...BUSI 604 Discussion Board 4: European Central Bank Michael Hipsman Liberty University EUROPEAN CENTRAL BANK AND WHY I’M INTERESTED IN IT I picked this Key Term due to relevance of the Euro and the European Central Bank in my previous work and current work experiences. I was previously employed with the Federal Reserve Bank, which is the main decision maker for all U.S. currency, and monetary policies. In my current position, the company I work for is headquarter overseas, and has offices located in countries that are members of the European Central Bank. I think researching the European Central Bank, will be very useful to have a more thorough understanding of currency and business practices in within the European Union. In addition, gaining the knowledge of what requirements are needed to join the European Central Bank, and the monetary policies these countries must abide by in order to maintain membership will be insightful towards my GBCA paper, since my country is member of the European Central Bank and European Union. EXPLANATION OF EUROPEAN CENTRAL BANK The European Central Bank is the central bank for nineteen European Union members. The central bank is responsible for all monetary policies within the European Union, and sets interest rates across the nineteen participating members. Any nation that chooses to join the European Union much adopt the Euro as their currency except for the member states which have been exempted under the Maastricht Treaty (Great Britain...
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...Executive Summary Introduction Eurozone debt crisis, which is also known as European Sovereign debt crisis is an on-going financial crisis that the countries within the Eurozone such as Ireland, Italy, Portugal, Greece and Spain varying a certain degree that faces struggles to repay or refinance their government debt without the assistance of third parties. This has caused much worries faced by the European Unions and hence to the above crisis, thus causing a great impact beyond the borders to the world as a whole. We will look into various roles undertaken by the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) in helping to solve the euro zone Debt Crisis. European Central Bank (ECB) The ECB is one of the seven institutions of the European Union which was listed in the Treaty on European Union where it administers the monetary policy of the 17 EU members’ states where euro zone is consider one of the largest currency areas in the world. Founded in 1998, the central bank is one of the most important in the world with more than 500 billion euros in its reserves. Currently, the bank is based in Frankfurt, Germany and led by Jean-Claude Trichet. The primary function of ECB is basically to implement monetary policy for Euro zone, responsible for the care of foreign reserves of the European System of Central Banks, and to promote and conduct smooth operating of the financial markets and foreign exchange functions. In addition...
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...Carlo Panico and Francesco Purificato POLITICAL ECONOMY RESEARCH INSTITUTE The Debt Crisis and the European Central Bank’s Role of Lender of Last Resort Gordon Hall 418 North Pleasant Street Amherst, MA 01002 January 2013 Phone: 413.545.6355 Fax: 413.577.0261 peri@econs.umass.edu www.peri.umass.edu WORKINGPAPER SERIES Number 306 The debt crisis and the European Central Bank’s role of lender of last resort by Carlo Panico and Francesco Purificato 1. The debate on the role of the central bank in the European debt crisis reveals the increasing difficulty of the authorities to apply sensible solutions. De Grauwe and Ji express this opinion by noticing that unfounded fears ‘have been widely advertised in Germany and have contributed to creating a view in that country that the German taxpayer is likely to become the victim of a money machine that rewards the profligacy of Southern European countries’ (De Grauwe and Ji, 2012, p. 1). These fears ‘have become powerful political forces that make it difficult for the governments to find rational solutions to the euro crisis’ (De Grauwe and Ji, 2012, p. 13). In order to appraise this opinion we discuss how the European Central Bank (ECB) and the Eurosystem have been intervening in favour of the Government sector. We start by noticing that central banks can play the role of lenders of last resort in favour of the banking and of the Government sector and that “moral hazard” problems emerge in both cases. Yet, they have only been mentioned...
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...Introduction * The European Central Bank (ECB) * Body * Summary of the Article * Analysis * Monetary Policy of the ECB * Interest Rate * The Impact of Interest Rate on: * Inflation * Liquidity * Gross Domestic Product (GDP) * Unemployment * How to Ease the Liquidity * Print more Euros (€) * ECB Buying of Government Bonds * New Governmental Institutions * Decrease of Reserve Requirements * ECB Buying Corporate Bonds * Recommendations * Bibliography Introduction: The European Central Bank (ECB): The European central bank was formed in Frankfurt, Germany in 1988. The ECB is responsible for the monetary system of the euro currency and it consists of 17 European countries. The European central bank works with the other national banks of each of the European Union members to formulate monetary policy that helps maintain the euro’s purchasing power. The responsibilities of the ECB are to formulate monetary policy, conduct foreign exchange, hold currency reserves and authorize the issuance of bank notes, among many other things. The European central bank and the national central banks constitute the Euro system, the central banking system and the monetary authority of the euro area. The main objective of the Euro system is to maintain price stability: safeguarding the value of the euro. In pursue to their...
