The Reserve Bank of India (RBI) has warned that the asset quality continued to pose some concerns as the growth in non-performing assets (NPAs) outstripped growth in advances, leading to a deterioration of gross NPA ratios.
However, the RBI’s second Financial Stability Report (FSR) also said the financial sector in India remained stress-free notwithstanding intermittent volatility, especially in equity and foreign exchange markets. “This is also displayed by the Financial Stress Indicator for India, which was introduced in the first FSR. Financial institutions remained healthy, credit offtake has picked up, as has profitability, especially in the first half of 2010-11,” the RBI said. The Banking Stability Index points to a healthy improvement in the stability of the banking sector over the past few years. This is corroborated by the results of a range of stress tests undertaken by the RBI, the second FSR said, after assessing the health of India's financial sector.
“These (NPA) ratios deteriorated despite increased write offs and one time settlements. Doubtful and loss assets comprised over 50 per cent of the stock of NPAs indicating the preponderance of sticky advances. Recently, some concerns had arisen in respect of real estate firms allegedly involved in the loan syndication bribery case and the fallout of investigations in regard to issuance of 2G telecom licenses on bank exposures to telecom companies,” the FSR said.
Detailed enquiries have been undertaken though preliminary findings do not point to widespread irregularities or systemic concerns, it said. However, there could be a potential impact on the flow of credit to these sectors as banks adopt a more cautious approach to lending to these segments of the economy, the RBI warned.
Some deterioration in the capital position of banks is evidenced only in case of a very sharp increase from the current NPA levels. Some issues in the financial market microstructure will need to be addressed, it said. “Asset quality of banks and their asset-liability management position continue to warrant monitoring. Regulatory gaps in the non-banking financial sector will need to be plugged. A robust macro prudential framework for identification of systemic risks will need to be set up,” it said.
On the real estate sector, the RBI said, “though the share of credit flowing to real estate has remained stable, the NPAs in real estate sector recorded a rise, thereby underlining the need for more intensive monitoring. The real estate NPAs showed increase of 8 per cent during the quarter ended September 2010.” As against their share of about 60 per cent in the total real estate loans, the residential mortgage NPAs contributed nearly 80 per cent of real estate NPAs as at end September 2010. NPAs in residential mortgages increased on a year on year basis as at end September 2010. However, the gross NPA ratio remained unchanged at about 2.5 per cent.
Source: The Indian Express Limited
http://www.indianexpress.com
Thursday, December 30, 2010
Wednesday, December 29, 2010
93rd annual conference of the Indian Economic Association starts in Panjab University
Chandigrah: Dr C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister has underlined the need for central banks of the developing economics to be transparent and explicit with the objectives of growth and financial stability, having price stability as their dominant objective. "Tying central banks to specific target of inflation may be too restrictive, and many even be counter productive", warned Dr Rangarajan.
He said maintenance of price stability at a level considered appropriate by the central banks themselves was, perhaps, the best approach. By maintaining price stability a central bank can pave the way for fulfilment of other objectives as well over the medium term.
Dr Rangarajan made this suggestion in his inaugural address at the 93rd annual conference of the Indian Economic Association (IEA) being held on the Panjab University campus here today. More than 3000 delegates from all over India and abroad are participating in this three-day event.
Dr Rangarajan said there was a raging debate going on currently on whether the present financial crisis in the west was precipitated by monetary policy failure or regulatory failure. It has been agued that lax monetary policy led to low interest rates which caused many distortions in the system culminating in the crisis.
The macro conditions preceding the crisis which included low real interest rates due to "Great Moderation" with a long period of very stable growth and stable low inflation led to systematic underestimation of risks and very low risks premia in financial markets.
He, however, said those who argue that the crisis was triggered by regulatory failure point to lax regulation and supervision which led to increased leverage, regulatory arbitrage, and less due diligence in loan origination. He said it was interesting to note that the country hit hardest by the current international crisis – United States – had not formally adopted inflation targeting as its objective. On the other hand Canada or Australia which had formally accepted inflation targeting had been affected very little by the crisis, he added.
