The Resolution of International Financial Crises: Private Finance and Public Funds

Over the past year and a half, authors Andy Haldane of the Bank of England and Mark Kruger of the Bank of Canada have been developing a framework for the resolution of international financial crises that aligns incentives for all parties in a way that deals with the crisis and preserves the integrity of the international financial system. The framework is built on principles, not rules. It attempts to be clear about the respective roles and responsibilities of the public and private sectors. A central element in shaping private sector expectations is knowledge that the official sector will behave predictably. Constraints on lending by the International Monetary Fund are a key step in that direction. They ensure that private sector involvement is a crucial part of crisis resolution, and they help encourage debtors and creditors to seek co-operative solutions to a crisis. Characterized by constraints, clarity, and orderliness, the framework has the potential to reduce the incidence and cost of financial crises.

Costs, advantages and drawbacks of the various means of payment

The total macroeconomic costs of the payment instruments used in the points of sale can be estimated to be 2.034 million euros, or 0.74 p.c. of Belgian GDP in 2003. The payment costs arising from cash were 0.58 p.c. of GDP, compared to 0.11 p.c. for debit cards, 0.04 p.c. for credit cards and 0.02 p.c. for the electronic purse Proton. About 50.5 p.c. of the payment costs originate in points of sale, whilst 47.1 p.c. come from the financial sector and 2.3 p.c. from currency-issuing institutions. If the costs of payment instruments are confronted to the transactions carried out, it can be seen that the costs per transaction are similar for three instruments. Costs are lowest for cash, at about 53 eurocents, but this instrument is closely followed by Proton (54 eurocents) and debit cards (55 eurocents). For credit cards, the costs are noticeably higher (2.62 euros). The costs per euro of turnover show that debit cards are the least expensive (1 eurocent), whilst cash, credit cards (at 3 eurocents in both cases), and especially Proton (10 eurocents), generate higher costs. These differences in costs, though, do not give any indication of the savings which could be made by replacing payment instruments with high variable costs with other instruments offering lower ones. The composition of the costs differs significantly between the different payment methods studied. Electronic payment costs are essentially fixed in nature : a significant part of these costs is linked to the infrastructure required for carrying out electronic transactions. The percentage is highest for Proton, with total fixed costs of 83 p.c. Next come credit cards (75 p.c.) and debit cards (61 p.c.). The cost breakdown for cash is far more balanced : 49 p.c. for fixed costs and 51 p.c. for variable costs (25 p.c. depending on the number of transactions and 26 p.c. on the amounts transacted). Variable costs per additional transaction are lowest for electronic purses, followed by cash, then debit cards and credit cards. Variable costs by additional euro of turnover are the highest for cash, since variable costs per transaction increase markedly according to the amount to be paid. In Belgium debit cards do not entail variable costs per additional euro of turnover and therefore give a level development for variable costs in relation to turnover. Essentially, variable costs for cash and debit cards are identical for a transaction of 10.24 euros ; it is better to pay smaller amounts in cash and higher amounts using a debit card. Moreover, it should be pointed out that the costs for using Proton are always lower than those for using cash but as soon as the sum to be paid reaches 53.74 euros, Proton becomes more expensive than using a debit card. It is possible to quantify a possible efficiency improvement in the use of payment instruments through a simulation. In order to do this, an analysis was carried out of the hypothetical replacement of 750 million transactions settled in cash by 250 million transactions (of an average 5 euros) paid by using Proton, and 500 million (of an average of 20 euros) using a debit card. The finding was that the saving would be about 58 million euros or 0.02 p.c. of GDP. Such a saving is rather low, even if a comparison is made at overall cost level (0.74 p.c. of GDP). Only a shift to a cashless society could generate substantial savings. This is, however, a purely theoretical scenario. As its market share shows, cash continues to be the public’s firm favourite : cash transactions make up 81.3 p.c. of point of sale operations. Cash does have intrinsic advantages ; it continues to be the only payment instrument which is universally accepted, basically because of its legal tender status, but also because its use does not require a terminal. Moreover, it can be used for operations between private individuals. Cash guarantees confidentiality in transactions and offers complete security in terms of protecting the private sphere of life. In addition, its use is unlikely to lead to building up excessive debts and lastly, it can also be a factor in social integration. Consumers should be able to continue to choose the payment methods they wish to use freely. Diversifying them contributes to greater flexibility for settling transactions and is therefore socially justified. In the future, efforts to make payment instruments more useful and more efficient will obviously have to be made. The spontaneous development of payments is already on the right lines, given the constant advances made in the area of electronic payments.banknote, cash, credit card, payment card

