samchain/econo-pairs-v1 huggingface dataset:
Now I would like to review recent developments in the Puerto Rico economy and then outline for consideration and discussion several steps to help put the Island on a path toward fiscal health. As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System. Economic conditions in Puerto Rico Let me turn to economic conditions in Puerto Rico. As you are well aware, the news has not been good. Puerto Rico’s economy has been in a slump for nearly a decade. After declining for five straight years, real (inflation-adjusted) gross national product (GNP) rose 0.9 percent in fiscal year 2012 and only 0.3 percent in 2013, rates considerably below the respective U.S. mainland growth rates. A monthly index produced by the Government Development Bank for Puerto Rico paints a similar picture of an economy that has stabilized but at a depressed level. We are finally beginning to see some signs of improvement in economic activity on the Island, though there is little evidence to suggest that the strong recovery that we seek has yet taken hold. Puerto Rico’s labor market remains weak. Overall payroll employment fell by about 10 percent between 2006 and 2010 and has leveled off since then.

An independent regulator for utilities is the norm throughout mainland states. By leveraging the expertise and reputation of existing independent regulatory agencies, Puerto Rico may improve the efficiency of its public corporations while reassuring investors. As a fifth step, the Commonwealth could benefit from adopting fiscal institutions more like mainland states. Balanced budget rules are far from perfect, but by following the states’ model – splitting the budget into an operating piece that must be balanced and a capital piece that can be financed with debt – Puerto Rico could better align financing methods with its spending priorities. A sixth step is for the Commonwealth to implement a framework to help ensure that budget targets are met. A key aspect of such a framework would require that the authorities implement multi-year budgeting, in which revenue and expenditure plans are articulated over a three to five year horizon. Such a framework should also incorporate a review of the central government’s macroeconomic and fiscal forecasts by a non-partisan independent entity, the views and analysis of which could be published in coordination with the Commonwealth’s proposed budget for any given fiscal year. New York City, for instance, uses this type of framework. The steps should be viewed as potential ways to improve Puerto Rico’s finances over time and I present them to you for consideration and discussion. The decisions are obviously up to you. Other countries, U.S. mainland states and municipalities facing similar fiscal issues have been able to overcome them.
We also saw that commodity prices had risen, as had food prices (Figure 6). Business tendency data from the National Institute of Economic Research also indicated that food prices would continue to rise. Inflation expectations, which normally fluctuate fairly substantially, had also shown a weak trend increase since summer 2005 and were at around 2.5 per cent for households in August, according to the National Institute of Economic Research’s survey (Figure 7). House prices had also continued to rise over the summer, while household borrowing had continued to increase at roughly the same rate as during the first quarter. BIS Review 111/2007  1  To summarise, there were in my view strong domestic reasons for raising the repo rate to 3.75 per cent in September. This could in itself also have justified a slightly higher forecast for the repo rate. But there was a counteracting effect from developments in the United States and the unrest on the financial markets. My conclusion was therefore that the repo rate forecast from June provided a fairly good picture of the most likely path for the repo rate over the coming years. If it were the case that the US economy suffered a deep recession with severe contagion effects, the Riksbank would have reason to reconsider its views. Advantages of an own interest rate forecast This leads me on to our experiences so far of the Riksbank’s publishing its own forecast for the repo rate.

