance” instrument that compensates losses on bonds resulting from “credit events”, w hich could include default or restructuring. The ISDA (International Swaps and Derivatives Association) is the group that determines whether a ‘credit event’ has occurred, triggering payouts on CDS. On Mar. 9, the ISDA ruled that Greece’s recent debt-swap would trigger CDS payouts. More IMF – International Monetary Fund International Monetary Fund – a multinational organization that pools funds from member states for use in assisting countries in financial distress. Currently contributing – jointly with the European Union – to the rescue packages for Greece, Ireland, and Portugal. The size of its contribution to the most recent bailout package for Greece is currently under discussion. Inflation target Monetary rule used – officially or unofficially – by most major central banks. Under the rule, the central bank would commit to a target inflation rate, thus influencing expectations about inflation and interest rates. Most recently in 2012, the BoJ introduced inflation targets (currently set at 1 percent). Typically, there is a second mandate for monetary policy in some growth measure – in the US, it is unemployment. OIS Rate – Overnight Index Swap Rate Reflects market expectations of what a certain interest-rate will average over a given period. Useful for gauging expectations of central bank interest-rate policy. For example, if OIS rates are lower than the current central bank rate, this means markets expect the central bank to lower rates in the future. US DOLLAR FOMC – Federal Open Market Committee The body within the Fed (headed by Chairman Ben Bernanke) which sets monetary policy – including the interest-rate target – for the US. Often used interchangeably with ‘The Fed’ when used in commentary and media. EURO CAC – Collective Action Clause Approved by Greece in February, these clauses allow the country to force all holders of bonds subject to Greek law to participate in the debt swap. On Mar. 9, Greece announced that it would activate the CACs to force 95.7 percent of creditors to swap their bonds. This move will trigger payouts on CDS contracts, according to the ISDA. More EBA – European Banking Authority European financial regulatory body that conducted two rounds of stress tests on European banks in 2011 and mandated that institutions meet a minimum capital ratio of 9 percent by June of 2012. Has the potential to put significant stress on the European banking system as it encourages hording of cash rather than lending. More EFSF – European Financial Stability Facility The EU’s temporary bailout fund set up in mid-2010 with a total “firepower” of 440 billion Euros, backed by guarantees from Eurozone governments. Has already committed funds to bailouts of Greece, Ireland, and Portugal. More ESM – European Stability Mechanism The EU’s permanent bailout fund with a total “firepower” of 500 billion Euros, to come into effect in July 2012. Discussions are currently ongoing about whether to expand the ESM’s capacity and whether to combine it with funds remaining in the EFSF. More Eurobonds Proposal that Eurozone countries would jointly issue bonds and would be jointly liable for their repayment. Join issuance was expected to boost market confidence and lower yields, but Germany remains firmly opposed to the idea. IIF – Institute of International Finance Group representing more than 400 financial institutions which represented Greece’s private-sector creditors in negotiations over the country’s 100-billion Euro debt swap. LTRO – Longer-Term Refinancing Operation Refers to the two rounds of 3-year loans the ECB offered European banks at an interest rate of 1 percent (there was a similar program for 3-month funds alongside each 36-month effort). The first round for three-year funds drew 489 billion euros from 523 banks on December 21, 2011. At the latest round on February 29, 2012, 800 banks borrowed a total of 530 billion Euro from the facility. The LTROs helped improve market confidence in Europe and lower yields on Italian and Spanish bonds. More NPV Loss on Greek Bonds Under the Greek debt-swap, creditors would take a nominal loss of 53.5 percent. However, due to the lower interest rates and longer maturities of the new Greek bonds, creditors would take an actual NPV (“net present value”) loss of over 70 percent over the life of the new debt. PSI – Private Sector Involvement A central demand of leading European politicians in the Greek rescue effort, the PSI refers to private-sector creditors taking losses (or haircuts) on their debt holdings. The proposal was reportedly accepted by holders of approximately 85.8 percent of privately held bonds. SMP – Securities Markets Programme The SMP allowed for the ECB to purchase government bonds