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...The ECB’s monetary policy in the crisis * In 1763, Amsterdam was the centre of a deep financial crisis. Highly leveraged investors were faced with a situation of falling asset prices. The liquidity crisis became severe and Amsterdam bank houses went bankrupt. * Similarly liquidity was an issue in the modern day financial crisis. Money markets seized up and several market participants found themselves unable to roll-over funding positions. * Finally, at the beginning of 2010 the latest turn: several euro area countries’ debt and deficit levels were found to be unsustainable. * Differently from the crisis in 1763, the determined actions of central banks prevented deleveraging, fire sales and ultimately deflation. * The ECB, and indeed all major central banks, reduced its policy rates to unprecedented lows and implemented various measures to restore monetary policy transmission to support credit flows to the real economy. * Liquidity support gives banks unlimited access to central bank money at a fixed price against adequate collateral for banks to liquefy their assets at times of stress by expanding the set of eligible assets used as collateral. * Also extending the maturity of lending so that the longest maturity of our long-term refinancing operations (LTROs) has been raised from the standard 3 months before the crisis to 6 months after. * The Outright Monetary Transactions (OMTs), eliminate the pricing of un-warranted tail risks in the bond...
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...Introduction Over the last 12 months, the excessive sovereign debt problems in Portugal, Ireland, Italy, Greece, and Spain which all are members of European Union led to a crisis in the global financial system. As the European Monetary Union members use the Euro as the common currency, they do not have abilities to use independent monetary policy, the solution of this debt crisis which can influence the whole global financial system becomes to difficult to be found. Chart 1: How country debts and budget deficits compare [pic] Source: Eurostat Newsrelease Euroindicators 2010 According to the Chart 1 above, the debt of Italy is 115.8% of GDP and Greece (115.1% of GDP) is closely followed, while Ireland has the highest budget deficit of 14.3% of GDP and next is Greece (13.6% of GDP). However, the European Union member states were required to have 3% for the ratio of the actual government deficit to GDP as market prices and 60% for the ratio of government debt to GDP at market prices (Treaty on European Union, 1992). It is clear that all member states shown above broke the standard of Treaty on European Union and have excessive deficit and debt relate to the GDP. Government debt is defined as the government borrowing in order to satisfy the short-term liquidity needs or the longer-term budget capital expenditures (Edirisuriya, 2010). The government debt usually can be caused as an accumulated governmental deficit over several years or several decades. A large scale of...
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...analysis the movements in value of the Euro against the pound since January 2008 Introduction The value of Euro varies with time by a floating exchange rate against British Pound (GBP). Hence, the exchange rate influenced the value of Euro against GBP and law of one price is assumed. Theories such as the relative Purchasing Power Parity and the fisher effect illustrate the impact of the inflation and the interest rate between two countries on the value of the currency. The asset market model is also another instrument to analyse the movement of a currency. The constraints of using these models are those theories all assumed perfect efficiency of market and the increasing role of global capital flows is ignored. Therefore they are relatively useful to predict the rates in the future which are demonstrated in part two. The following analysis is based on economic factors such as the economic status of the Euro area and the United Kingdom (UK) and the decision made by the Bank of England (BoE) and the European Central Bank (ECB). The investor confidence (Market Psychology) is also below. They affect the value of euro significant, as they vary the supply of and demand for Euro. The value of Euro against British Pound (GBP) increased throughout the three years. The Euro rose from 0.7416 to 0.8507 over the three decades. Euro was 0.7416 at the beginning of 2008, which was its weakest point in these three years. Moreover, the strongest point of Euro relative to GBP is 0.9785 on December...