Dr Sukhadeo Thorat, Chairman, University Grants Commission, and Professor of Economics, Jawaharlal Nehru University, New Delhi in his presidential address stressed the need to modify the nature of the growth to make it more pro-poor and formulate policies to make farm and rural non-farm growth more pro-poor. He said there was also a need to strengthen the present pattern of agricultural growth by increasing the support and incentive for small and marginal farmers.
The per unit growth in agriculture brings greater decline in poverty or self-employed poor farmers than poor non-agricultural households engaged in non-farm production and business, he added.
The strategy for inclusive growth in the Eleventh Plan, he said, is not just a conventional strategy for growth but it is a strategy which aims at a particular type of growth process to meet the objectives of inclusiveness and sustainability.
Earlier, the Panjab University Vice-Chancellor Prof. R.C. Sobti in his welcome address informed the distinguished guests and delegates of the outstanding achievements of the university and its remarkably high ranking status globally (387 among 500 leading educational institutions) and nationally in scientific research (number one in India).
Prof. Sobti said by taking steps towards increasing the number of seats for reservation for the Other Backward Classes for the students in the Panjab University as part of university's obligation under the Central Education Institutions Act was in a way a tribute to the father of the nation, Mahatma Gandhi's and realization of his ideal of Swaraj. He said the university has already received a grant of Rs.150 crore for its development projects and hoped the UGC chairperson would use his good offices in the early release of another 58 crore needed urgently.
A documentary of the Panjab University prepared by the University's School of Communication Studies was also screened to the delegates which was highly applauded by all.
On this occasion mementoes were presented to honour Dr. C. Rangarajan, Dr. Anil Kumar Thakur, secretary and treasurer, IEA; Prof. M. Madaiah, former president, IEA; Prof. L.K. Mohana Rao, Principal, Andhra University College of Arts and Commerce, Andhra University, Vishakapatnam (AP); Prof. Sukhdeo Thorat, Chairman, U.G.C. and President, IEA.; Prof. G.K. Chadha, Chief Executive Officer, South Asian University, New Delhi; Prof. T.S. Papola, visiting professor, ISID, New Delhi; Prof. H.S. Shergill, former Professor of Economics, Panjab University; Prof. R.C. Sobti, Vice-Chancellor, P.U.; Mrs. Rangarajan and Mrs. Chadha; Mrs. Madaiah and Dr. Ajit Singh from Cambridge University, U.K.
Prof. L.K. Mohana Rao, Principal, Andhra University College of Arts and Commerce, Vishakapatnam and vice-president of Indian Economic Association read out the citation Prof. Sukhdeo Thorat presented the Sushila Thakur Merit Award for the Best Women Paper Writer to Ms. Harwinder Kaur of Punjabi University, Patiala. On this occasion various editions of Indian Economic Journal and so many books on economics were also released by Prof. Sukhdeo Thorat.
Prof. Thorat also released a book jointly written by Prof. Sucha Singh Gill, Prof. Gurmail Singh and Prof. H.S. Shergill and a Souvenir of the Panjab University. In his lecture, Dr. Anil Kumar Thakur, Secretary and Treasurer of the IEA highlighted in detail the activities and achievements of Indian Economic Association. He said that the IEA had more than 4600 members in India and abroad, at present.
The Indian Economic Association (IEA), the oldest and largest academic-discussion-led body of economists in India, which was founded by Dr. Gilbert State, Prof. C.J. Hamilton and Prof. Percy Ansely of the three Presidency Universities of Madras, Bomaby and Calcutta in 1917, has become worldwide. Its academic fragrance has already crossed the boundary line of India. 'A study of Village Economics' authored by eminent scholar Prof. V.K. Kale was the first paper for the IEA. The current periodical 'Indian Economic Journal' was first published in 1952 by Prof. C.N. Vakil, R. Bala Krishna and V.B. Krishnamuthi, and Prof. P.R. Brhmanda was a long service editor of this esteemed journal. Presently the Indian Economic Journal has reached top ranking under the stewardship of Prof. V.R. Panchmukhi among academic journals.