Economic projections for Belgium – Autumn 2008

Since the publication of the previous forecasts in June 2008, the economic outlook has deteriorated very rapidly, both at global level and for Belgium. The financial tensions which emerged in mid 2007 turned into a serious crisis, and the contagion effects on the real economy proliferated, halting the growth of activity in the advanced economies and causing an abrupt fall in commodity prices. The slowdown in activity which began in mid 2007 as a result of weakening external demand was slightly less marked in Belgium than in the euro area. However, the plummeting confidence indicators show that the deterioration in the international economic situation and the worsening financial crisis will have a more widespread impact on the economy. As in the euro area, activity is predicted to decline in Belgium in late 2008 and early 2009, with a very modest recovery in the ensuing quarters. Thus, real GDP growth is projected to fall from 2.6 p.c. in 2007 to 1.4 p.c. in 2008 and –0.2 p.c. in 2009. Most expenditure categories are affected directly or indirectly by the global financial crisis, and will therefore reflect the sharp growth slowdown in 2009. Exports of goods and services are projected to fall, following the marked deterioration in external demand. After its expansion had been curbed in 2008 by the stagnation of real disposable income caused by rising inflation, private consumption is not expected to grow in 2009, the main factors being the stock market slide and the subsequent increase in the savings ratio, but more generally the deteriorating economic conditions and labour market prospects. In these gloomy circumstances in terms of demand, and in the face of the increased cost of raising finance via bank credit or via share issues, business investment is forecast to decline in 2009, after having been vigorous for more than four years. Investment in housing is likely to maintain the tendency to slow down which began in 2007. On the labour market, net job creation, which had been a significant factor bolstering the economy in the last three years, is likely to dry up in 2009. As an annual average, growth should remain positive thanks to the still favourable trend during 2008. Following a year-on-year increase of 1.8 p.c. in 2007 and 1.5 p.c. in 2008, the rate of employment expansion in persons is projected to fall to 0.2 p.c. in 2009, although supported by a further increased in service vouchers. This expected rise in the average number of persons employed in 2009 corresponds to a 0.3 p.c. reduction in the volume of labour, as firms prefer to start reducing the number of hours worked. The unemployment rate is projected to rise from 6.6 p.c. in the fourth quarter of 2008 to 7.1 p.c. in the fourth quarter of 2009. As an annual average, it is set to increase from 6.7 p.c. in 2008 to 6.9 p.c. in 2009. After having reach a peak of 5.9 p.c. in July 2008, average inflation is likely to diminish from 4.6 p.c. in 2008 to 1.9 p.c. in 2009 on the back of the deceleration in food price rises and the drop in oil prices. The health index is forecast to rise by 4.3 p.c. in 2008 and 2.3 p.c. in 2009. However, inflation is expected to increase in the case of services, particularly as a result of the indirect effect of the energy and food price shocks on transport and restaurants, the linking of certain service price increases to the general level of inflation, e.g. for rents, and the progressive incorporation of labour cost increases. Reflecting both the dip in labour productivity, following the weakness of economic activity in 2008 and 2009, and the continuing sustained increase in hourly labour costs, unit labour costs in the private sector are forecast to rise by 3.1 p.c. in 2007, 3.8 p.c. in 2008 and 3.2 p.c. in 2009, compared to an average annual increase of 0.7 p.c. from 2002 to 2006. For 2009, the growth of 3.3 p.c. in hourly labour costs, assumed for the purpose of this exercise, corresponds essentially to the expected effect of indexation, the latter taking time to respond to the acceleration in inflation measured by the health index. This assumption is in line with that adopted by the Central Economic Council Secretariat, taking account of the adjustment to the outlook for growth and inflation in recent months. It does not in any way anticipate the outcome of the current negotiations between the social partners. According to the latest information, public finances will end the year 2008 with a deficit of 0.9 p.c. of GDP. In the macroeconomic context described above, that deficit is likely to reach 1.7 p.c. of GDP in 2009. The downward trend in the public debt ratio is expected to be interrupted in 2008. At the end of this year, the public debt is forecast at 87.8 p.c. of GDP, or around 4 percentage points above its level at the end of 2007. This increase is due to loans which the Belgian State contracted to finance injections of capital into its financial institutions and the loans which it granted to them. In 2009, the public debt ratio is likely to begin falling again, although more slowly than in previous years taking account of the relative weakness of nominal GDP growth and the increased borrowing requirement.Belgium, macroeconomic projections, Eurosystem