In doing so, I would draw upon Thailand’s experience by touching on, first, a quick overview of the retail banking sector; second, I will draw the link to its social aspects - focusing on what’s moving and shaking in the Thai financial landscape; third, going through supervisory concerns and challenges - our policies to promote retail banking sector, while preserving financial stability, and concluding the session by attempting to answer “What do Regulators Really Want?” - from Thailand’s perspective, some elements of which I hope would be true or applicable to other countries’ experience as well. 1. Market developments of the retail banking sector in Thailand  The past few years have witnessed a steady increase in the share of retail credits to total credits of the Thai banking sector, climbing to 16.6 percent as of September 2003 from just slightly over 10 percent in 1998 - right after the Asian crisis. This remarkable trend can be explained by both push and pull factors. Laden with excessive liquidity and mired with sizeable unresolved NPL in the corporate sector within the banking system, commercial banks are under pressure to extend credit to the retail sector. In addition, lending to retail sector imposes lower possible loss in case of defaults given its much smaller average size of credits and greater diversity of portfolio than those of the corporate sector.
Between these two extremes – the US and the no-hoper – there are of course many cases where the situation is less clear-cut or less predictable. Euroland provides an interesting example. Given the careful steps which were taken before the advent of the euro to ensure the insulation of monetary from fiscal policy and to outlaw monetary financing of budget deficits, we might wonder why the news of impending budget overruns should cause the euro to weaken. It seems that not only do credit spreads faced by individual deficit countries widen (presumably for fear, however slim, of sovereign default), but also the currency weakens for fear of governments conspiring with the central bank to abandon its mandate against inflation or to break the rules against monetary financing. A rather different interpretation could be that foreign exchange markets are merely exhibiting a pavlovian reaction: having been brainwashed to the effect that a deficit is inherently bad if it surpasses certain preannounced limits, the reaction when such a breach does occur is bound to be negative, even if analysis of the substance underlying the breach provides little or no justification for such a reaction. In the context of trying to identify a relationship between the fiscal position and the exchange rate, these examples demonstrate that there is no simple, pre-ordained relationship. The outcome depends on a wealth of factors, including the nature of the disturbances affecting public finances, the policy regime and policy responses, and the state of sentiment in financial markets.

Several years of debilitating external debt, regional political instability, and doubtful macroeconomic management have all played a role in keeping private capital flows away from our economies. However, with endurance, progress in the region generally and Zambia in particularly is certainly being recorded. A glimmer of hope is finally showing that we are once again being welcomed in the international capital market arena. As you are aware, the Government has over the years set out programs to reform the country’s political and economic platforms. Politically, Zambia has been one of the most stable democracies in Africa boasting peace since independence in 1964. On the economic front, Zambia has made respectable progress in the area of macroeconomic management. Over the recent past, the Zambian economy has performed relatively well. This is reflected in positive growth rates of real Gross Domestic Product (GDP), low inflation, relatively stable exchange rate, stable financial sector and improved banking services. In addition, Zambia’s access to the Highly Indebted Poor Country Initiative and the Multi-lateral Debt Relief Initiative resources drastically reduced the country’s onerous debt burden from around US $ 7 billion to below US $ 1 billion. The removal of the debt burden also made Zambia more attractive to foreign direct investment and capital flows, that have been an important source of investment financing. Furthermore, over the recent past, the growth in the real Gross Domestic Product (GDP) has remained positive and above 5% for the last six years.
Greece, Ireland and Portugal are the three countries that have benefited from EU and IMF rescue packages. I will return to this in greater detail in a minute. The financing conditions of a number of other euro area countries have been extremely tight for the past few months, but they have not required bail-outs. This is particularly the case of Spain and Italy. Here too, certain economic or political weaknesses along with deteriorated public finances are stoking fears in financial markets, which – I should say in passing – have the unfortunate habit of lumping all players together and always expecting the worst. I would like to stress one point: the current crisis is not a crisis of the euro but a sovereign debt crisis. Moreover, we can see that all the turmoil that has been affecting the economy for the past few years is ultimately due to indebtedness: first, US household indebtedness and then sovereign indebtedness. Nevertheless, since end-2009, the crisis has revealed major shortcomings in the implementation of fiscal discipline and, more generally, in the economic governance of the euro area. The founders of the single currency had put in place the Stability and Growth Pact because they knew that a monetary union could not work without a common fiscal discipline. Its principles were sound, aiming to achieve a long-term balanced budget. But its implementation was greatly lacking.