IEA's former presidents include renowned scholars like Dr Manmohan Singh, Prime Minister of India, Prof. Amartya Sen the Nobel Laureate, Prof. V.K.R.V. Rao, Prof. G.S. Bhalla, Prof. G.K. Chadha and Dr I.G. Patel, all eminent economists. Prof. Sukhadeo Thorat, Chairman, University Grants Commission is the President of Indian Economic Association currently. First time, 43rd Annual conference was organised on PU campus in December 1960 and then 78th annual conference of the IEA was held in December 1995.
Prof. Gurmail Singh, chairperson, department of economics and local organizing secretary of the conference proposed a vote of thanks.
Source: India Education Diary
http://indiaeducationdiary.in
He said maintenance of price stability at a level considered appropriate by the central banks themselves was, perhaps, the best approach. By maintaining price stability a central bank can pave the way for fulfilment of other objectives as well over the medium term.
Dr Rangarajan made this suggestion in his inaugural address at the 93rd annual conference of the Indian Economic Association (IEA) being held on the Panjab University campus here today. More than 3000 delegates from all over India and abroad are participating in this three-day event.
Dr Rangarajan said there was a raging debate going on currently on whether the present financial crisis in the west was precipitated by monetary policy failure or regulatory failure. It has been agued that lax monetary policy led to low interest rates which caused many distortions in the system culminating in the crisis.
The macro conditions preceding the crisis which included low real interest rates due to "Great Moderation" with a long period of very stable growth and stable low inflation led to systematic underestimation of risks and very low risks premia in financial markets.
He, however, said those who argue that the crisis was triggered by regulatory failure point to lax regulation and supervision which led to increased leverage, regulatory arbitrage, and less due diligence in loan origination. He said it was interesting to note that the country hit hardest by the current international crisis – United States – had not formally adopted inflation targeting as its objective. On the other hand Canada or Australia which had formally accepted inflation targeting had been affected very little by the crisis, he added.
Dr Sukhadeo Thorat, Chairman, University Grants Commission, and Professor of Economics, Jawaharlal Nehru University, New Delhi in his presidential address stressed the need to modify the nature of the growth to make it more pro-poor and formulate policies to make farm and rural non-farm growth more pro-poor. He said there was also a need to strengthen the present pattern of agricultural growth by increasing the support and incentive for small and marginal farmers.
The per unit growth in agriculture brings greater decline in poverty or self-employed poor farmers than poor non-agricultural households engaged in non-farm production and business, he added.
The strategy for inclusive growth in the Eleventh Plan, he said, is not just a conventional strategy for growth but it is a strategy which aims at a particular type of growth process to meet the objectives of inclusiveness and sustainability.
Earlier, the Panjab University Vice-Chancellor Prof. R.C. Sobti in his welcome address informed the distinguished guests and delegates of the outstanding achievements of the university and its remarkably high ranking status globally (387 among 500 leading educational institutions) and nationally in scientific research (number one in India).
Prof. Sobti said by taking steps towards increasing the number of seats for reservation for the Other Backward Classes for the students in the Panjab University as part of university's obligation under the Central Education Institutions Act was in a way a tribute to the father of the nation, Mahatma Gandhi's and realization of his ideal of Swaraj. He said the university has already received a grant of Rs.150 crore for its development projects and hoped the UGC chairperson would use his good offices in the early release of another 58 crore needed urgently.
A documentary of the Panjab University prepared by the University's School of Communication Studies was also screened to the delegates which was highly applauded by all.
On this occasion mementoes were presented to honour Dr. C. Rangarajan, Dr. Anil Kumar Thakur, secretary and treasurer, IEA; Prof. M. Madaiah, former president, IEA; Prof. L.K. Mohana Rao, Principal, Andhra University College of Arts and Commerce, Andhra University, Vishakapatnam (AP); Prof. Sukhdeo Thorat, Chairman, U.G.C. and President, IEA.; Prof. G.K. Chadha, Chief Executive Officer, South Asian University, New Delhi; Prof. T.S. Papola, visiting professor, ISID, New Delhi; Prof. H.S. Shergill, former Professor of Economics, Panjab University; Prof. R.C. Sobti, Vice-Chancellor, P.U.; Mrs. Rangarajan and Mrs. Chadha; Mrs. Madaiah and Dr. Ajit Singh from Cambridge University, U.K.