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...The Euro Crisis According to Wikipedia (2012), the Euro Zone is comprised of 17 members that have accepted the euro as their only method of payment for goods and services. Monetary policy and management of inflation levels is governed by the ECB (European Central Bank) which consists of a president and board originating from central banks within the area. Since the late 2000's the Euro zone has experienced financial troubles mainly resulting from the varying degrees of difference between fiscal and monetary policy within each country. The majority of the debt can be attributed to the increase in both public and government debt around the globe as well as the arising debt within the euro zone. Some countries were noted for their involvement in the property crisis while other countries including Greece developed most of their financial obligations from increased public sector wages and pension contributions at an unsustainable level. As the desire for higher yielding investments expanded, many investors sought global markets as those offered by the U.S. Treasury. Norbert Walter (2012) argues that different growth rates, employment levels and unit labor costs have attributed to the euro crisis leading to heightened risk premiums and increased capital flights to those with lower risk assessments. Trade imbalances resulted from rising labor costs within several countries as well as accumulation of trade surpluses between those with the same currency that prevented appreciation...
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...1. In Greece the banks didn’t sink the country. The country sank the banks. Discuss this view. Which are the main differences between the Greek crisis and the crisis of Ireland and Portugal? The main cause of the Greek crisis is the ongoing disclosure of statistics that were well hidden from the eyes of the public, leaving people in ignorance about their own country and the future. When the figures started to become revealed, breaking up the shocking news about the forgery that lasted for over 30 years, it left the world in wonder – how is it possible to disclose such a thing for so long, and how is it possible that such action remains unpunished? The problems caused by the global recession were compounded by revelations that national statistics had been altered in order to cover the fact that Greece, in terms of debt levels, exceeded limits set down by the EU. The country's debt is already well over 100 percent of GDP and is still rising. According to euro zone rules, total government debt should not exceed 60 percent of GDP. The country's budget deficit in 2009 was almost 13 percent of GDP, more than four times the 3 percent limit allowed in the euro zone. But beyond the debt there is more deficit. What Greeks did when they got all this borrowed money, they gave away incredible sums to citizens, raised the wages to such an extent that it created a serious budget deficit. Inefficient Government? Corrupted mentality? Call it as you like, but it caused consequences that citizens...
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...The contagious impact of the European sovereign debt crisis on the foreign exchange market 1. Introduction In 2010, the debt crisis caused the euro to go down 10% in a three-month period. Some largest hedge funds in America discovered this opportunity and short euro in groups to an enormous scale. Later on, the British pound is being infected. It continuously dropped for six days, which wrote the longest dropping period record. In this paper, the objective is to critically analyse how the European sovereign debt crisis affects foreign exchange markets. The theme focuses on the contagion on the markets. The contagion phenomenon exists between foreign exchange spot and derivative markets. One of the channels is the investor sentiment, which makes large scale of influences on both markets and volatility dynamics (Corredor, P., Ferrer, E., Santamaria, R., 2015). It makes sense on aspects like trading volume, effective transaction costs and so on. This paper has two main parts. The first part is to evaluate impacts on foreign exchange spot market through analysing the political channel, bank channel and financial markert channel. The second part is to investigate impacts on foreign exchange derivatives, especially on the foreign exchange swap. 2. Contagious impact on the foreign exchange market 2-1 Impacts on foreign exchange spot (impacts on euro) In this part, we explain how the debt crisis makes impacts on the foreign exchange spot market, especially, we focus...
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...This essay will talk about what is currently going in Europe with the Eurozone sovereign debt crisis and the fiscal state the European Union is in, it is important and interesting because it is still current affairs and there are various factors and decisions that have helped the path that the crisis is going in, this essay will look at the crisis but on the implications and problems that European union face as well as what they have faced already and whether the European Central Bank are doing enough to improve the situation and what their plans are for the future. A sovereign bond serves as a floor for interest rates banks charged for loans and for the pricing of other financial contracts and securities. The global financial crisis led to the deterioration of government budgets and finances as nations utilized public expenditures to provide stability and stimulus. The Eurozone suffered because of heavy borrowing practices, property pebbles and living above their means. The Eurozone debt crisis started because Greece who had borrowed heavily in international capital markets over the past decade were turned against by investors this is because Greece in 2009 admitted that they had double the amount of debt that was allowed in the Eurozone limit. Ratings agencies started to downgrade Greek bank and government debt, and there was fear of Greece defaulting and not being able to pay back its debts but the Greek Prime Minister George Papandreou insisted otherwise however this was...