Economic projections for Belgium – Spring 2007

Since the projections published in December 2006, the international environment has remained buoyant. GDP growth in the euro area, which proved stronger than previously expected over the last months, should keep going at a solid pace in 2007. In Belgium, economic activity has been particularly strong in 2006. It should slow down slightly in 2007 and 2008, to return to a rhythm more in line with potential. Overall, real GDP growth is projected to decline from 3 p.c. in 2006, the highest rate for six years, to 2.5 p.c. in 2007. It is expected to be 2.2 p.c. in 2008. Over the whole period covered by the projections, growth should turn out to be more balanced than in 2006, backed by both foreign demand and domestic demand. In particular, although slowing down somewhat in comparison with the vigorous expansion recorded in 2006, private consumption and business investment should expand in line with still supportive demand, income and labour market conditions over the period 2007-2008. Actually, the rate of employment growth appears to be more sustained than in previous upturns. Following an increase of 46,000 units in 2006, domestic employment should grow by another 115,000 jobs or so over the period 2007-2008. With a cumulative decline of 60,000 jobless, the highest number over a two-year period since 1999-2000, the harmonised unemployment rate is projected to fall from 8.2 p.c. in 2006 to 7.2 p.c. in 2008, prolonging a downward movement that begun in 2006. Estimated on the basis of the HICP, overall inflation is forecast to fall markedly, from 2.3 p.c. in 2006 to 1.6 p.c. in 2007 and 1.8 p.c. in 2008. This drop can be explained by the moderating influence exerted by the energy component of the index, stemming from some appeasement of the oil price evolution and from the downward impact of the liberalisation of the gas and electricity markets in Brussels and Wallonia, as well as the new method of recording these energy prices in the consumer price index. The underlying trend in inflation is expected to rise moderately, from 1.6 p.c. in 2006 to 1.9 p.c. in 2007, before falling back to 1.7 p.c. in 2008. The slight acceleration in 2007 is almost exclusively due to increases in excise duties on tobacco and the levy on packaging. Reflecting the slowdown in labour productivity alone, as a result of the net rise in employment, unit labour costs in the private sector are projected to increase somewhat, rising from 1.1 p.c. in 2006 to 1.6 p.c. in 2007 and 2008. Moreover, the growth in hourly labour costs is expected to dip slightly from the 2006 level, coming down from 2.7 p.c. to 2.4 p.c. in 2007 and 2.6 p.c. in 2008. For both of these years, the cumulative increase corresponds to the 5 p.c. target set in the central wage-bargaining agreement, in the absence of information on the outcome of the wage negotiations being conducted in the various joint committees at sectoral level. After showing a surplus of 0.2 p.c. of GDP in 2006, general government accounts are likely to show a slight deficit, of 0.1 p.c. of GDP this year and 0.2 p.c. in 2008. Interest charges should continue to drop and tax revenues are expected to benefit from the promising economic outlook, but these elements are more than entirely offset by the disappearance of the favourable impact of nonrecurrent factors, as well as by a deterioration of the structural primary balance in 2007. The public debt ratio will continue to fall gradually, coming down by some 6 percentage points of GDP over the two years of the forecasting period, to reach 82.7 p.c. of GDP in 2008.Belgium, macroeconomic projections, Eurosystem