Prof. L.K. Mohana Rao, Principal, Andhra University College of Arts and Commerce, Vishakapatnam and vice-president of Indian Economic Association read out the citation Prof. Sukhdeo Thorat presented the Sushila Thakur Merit Award for the Best Women Paper Writer to Ms. Harwinder Kaur of Punjabi University, Patiala. On this occasion various editions of Indian Economic Journal and so many books on economics were also released by Prof. Sukhdeo Thorat.
Prof. Thorat also released a book jointly written by Prof. Sucha Singh Gill, Prof. Gurmail Singh and Prof. H.S. Shergill and a Souvenir of the Panjab University. In his lecture, Dr. Anil Kumar Thakur, Secretary and Treasurer of the IEA highlighted in detail the activities and achievements of Indian Economic Association. He said that the IEA had more than 4600 members in India and abroad, at present.
The Indian Economic Association (IEA), the oldest and largest academic-discussion-led body of economists in India, which was founded by Dr. Gilbert State, Prof. C.J. Hamilton and Prof. Percy Ansely of the three Presidency Universities of Madras, Bomaby and Calcutta in 1917, has become worldwide. Its academic fragrance has already crossed the boundary line of India. 'A study of Village Economics' authored by eminent scholar Prof. V.K. Kale was the first paper for the IEA. The current periodical 'Indian Economic Journal' was first published in 1952 by Prof. C.N. Vakil, R. Bala Krishna and V.B. Krishnamuthi, and Prof. P.R. Brhmanda was a long service editor of this esteemed journal. Presently the Indian Economic Journal has reached top ranking under the stewardship of Prof. V.R. Panchmukhi among academic journals.
IEA's former presidents include renowned scholars like Dr Manmohan Singh, Prime Minister of India, Prof. Amartya Sen the Nobel Laureate, Prof. V.K.R.V. Rao, Prof. G.S. Bhalla, Prof. G.K. Chadha and Dr I.G. Patel, all eminent economists. Prof. Sukhadeo Thorat, Chairman, University Grants Commission is the President of Indian Economic Association currently. First time, 43rd Annual conference was organised on PU campus in December 1960 and then 78th annual conference of the IEA was held in December 1995.
Prof. Gurmail Singh, chairperson, department of economics and local organizing secretary of the conference proposed a vote of thanks.
Source: India Education Diary
http://indiaeducationdiary.in
Tuesday, December 28, 2010
Germany's Schaeuble:Euro-zone Nations Must Focus On Debt Cuts-Paper
BRUSSELS (Dow Jones)--Euro-zone countries must reduce their debt levels and the European Union must levy harsher sanctions on those who fail to follow advice on doing so, German Finance Minister Wolfgang Schaeuble wrote in an opinion column for Belgian newspaper L'Echo.
"The European Monetary Union will not function if certain countries keep running budget deficits and weakening their competitiveness at the expense of the euro's stability," he wrote in an article published Tuesday.
Schaeuble said the European Financial Stability Mechanism is a temporary measure while the euro zone fixes the "fundamental faults" in the stability and growth pact, the fiscal rules to which countries in the currency bloc must adhere.
"Countries who repeatedly ignore recommendations designed to reduce their excessive deficits, or who manipulate official statistics, would see their EU subsidies frozen and voting rights suspended," he wrote.
Source: http://online.wsj.com
"The European Monetary Union will not function if certain countries keep running budget deficits and weakening their competitiveness at the expense of the euro's stability," he wrote in an article published Tuesday.
Schaeuble said the European Financial Stability Mechanism is a temporary measure while the euro zone fixes the "fundamental faults" in the stability and growth pact, the fiscal rules to which countries in the currency bloc must adhere.
"Countries who repeatedly ignore recommendations designed to reduce their excessive deficits, or who manipulate official statistics, would see their EU subsidies frozen and voting rights suspended," he wrote.