Tackling the urgent issues To tackle the urgent issues stemming from the crisis, it was first essential for the three countries that were experiencing major difficulties to be able to continue funding themselves:  BIS central bankers’ speeches  3  the EU and the IFM stepped in to assist them. They did this via bilateral loans in the beginning, and then in the framework of a structure that borrowed on the markets backed by a guarantee from the euro area Member States: the European Financial Stability Facility (EFSF). This support was subject to strict conditionality to ensure that the sustainability of public finances was restored and the country in question regained its competitiveness. These countries therefore undertook to meet deficit reduction targets in order, ultimately, to be able to tap the markets directly for their funding needs. This support was always designed to be temporary and encourage sound fiscal policies. Central banks also played a decisive role throughout the crisis. First, they cut their key interest rates sharply after the crisis of 2008 in order to guarantee price stability and boost lending and activity. Furthermore, they provided financial institutions with liquidity to limit credit crunches. Since 2008, the Eurosystem, for example, has conducted fixed-rate tenders with full allotment against an extended range of eligible collateral.
For instance, capital requirements do not prohibit risky exposures, but they make them expensive to the bank. Before moving somewhat deeper into the questions of supervision, there are some things to say about risk management. BIS Review 66/2000  2  Risk management Risk management systems are at the core of modern banks. Banks must have consistent systems for identifying, monitoring, controlling and managing risks. These systems must be endorsed and understood not only by credit officers, but also by the board and the management. In a deregulated banking sector, the division of control and responsibilities in a bank is of particular importance. Owners must take an active interest in the bank by setting broad strategic guidelines and policies for risk management and internal controls. Bank boards must have access to timely and adequate information and act on it when necessary. There must be a division of labour making it clear to all members of management and staff what specific responsibilities they have. From the Swedish banking crisis I would single out a few types of risk. Credit risk in general, linked to the issue of collateral, was - as should be expected - the main problem. It was our experience that banks coming from the sheltered world of strict regulation did not have good and consistent systems for credit evaluation and documentation. Today, banks must have credit policies, stating what kind of credits they wish to grant.

Usually, small and simple loans are provided at branch office level, but larger and complicated loans are provided at successively higher levels. Banks have also adopted internal risk evaluation systems in which the individual loans are graded according to their risk. Loan documentation is improved to facilitate monitoring of the loan but also to ensure that the bank can collect on the loan in the event of a judicial process. In Sweden, concentration of credit risk was a major problem during the crises. Some two thirds of the losses were linked to the sharp price declines in real estate. A loan and its collateral must be evaluated separately, something that we had forgotten during the many years of regulation. If the expected returns from the investment made by the loan are uncertain or not adequate the loan should in most cases not be given, irrespective of the collateral. The reason is that the collateral, in a crisis situation, often proves to be worth far less than expected. This is particularly true when it is tied to the borrower - such as when a company has put up its own building as collateral. The linkage between credit risk and foreign exchange risk was large during the Swedish banking crises. This was seen also in the Asian crises in 1998. For example: Swedish borrowers wanted loans in yen and German marks because the interest rates in these currencies were low.
Since the Asian crisis erupted in mid-1997 we experienced a number of speculative attacks aimed at toppling the Hong Kong dollar and breaking its fifteen-year-old link to the US dollar. This link is successfully maintained by a strict and automatic currency board system, backed by more than adequate foreign currency reserves. During the attacks speculators took out large short positions against the Hong Kong dollar with the aim of destabilizing the linked exchange rate. On all these occasions the attacks activated the autopilot mechanisms under the currency board and drove up interbank interest rates to such high levels that the speculators (who had to borrow locally to fund their short positions) were forced to unwind their positions and incur heavy losses. The speculators failed, the currency board worked, and the link survived. But the interest rate volatility, and the consequent additional pain imposed on the community, was extreme: during one attack, on 23 October 1997, the overnight interest rate shot up to nearly 300%. In August we faced a much more complicated situation, in which speculators launched coordinated and well planned attacks across our financial markets. Speculators had discovered that by intensively selling Hong Kong dollars over a short period they could temporarily drive up interest rates under the currency board system, which would exert a downward pressure on stock prices. By pressuring the currency and selling stocks short, they could realize a profit on stock index futures contracts, even if they could not break the exchange rate link.