of the peripheral Eurozone countries – though details of purchases (such as country) are withheld. Given improved market conditions and Greece’s debt swap, an indefinite suspension of the program is under discussion. That said, additional purchases under this program could be treated as a distinct signal of regional financial deterioration. SPIV – Special-Purpose Investment Vehicle First proposed at the Oct. 26, 2011 EU summit, an SPIV would pool resources from Eurozone countries as well as foreign investors to support prices on European sovereign bonds. The idea has received a lukewarm reaction from China and other emerging markets and has since been on hold. Troika Designation for the IMF , European Commission, and ECB, which jointly evaluate the progress of Eurozone bailout recipient countries’ progress in implementing austerity measures. They are also responsible for approving bailout payments to those countries. More BRITISH POUND APF – Asset Purchase Facility The BoE’s quantitative easing program. Launched in Jan. 2009, the APF allows the BoE to purchase commercial paper, corporate bonds, and asset-backed securities. At its February policy meeting, the MPC increased the APF’s scope by 50 billion Pounds to 325 Billion Pounds. Also commonly referred to as the ‘bond purchasing program’ in the media. More MPC – Monetary Policy Committee The decision-making body of the BoE, which sets UK monetary policy. The MPC is currently headed by BoE Governor Meryvn King. The BoE and MPC are terms that are often used interchangeably. OBR – Office for Budget Responsibility Independent body established in 2010 to monitor the UK government’s progress in implementing its deficit-reduction plan and evaluate its effects on economic growth. With the UK economy exhibiting slow growth and unemployment at the highest in over a decade, there is ongoing debate about whether deficit-reduction should take precedence over stimulus. JAPANESE YEN APP – Asset Purchase Program Launched by the BoJ in Oct. 2010 as a vehicle to purchase Japanese government bonds, corporate bonds, and real-estate investment trusts. Intended to stimulate growth and combat Japan’s perennial deflation, the BoJ most recently expanded the APP by 10 trillion Yen on Feb. 14. The program amplified a yen selloff that began with the month and subsequently drove USDJPY to multi-month highs. Securities Lending Facility, Special Earthquake Reconstruction Lending Facility Other major ongoing BoJ liquidity programs meant to spur economic growth. SWISS FRANC Exchange rate floor In response to the strong appreciation of the Swiss Franc on Eurozone concerns, the SNB set a floor of 1.20 Francs / Euro in Sept. 2011, pledging to purchase an “unlimited amount” of foreign currency to defend the rate. Speculation remains that the SNB could raise the floor to further weaken the Franc. So far, this program has worked in that the exchange rate has neither tested or moved below the floor. More Negative interest rate s Another proposed solution to the threat of deflation would see banks charge savers to deposit funds in their accounts. So far, the idea has gained little traction and Swiss lawmakers voted against it in December. Sight deposi ts Another one of the SNB’s measures has been expanding sight deposits; the latest move raised them to 200 billion Francs. These are deposits that commercial banks hold at the SNB that could be transferred and converted to cash without restriction. CHINA RRR – Reserve requirement ratio One of China’s main monetary-policy tools, the RRR governs the percentage of deposits that banks must hold at the PBoC rather than lend out. A higher RRR means tighter policy. China has lowered the RRR by 100 bps since November on slower inflation and signs of a slowing economy and is expected to cut it further. More 1 -year lending/deposit rate These benchmark rates are China’s other tool for conducting monetary policy, besides the RRR . It is argued that these are more effective at curbing inflation and they have also shown greater spillover effects for the capital markets.
|Central Bank||Central Bank Full Name||Main Benchmark Interest Rate||Head|
|Fed||US Federal Reserve||Federal Funds Rate||Ben Bernanke|
|ECB||European Central Bank||Main Refinancing Rate||Mario Draghi|
|BoE||Bank of England||Official Bank Rate||Mervyn King|
|BoJ||Bank of Japan||Overnight Call Rate||Masaaki Shirakawa|
|RBA||Reserve Bank of Australia||Official Cash Rate||Glenn Stevens|
|RBNZ||Reserve Bank of New Zealand||Official Cash Rate||Alan Bollard|
|BoC||Bank of Canada||Overnight Rate||Mark Carney|
|SNB||Swiss National Bank||3-Month Swiss Franc Libor||Thomas Jordan ( interim )|
|PBoC||People’s Bank of China||1-Year Lending/Deposit Rate||Zhou Xiaochuan|
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