Source: http://online.wsj.com
Monday, December 27, 2010
Fed's Free Money Lures This Important Writer: Kevin Hassett
If AIG was too important to fail, can’t I be, too?
The U.S. Financial Stability Oversight Council is working to identify parts of our financial system that can’t be allowed to go under. Once called “too big to fail,” these companies are now referred to as “systemically important” and fall under the authority of the Federal Reserve.
Therein lies my opportunity.
I’m no American International Group Inc., the huge insurer that needed a $182.3 billion federal rescue to survive its central role in the financial crisis. So no, I’m not too big. But I’m important.
See, I’m a Ph.D. economist with a reputation for parsimony fostered by a somewhat infamous wardrobe. My teenage son, for instance, can’t believe I still wear “that sweater.”
If I were to default on my debts, the world would see that even trained economists who spend little on their appearance can’t make ends meet. Imagine the global panic, the massive selloff, that would follow.
Clearly, then, I meet the definition of systemically important. Not convinced? The Dodd-Frank financial law, in creating the Financial Stability Oversight Council, empowered it to consider, in addition to a company’s leverage, size and exposure, “any other risk-related factors the council deems appropriate.”
Bear Stearns Precedent
What might those factors be? Given what has already happened, it could be anything at all. And when it comes to determining whom to lend money to, suffice it to say that if we can lend to Bear Stearns and AIG at ridiculously low interest rates, we can lend to me.
Sure, I’ve been paying my bills lately, but given the line of cut-rate credit waiting for me at the discount window should I need it, my creditors are rightly worried that I might stop payment at any moment.
Once I have access to the Fed, I will borrow at close to zero percent interest and invest in longer-term Treasuries that pay a higher interest rate. A few hundred billion dollars of such transactions, and I’ll be looking at some nice profits.
And for that I say: Thanks, America!
We shouldn’t fight the spread of the Fed’s power in the New Year; we should embrace it, rejoice in it, even baste ourselves in it. Looking back at the past two years with the benefit of hindsight -- that phrase always makes people think the forthcoming observation must be wisdom-filled -- it becomes clear that policy makers have not been creative enough. The policy that could take this fledgling recovery and turn it into an unprecedented boom has eluded them.
But I’m here now.
Not Stimulating
Many of our leading financial institutions have been handed the same free cash I’m seeking, but they’re sitting on it, not making loans, slowly recapitalizing after incurring massive losses. So much for stimulus.
While I might seem small by contrast, I’m a better risk than many of the troubled institutions that have been playing this game. I have no huge losses to tie me down. Right here, right now, I promise that I will spend every penny of my multibillion-dollar windfall. Hello, new Bentley. Ready for a spin?
Why should you, dear reader, support me in my quest to achieve systemic importance?
Once our financial overseers realize how stimulative I become, they will want to share their largesse with you as well. Before long, we’ll all be important, and the free money that previously was limited to banks will be available to us all. How great is that?
In the old days, we had to work hard to make ends meet. If the broad new powers granted by Congress are used to declare me systemically important, those sweat-filled days will be gone forever. The path to your personal fortune will become no more laborious than the well-worn path to your refrigerator.
Source: Bloomberg
http://www.bloomberg.com
The U.S. Financial Stability Oversight Council is working to identify parts of our financial system that can’t be allowed to go under. Once called “too big to fail,” these companies are now referred to as “systemically important” and fall under the authority of the Federal Reserve.
Therein lies my opportunity.
I’m no American International Group Inc., the huge insurer that needed a $182.3 billion federal rescue to survive its central role in the financial crisis. So no, I’m not too big. But I’m important.
See, I’m a Ph.D. economist with a reputation for parsimony fostered by a somewhat infamous wardrobe. My teenage son, for instance, can’t believe I still wear “that sweater.”
If I were to default on my debts, the world would see that even trained economists who spend little on their appearance can’t make ends meet. Imagine the global panic, the massive selloff, that would follow.