This double play strategy, backed by massive prefunding offshore (which protected the speculators against the interest rate volatility in Hong Kong) occurred with increasing intensity and formed the BIS Review 2/1999  –5–  background to our controversial operations in the equity markets in late August. We used official reserves to purchase stocks to ensure that the speculators did not profit: in other words, we did the unexpected in order to prevent our predictable and transparent system from falling prey to manipulation. We had absolutely no intention of defending a given level of equity prices. Nor do we have any intention of playing a role in corporate decision making in Hong Kong. The substantial stock portfolio that we acquired during the operation has since been turned over to an independent body with wide representation, to be managed in a neutral and transparent manner. We further followed the market operation with a package of technical measures designed to strengthen the currency board system and make it less susceptible to manipulation. At the same time, stock exchange trading rules have been tightened. We were roundly condemned at the time for what many saw as a criminal breach of free market principles. Milton Friedman, for example, called our operation in the markets “insane”, and suggested that it was part of a plan to socialize Hong Kong. Less dramatic critics feared that it marked the beginning of the end of Hong Kong’s fabled philosophy of positive noninterventionism.
It also will require firm-specific action to manage individual risks. The challenge is that the window for action is narrowing. 5/6  BIS central bankers' speeches  Therefore, we must redouble our efforts to ensure a successful transition from LIBOR to a more sound and durable regime. Thank you for your kind attention. I would be happy to take a few questions. 1 James Bergin, Raymond Check, Caren Cox, Gerard Dages, Joshua Frost, Matthew Lieber, William Riordan, and  Kevin Stiroh assisted in preparing these remarks.

We left most of these problems behind us when we began making forecasts based on market expectations, as reflected in the so-called implied forward rates. This was because market expectations in most cases provide a much more realistic forecast for the future development of the repo rate. The changeover from a constant repo rate to the markets’ expected interest rate path was also a natural step on the route to publishing our own forecast for the repo rate. We then began talking more systematically about future interest rate developments by commenting on the plausibility of the interest rate path given by market expectations. In my opinion this was when we took the major step towards increased clarity with regard to our view of future interest rate developments. The method of basing forecasts on market expectations is not without its problems, either. One problem concerns how expectations are measured. Other problems are related to communication regarding the interest rate path. Let me explain what I mean here. Changes in the policy rate have a direct effect on the shortest interest rates in the economy. Monetary policy can therefore also affect financial market expectations of future short-term interest rates. It is these expectations that the implied forward rates are meant to capture. The implied forward rates can be interpreted as the financial markets’ ”average” forecast for the future repo rate.
I would like to focus in particular on the results from two different but complementary empirical approaches that sharpen the view on the existence and nature of contagion occurring in the euro area over the course of this year.6 The first approach exploits the possibility of a persistent ability of idiosyncratic events in Greek credit default swap premiums to predict developments in other euro area countries’  4  A previous account of this has been provided in a recent speech by my colleague Vítor Constâncio, who described inter alia how contagion spread the sovereign debt crisis beyond the countries under EU/IMF programmes over the summer (http://www.ecb.europa.eu/press/key/date/2011/html/sp111010.en.html). For further discussions of the links between banking instabilities and sovereign debt problems, see V. Acharya, I. Drechsler and P. Schnabl (2011), “A pyrrhic victory? – Bank bailouts and sovereign credit risk”, NBER Working Paper, no. 17,136, June, or A. Alter and Y. Schüler (2011), “Credit spread interdependencies of European states and banks during the financial crisis”, mimeo., University of Konstanz, June. 5  Like in previous episodes, such effects were not limited to sovereigns. The average CDS premium of a group of 17 large European banking groups – none of which is Greek – showed the largest one day increase of this year. Finally, also non-financial corporations were affected. The Eurostoxx 50 declined by 5.2% on the same day, the third largest one day drop of this year.

Thus, by promoting a digital euro we must acknowledge that the Eurosystem is potentially putting its reputation at stake in that it remains liable for the overall functioning of the digital euro architecture whether it decides to rely on third parties for its distribution and operation or not. That said, the biggest source of concern is how a non-controlled expansion of the digital euro as a form of investment could, indeed, threaten the ability of authorities to properly maintain financial stability. As a matter of fact, a too attractive and accessible digital euro could foster a significant migration of banks deposits, thus compromising their intermediation and lending capacity plus also likely destabilizing the entire banking system in times of financial stress. To prevent these macroeconomic consequences from happening, ongoing discussions are currently focusing on what potential safeguards could be built into the digital euro, yet final decisions remain pretty much open at this stage. The main reason being they not only depend on the practical feasibility of the various available tools but also on the likelihood of different scenarios to materialize and the extent to which the latter may actually compromise banks’ resilience. As such, the fine-tuning of design features of the digital euro calls for additional research which I strongly believe the members of CEBRA are best positioned to provide us with. As of today, operational and legal considerations have been the bulk of our work thus far.