Economic projections for Belgium – Autumn 2009

Since the previous forecasts, there have been increasing signs of recovery, in the wake of the most severe recession suffered by the global economy in the last sixty years. Indicators show that confidence has returned since the spring, against a backdrop of easing financial tension, while industrial production and trade have both increased slightly worldwide. Doubts still remain, however, as to the sustainability of the recovery. This recovery has, in fact, largely been driven by budgetary and monetary policy stimulus, along with movements in inventories, the effects of which are temporary. In contrast, unemployment is likely to increase further in most of the advanced economies, with investment remaining low, and this will restrict growth in 2010. In Belgium, the sheer scale of the GDP decline at the end of 2008 and the start of 2009 was historic. However, GDP did rise by 0.5 p.c. in the third quarter, and a revival in business cycle indicators suggests that the economy should continue to grow. The growth rate will remain low, however, given the absence of any vigorous recovery in foreign demand and the anticipated weakness of investment and private consumption, against the backdrop of a deteriorating labour market. GDP is thus set to contract by 3.1 p.c. on average in 2009, before growing by 1 p.c. in 2010. The labour market initially showed a certain degree of resilience in the face of the severe contraction in activity. Job losses and increasing unemployment were contained by the massive use of temporary lay-offs and other methods of reducing working hours. They were also cushioned by a significant drop in company productivity. Employment is likely to fall by 118,000 units between the end of 2008 and the end of 2010. As an annual average, net job losses are forecast at 27,000 and 64,000 persons respectively in 2009 and 2010. The unemployment rate is set to rise from 7 p.c. in 2008 to 9 p.c. in 2010. The deterioration in labour market conditions is expected to result in wage growth moderation. The combination of a severe financial crisis and a generalised decline in economic activity significantly affected both consumers and businesses in 2009. With the exception of public sector consumption and investment, all the main expenditure categories affected GDP negatively. Businesses had to face the synchronised collapse of most foreign markets, with exports contracting by more than 12 p.c. In addition, inventories were reduced significantly. Finally, businesses are likely to cut their investments, due to the unprecedented decline in their capacity utilisation rate in particular, along with modest demand prospects. Consumers are also likely to reign in their expenditure significantly in 2009, both in terms of consumption and investment in housing. This behaviour is largely an expression of great restraint in the face of uncertain prospects for jobs or future incomes. In 2010, the modest recovery in growth is likely to be based on a slight increase in private consumption and exports, and on a turnaround in inventory movements. Private investment adjustment is, however, likely to continue. As in the euro area, inflation in Belgium eased rapidly over the course of 2009, even turning negative from May to November, as a consequence of the significant fall in energy prices in comparison with the previous year. Due to the recent increase in international oil quotations, inflation is expected to return to positive figures at the end of 2009, though remaining low, owing to the rapid attenuation of pressure from import prices and wages. In all, as an annual average, inflation is expected to be 0 p.c. in 2009 and 1.6 p.c. in 2010. In the macroeconomic context depicted above, and in the light of the measures approved by the authorities, e.g. in the budgetary context, the public deficit is expected to reach 6.1 p.c. of GDP in 2009 and 5.4 p.c. in 2010, if there is no change in policy. In 2009 and 2010, the general government debt is expected to record a further sharp rise, though the increase should be slightly lower than the average for the euro area, rising from 89.8 p.c. of GDP in 2008 to 98.1 p.c. in 2009 and 102 p.c. in 2010.Belgium, macroeconomic projections, Eurosystem

Banking Fees in Australia

The Reserve Bank has conducted a survey on bank fees each year since 1997. The results of the latest survey show that banks’ aggregate fee income was unchanged in 2010. Fee income from households declined as exception fee income and ATM revenue fell sharply, while fee income from businesses grew.banking, fees, fee income, exception, ATM, survey