Clearly, then, I meet the definition of systemically important. Not convinced? The Dodd-Frank financial law, in creating the Financial Stability Oversight Council, empowered it to consider, in addition to a company’s leverage, size and exposure, “any other risk-related factors the council deems appropriate.”
Bear Stearns Precedent
What might those factors be? Given what has already happened, it could be anything at all. And when it comes to determining whom to lend money to, suffice it to say that if we can lend to Bear Stearns and AIG at ridiculously low interest rates, we can lend to me.
Sure, I’ve been paying my bills lately, but given the line of cut-rate credit waiting for me at the discount window should I need it, my creditors are rightly worried that I might stop payment at any moment.
Once I have access to the Fed, I will borrow at close to zero percent interest and invest in longer-term Treasuries that pay a higher interest rate. A few hundred billion dollars of such transactions, and I’ll be looking at some nice profits.
And for that I say: Thanks, America!
We shouldn’t fight the spread of the Fed’s power in the New Year; we should embrace it, rejoice in it, even baste ourselves in it. Looking back at the past two years with the benefit of hindsight -- that phrase always makes people think the forthcoming observation must be wisdom-filled -- it becomes clear that policy makers have not been creative enough. The policy that could take this fledgling recovery and turn it into an unprecedented boom has eluded them.
But I’m here now.
Not Stimulating
Many of our leading financial institutions have been handed the same free cash I’m seeking, but they’re sitting on it, not making loans, slowly recapitalizing after incurring massive losses. So much for stimulus.
While I might seem small by contrast, I’m a better risk than many of the troubled institutions that have been playing this game. I have no huge losses to tie me down. Right here, right now, I promise that I will spend every penny of my multibillion-dollar windfall. Hello, new Bentley. Ready for a spin?
Why should you, dear reader, support me in my quest to achieve systemic importance?
Once our financial overseers realize how stimulative I become, they will want to share their largesse with you as well. Before long, we’ll all be important, and the free money that previously was limited to banks will be available to us all. How great is that?
In the old days, we had to work hard to make ends meet. If the broad new powers granted by Congress are used to declare me systemically important, those sweat-filled days will be gone forever. The path to your personal fortune will become no more laborious than the well-worn path to your refrigerator.
Source: Bloomberg
http://www.bloomberg.com
Friday, December 24, 2010
Arlington Arrives: Introducing Santa Barbara's Arlington Financial Advisors
Arlington Financial Advisors, a new group of entrepreneurs, didn't need to burst onto the scene in Santa Barbara when they opened for business a couple weeks ago.
That's because they're largely doing the same work as they did mere days before, and for largely the same client base.
The difference?
The close-knit team at Arlington Financial Advisors has taken its tried-and-true methodology out from under the purview of finance giant Merrill Lynch, and begun practice as an independent firm.
Arlington wants to provide the same top-notch service, looking out for its clients' financial well-being, but ultimately wanted more stability for its client base than working directly for a major national firm allowed.
"We want to be proud of where we work, not read a headline and get 15 phone calls about some person out of my control buying [an extravagant] trashcan," said Dianne Duva, a Certified Financial Planner and one of the five founding partners of Arlington.
The comment was a callback to Merrill Lynch's former CEO John Thain, who famously spent $1 million on renovating his office, including $1,200 on a wastebasket, during one of the most tumultuous economic periods of the modern era.
Duva says that she, along with partners Wells Hughes, John Lorenz, Arthur Swalley, and Joseph Weiland, started kicking around the idea of jumping ship as early as 2008.
The financial markets were experiencing instability, and decisions by higher-ups—even non-trashcan related—weren't doing the team any favors when it came to reassuring clients through difficult economic times.
The fact that the team was subjected to a new upper-level manager about every 18 months also didn't promote consistency.
For the team that would form Arlington, it became a matter of what they could do to provide more stability for clients.
The team's own staffing continuity was certainly there; Duva, the newest member of the team, has been on board for more than 10 years.
The team explored several options, such as joining with another of the major players.
"It would have been more of the same thing, with upper-level management potentially making bad decisions that would make our clients nervous," said Duva. "So we went the independent route."
Thus Arlington Financial Advisors was born.
