Typography

SWIFT headquarters in Belgium ( source ) German foreign minister Heiko Maas recently penned an article in which he said that "it’s essential that we strengthen European autonomy by establishing payment channels that are independent of the US, creating a European Monetary Fund and building up an independent Swift system." So what exactly is Maas's quibble with SWIFT, the Society for Worldwide Interbank Financial Telecommunication ? SWIFT is a proprietary messaging system that banks can use communicate information about cross border payments. This November, U.S. President Trump has threatened to impose sanctions on SWIFT if it doesn't remove a set of Iranian banks from the SWIFT directory. For Heiko Maas, this is a problem. Iran and Germany remain signatories to the same nuclear deal that Trump reneged on earlier this year. The deal committed Iran to cutting back its uranium enrichment program and allowing foreign inspectors access to nuclear sites, in return obligatin...

The eyes of the world are on one of history's largest cash withdrawals ever. Earlier this week, the Central Bank of Iran ordered its European banker, Hamburg-based Europaeisch-Iranische Handelsbank AG , to process a €300 million cash withdrawal. Germany's central bank, the Bundesbank, is being asked to provide the notes. If the transaction is approved, these euros will be counted up, stacked, and sent via plane back to Iran. German authorities are still reviewing the details of the request. Iran claims that it needs the cash for Iranian citizens who require banknotes while travelling abroad, given their inability to use credit cards, says  Bild . Not surprisingly, U.S. authorities  are dead set against  the €300 million cash transfer and are lobbying German lawmakers to put a stop to it. They claim the funds will be used to fund terrorism. The picture below illustrates $1 billion in U.S. dollars, so you can imagine that €300 million in euro 100 notes would be about a third of t...

Network view of cross-border banking, IMF, Minoiu and Reyes (2011)  PDF I recently blogged at Bullionstar on the topic of the upcoming Iranian monetary blockade. Many years ago when I was taking a political science class at university, I remember the professor teaching us two criticisms of sanctions. The first is that they don't really work—people can always get around them. And secondly, even if they are so tight that they can't be evaded, sanctions don't change the behaviour of the party being sanctioned. The Iranian monetary blockade that ran from 2010-2015 seemed to contradict both of these claims. The sanctions were very difficult to evade. And they forced Iran to come to the bargaining table and agree to end their nuclear program in exchange for economic relief. According to the International Atomic Energy Agency, Iran has complied with its promise. The Trump administration has announced that it is reneging on the nuclear deal and re-imposing sanctions in order to f...

Production of the European Central Bank's €500 notes is scheduled to come to an end later this year. But a chart of the quantity of €500 banknotes in circulation (see below) reveals something odd. The supply of €500s began to plummet way back in early 2016, long before note production was supposed to be halted. What gives? It was back on May 4, 2016 that the ECB officially announced that it would stop printing and issuing the €500 note, one of the world's most valuable banknotes ranked by purchasing power. The reason it gave was concerns that the €500 "could facilitate illicit activities." You may remember that this was in the midst of ex-banker Peter Sands screed against high denomination notes, echoed by  economist Larry Summers and later amplified by Ken Rogoff's book The Curse of Cash . While the €500 is undoubtedly popular with organized crime, there is some evidence that regular people use €500s, as Larry White points out here . In the recently published ...

This post is about the dismantling of the rupee-zone between 1947-49, an historical event that is especially topical in light of two modern monetary projects: Narendra Modi's poorly-executed 2016 demonetization and a potential eurozone breakup. Thanks to a recommendation by Amol Agrawal, who blogs at the excellent Mostly Economics , I've been pecking away at the 900-page history of the Reserve Bank of India, although I have to confess that I've spent most of my time on the chapter on the partition period. For those who don't know, India and Pakistan weren't always independent countries. Up until partition in August 1947, each was part of British India, a British colony. The rupee, which was issued by the Reserve Bank of India (RBI), was the sole medium of exchange in British India. By mid-1949, less than two years after partition, usage of RBI-issued rupees had been successfully limited to the newly-created state of India. As for Pakistan, it had managed to erect i...