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...D December 1, 2012 International Crisis in Lending Lessons to be learned Group V Samantha Jeffrey Gabriella Stankovic Na-taisha Williams The debt crisis played a huge role in international lending. This report will discuss how economic crisis can result from many different factors such as changes in government policies which result in failure, and the cost of bank bailouts. Least developing countries also learned a lesson about how interest rates and low exports and imports played a major role in the financial crisis. These countries also tried to stabile their country's currency by fixing its exchange rate to that of the United States, which also resulted in failure. European countries also integrated their currency to Euro that caused a major crisis in lending. All are major factors that contributed to a crisis in international lending. Countries need to know what they are doing wrong before they can solve their problems. The historical events discuss will help serve as answer of how it can be resolved. Sovereign risk is the risk of lending money to the government with the risk of not being able to repay the obligation. There is always a risk in lending but the previous debt crisis and the crisis that is occurring in Europe plays a role in whether financial institutes want to lend to governments. The sovereign risk is important in international lending because many countries borrow money...
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...a nation powerless over its monetary policy. Currently, every European nation is faced with the question of whether to join European Monetary Union; however, the eagerness with which new member states join is paralleled by the resistance of several holdouts to adoption of the common currency. With the unprecedented growth rate of the Euro-zone over the past decade and the number of nations currently making the required policy adjustments, core members need to be aware of the motivating factors fueling the growth in the number of new member states. The European Union is experiencing an adverse selection scenario in which nations seeking increased stability are willing to make the sacrifices that membership entails while the redistributive effect of wealth from existing to new relatively poorer member states is an implicit benefit of the current system. When Paul Henri Spaak of Belgium, Christian Pineau of France, Joseph Luns of the Netherlands, Antonion Segni from Italy, Joseph Bech from Luxemburg, and Konrad Adenauer from the Republic of Germany signed the Treaty of Rome in 1957 creating the European Economic Community(EEC), their long-term objective was the creation of a union bound by political integration with a market between members free from traditional barriers to trade. It was not until the late 1970’s the formal movement towards the monetary integration which led to the establishment of the European Currency Unit began to gain traction within the Union which had...
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... 2 2.0 The Establishment of the Euro Zone and the introduction of the Euro 2 3.0 Key Causes of the European Financial and Economic Crises 3 4.0 The Start and Progression of the European Debt Crisis 5 5.1 Greece 6 5.2 Portugal 6 5.3 Italy 7 5.4 Spain 7 5.5 Ireland 8 5.6 Iceland 9 5.0 Measures Taken (so far) to Combat the Debt Crisis (European Level) 10 6.7 European Financial Stability Facility (EFSF). 10 6.8 European Financial Stabilization Mechanism (EFSM). 10 6.9 ECB interventions. 10 6.10 Brussels Agreement. 11 6.0 Implications of the European Debt Crisis: For the European Union 12 7.0 Implications of the European Debt Crisis: For the Global Economy 13 8.0 Implications of the European Debt Crisis: For Global Politics 14 9.0 Implications of the European Debt Crisis: For Pakistan 15 10.0 Implications of the European Debt Crisis: For the Welfare State 16 11.0 Solutions for the European Debt Crisis 16 12.11 Eurobonds. 16 12.12 Restructuring of Eurozone. 18 1.0 Overview: With a nominal GDP of $16,242 Billion in 2010 (20% of global GDP), the European monetary union is not only the world’s largest economic block, but also the foremost integrated economic and political association of nations in history. The economic crisis the Euro Zone currently faces is unique in all...
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...Greek Sovereign Debt Crisis CONTENTS 1. INTRODUCTION................................................................................................................... 2 2. THE CRISIS ........................................................................................................................... 2 3. THE WAY TO THE CRISIS...................................................................................................... 3 4. HOW DOES THE CRISIS AFFECT THE GLOBAL FINANCIAL SYSTEM? .................................... 4 5. WHAT IF GREECE LEFT THE EURO ZONE? ........................................................................... 5 6. IF GREECE HAS RECEIVED BILLIONS IN BAILOUTS, WHY IS THERE STILL A CRISIS? ............. 6 7. CONCLUSION....................................................................................................................... 7 8. BIBLIOGRAPHY .................................................................................................................... 8 1|Page Greek Sovereign Debt Crisis 1. Introduction The economy of Greece is the 45th largest in the world with a nominal gross domestic product (GDP) of $238 billion per annum. It is also the 51st largest in the world by purchasing power parity at $286 billion per annum. As of 2013, Greece is the thirteenth-largest economy in the 28-member European Union. Greece is classified as an advanced, high-income economy, and...
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