"We are an independent, boutique firm that helps individuals and families oversee their financial lives," explained Duva.
She describes the business as "a full service model" that puts a spotlight on a different aspect of a client's financial stability every quarter, from assets and investment portfolios to insurance and tax planning.
They help ensure nothing fall through the cracks as they aim to help clients achieve financial goals, even advising on what those goals should be.
With the products and services part of the business down pat, the challenge for this team is to exist as an independent entity, and all that entails. They've tackled important obstacles, including finding a bank to clear through (they went with Wells Fargo) and securing office space; they're still hashing out some of the day-to-day items.
Swalley, Arlington's director of investments, said that his only fear in in leaving Merrill was the potential loss of operational efficiency when it came to covering overhead and getting deals on basic business items.
"I was worried that things wouldn’t be as efficient, that they would cost a lot more on our own," Swalley shared. "But there's great support in the area for local business. Turns out it's even better in Santa Barbara for local business than I expected."
Arlington's office, at 100 E. De La Guerra, is certainly a professional space, but also has certain eclectic, homey qualities.
The design of the space—mostly modest-sized rooms; a circuitous layout; a rather quaint kitchen; an interesting chandelier in the conference room—certainly speak more to State Street than Wall Street.
The comforting, at-home feel of the space is in line with how Duva describes the firm's client base.
"We target nice people that we want to work with. We have a philosophy that since we spend more time at work than we do at home, we want to love the people that we work with ... and really our clients become part of our family."
Duva says that the firm's hands-on approach makes a real difference, and is both key to the loyalty of clients that have made the transition and the word of mouth that encourages new business.
"We have that service model that most financial planning and investment firms do not have," she explained, saying that Arlington's concerns go beyond the portfolio, adding that "we're trying to make sure that your life is taken care of."
So now the challenge, along with the logistics of doing business as an independent entity, is to enhance client experience.
"How do we take an already great platform and make it better? What will we do to make the client experience better? Because, really, our clients are what matter."
Keeping that priority from the get-go seems to have worked in Arlington's favor.
Duva says that nearly all of the clients that the new firm has been in touch with have decided to make the switch from Merrill along with them.
"That's the fear, that you make this move and that the clients don't come with you," she said. "If we had known how overwhelmingly positive our clients' reactions would have been, we probably have done it sooner."
"Honestly, it's been affirming, and a wonderful experience," she emphasized. "We couldn’t be happier."
Source: The Daily Sound
http://www.thedailysound.com
That's because they're largely doing the same work as they did mere days before, and for largely the same client base.
The difference?
The close-knit team at Arlington Financial Advisors has taken its tried-and-true methodology out from under the purview of finance giant Merrill Lynch, and begun practice as an independent firm.
Arlington wants to provide the same top-notch service, looking out for its clients' financial well-being, but ultimately wanted more stability for its client base than working directly for a major national firm allowed.
"We want to be proud of where we work, not read a headline and get 15 phone calls about some person out of my control buying [an extravagant] trashcan," said Dianne Duva, a Certified Financial Planner and one of the five founding partners of Arlington.
The comment was a callback to Merrill Lynch's former CEO John Thain, who famously spent $1 million on renovating his office, including $1,200 on a wastebasket, during one of the most tumultuous economic periods of the modern era.
Duva says that she, along with partners Wells Hughes, John Lorenz, Arthur Swalley, and Joseph Weiland, started kicking around the idea of jumping ship as early as 2008.
The financial markets were experiencing instability, and decisions by higher-ups—even non-trashcan related—weren't doing the team any favors when it came to reassuring clients through difficult economic times.
The fact that the team was subjected to a new upper-level manager about every 18 months also didn't promote consistency.
For the team that would form Arlington, it became a matter of what they could do to provide more stability for clients.
The team's own staffing continuity was certainly there; Duva, the newest member of the team, has been on board for more than 10 years.
The team explored several options, such as joining with another of the major players.
"It would have been more of the same thing, with upper-level management potentially making bad decisions that would make our clients nervous," said Duva. "So we went the independent route."
Thus Arlington Financial Advisors was born.