Remember when shadow banks regularly outcompeted stodgy banks because they could evade onerous regulatory requirements? Not any more. In negative rate land, regulatory requirements are a blessing for banks. Shadow banks want in, not out. In the old days, central banks imposed a tax on banks by requiring them to maintain reserves that paid zero percent interest. This tax was particularly burdensome during the inflationary 1970s when short term rates rose into the teens. The result was that banks had troubles passing on higher rates to savers, helping to drive the growth of the nascent U.S. money market mutual fund industry. Unlike banks, MMMFs didn't face reserve requirements and could therefore offer higher deposit rates to their customers. To help level the playing field between regulated banks and so-called shadow banks, a number of central banks (including the Bank of Canada) removed the tax by no longer setting a reserve requirement. While the Federal Reserve didn't go as f...

This 2 euro coin is issued by Monaco, which is not a member of the Eurozone Grexit isn't what people take it to be. The standard narrative is that Greece is approaching a fork in the road. It must either stay in the euro or adopt a new currency. I don't think this is an entirely accurate description of the actual fork that Greeks face. Over the next few months, Greece will either: A) stay a member in good-standing of the institution called the "Eurozone" and continue to legitimately use that institution's currency, the euro, or B) leave the Eurozone while continuing to use the euro 'illegitimately.'* This means either the status quo of de jure (official) euroization or de facto (unofficial) euroization. In both cases, the euro stays. The probability of a new drachma emerging is awfully low. The widespread idea that a sick country can rapidly debut a new currency and, more importantly, have that currency be universally adopted as a unit of account is mag...

Unfathomable Depths by Ibai Acevedo Denmark's Nationalbank and the Swiss National Bank are the world's most interesting central banks right now. As the two of them push their deposit rates to record low levels of -0.75%, they're testing the market's limit for bearing negative nominal interest rates. The ECB takes second prize as it has been maintaining a -0.2% deposit rate since September 2014. At some point, investors will flee deposits into 0%-yielding cash. This marks the effective lower bound to rates. Has mass paper storage begun? The last time I ran through the data was in my  monetary canaries post , which was inconclusive. Let's take a quick glance at the updated data. To gauge where we are relative to the effective lower bound, I'm most interested in the demand for large denomination notes, which bear the lowest costs of storage. Once a central bank reduces its deposit rate so deep into negative territory that the carrying cost of deposits exceeds the...

Central bankers are usually classified as either hawks or doves. This post is devoted to a third and rare breed; today's monetary policy canaries. Having taken their respective deposit rates to -0.75%, deeper into negative territory than any other bank in history (save the Swedes), the Swiss National Bank and Denmark's Nationalbank are the canaries of the central banking world, plumbing depths that everyone assumes to be dangerous. Other central bankers, in particular the ECB's Mario Draghi, will no doubt be watching the Swiss and Danes quite closely. The information these two nations generate as they go deep into the bowels of negative rate territory will give a good indication of the level to which the others can safely reduce their own rates before hitting their respective effective lower bounds. That there is an effective lower bound to rates stems from the fact that at some negative nominal interest rate, everyone will choose to convert deposits into cash, preferring...

The upcoming Greek election has renewed interest in the idea of Grexit. This option is often presented to the Greek public as desirable given that it would restore an independent monetary policy to the nation. Beware, this is dangerous advice. The euro isn't a glove that you can take on and off, it's a Chinese finger trap; once in, it's tricky to get out. Even if Greece were to formally leave the euro, odds are that it would remain unofficially euroized, leaving it just as bereft of an independent monetary policy as before. The real trade off in a Grexit-or-not scenario is between formal membership in the euro with some say in monetary policy, no matter how small, or informal membership without any say whatsoever. The optimists, say someone like Hans-Werner Sinn , advise the Greeks to leave the euro and adopt a new currency. The value of this new drachma would immediately collapse. As long as prices in Greece are somewhat sticky, Greek goods & services will become incre...

Having reduced the ECB's overnight target rate to +0.05% and the deposit rate to -0.2%, Mario Draghi confidently told those assembled at Thursday's press conference that the ECB wants to “make sure that there are no more misunderstandings about whether we have reached the lower bound. Now we are at the lower bound.” So it's official, according to its leader the ECB has run out of powder and can't reduce interest rate anymore. But that's simply not true. I figure that the ECB has at least a handful of interest rate reductions left in its arsenal before the true lower bound bites, especially given that it's now adjusting rates in smaller increments of 0.1% and not 0.25%. And if the ECB were to get rid of its pesky issue of €500 notes, it would have a whole extra round of reductions up its sleeve (more on that later). Shame on Draghi for claiming impotence when he actually has plenty of rate ammunition still left. The lower bound starts to bind when interest rat...