"We are an independent, boutique firm that helps individuals and families oversee their financial lives," explained Duva.
She describes the business as "a full service model" that puts a spotlight on a different aspect of a client's financial stability every quarter, from assets and investment portfolios to insurance and tax planning.
They help ensure nothing fall through the cracks as they aim to help clients achieve financial goals, even advising on what those goals should be.
With the products and services part of the business down pat, the challenge for this team is to exist as an independent entity, and all that entails. They've tackled important obstacles, including finding a bank to clear through (they went with Wells Fargo) and securing office space; they're still hashing out some of the day-to-day items.
Swalley, Arlington's director of investments, said that his only fear in in leaving Merrill was the potential loss of operational efficiency when it came to covering overhead and getting deals on basic business items.
"I was worried that things wouldn’t be as efficient, that they would cost a lot more on our own," Swalley shared. "But there's great support in the area for local business. Turns out it's even better in Santa Barbara for local business than I expected."
Arlington's office, at 100 E. De La Guerra, is certainly a professional space, but also has certain eclectic, homey qualities.
The design of the space—mostly modest-sized rooms; a circuitous layout; a rather quaint kitchen; an interesting chandelier in the conference room—certainly speak more to State Street than Wall Street.
The comforting, at-home feel of the space is in line with how Duva describes the firm's client base.
"We target nice people that we want to work with. We have a philosophy that since we spend more time at work than we do at home, we want to love the people that we work with ... and really our clients become part of our family."
Duva says that the firm's hands-on approach makes a real difference, and is both key to the loyalty of clients that have made the transition and the word of mouth that encourages new business.
"We have that service model that most financial planning and investment firms do not have," she explained, saying that Arlington's concerns go beyond the portfolio, adding that "we're trying to make sure that your life is taken care of."
So now the challenge, along with the logistics of doing business as an independent entity, is to enhance client experience.
"How do we take an already great platform and make it better? What will we do to make the client experience better? Because, really, our clients are what matter."
Keeping that priority from the get-go seems to have worked in Arlington's favor.
Duva says that nearly all of the clients that the new firm has been in touch with have decided to make the switch from Merrill along with them.
"That's the fear, that you make this move and that the clients don't come with you," she said. "If we had known how overwhelmingly positive our clients' reactions would have been, we probably have done it sooner."
"Honestly, it's been affirming, and a wonderful experience," she emphasized. "We couldn’t be happier."
Source: The Daily Sound
http://www.thedailysound.com
Thursday, December 23, 2010
It's reassuring that regulators are still worried about financial stability
The fact remains that the old risks have not all gone away, and upon close examination there are some new ones to fret about, too
The Bank of England's Financial Stability Report must be a tricky thing to put together. Its purpose is to lay bare the risks to the financial system, in the hope of encouraging remedial action and improving market transparency. But there is a thin line between warning of risks, in order to mitigate them, and raising the alarm too loudly and inducing a panic.
Furthermore, the steady increase in the Bank's responsibilities since the financial crisis has been such that its senior executives must now lie in bed at night not only worrying about the risks to the system, but worrying about which risks to worry about. And that is rather how I felt after reading Thursday's Financial Stability Report.
Since 2009, the Bank has had a much keener focus on financial stability, under the still new-ish Financial Stability Committee chaired by Paul Tucker - a recognition of the failure to pay sufficient attention to the big picture, rather than what individual banks were doing, in the run-up to the crisis. Europe-wide scrutiny of the financial system will also grow more intense under the new European Systemic Risk Board.
The Financial Stability Committee is laudably thorough both in categorising the manifold risks to the system and in attempting to gauge their severity. It is true that British banks have made considerable progress in raising the large amounts of financing they will need to meet new capital requirements, and that low interest rates and obliging banks have combined to keep default and repossession rates at surprisingly low levels; but as the Report points out, the fact remains that the old risks have not all gone away, and upon close examination there are some new ones to fret about, too.
Indeed, some of the old worries are still quite scary: British banks are in better shape than many of their European counterparts, but we should not be complacent, now that we know how swiftly contagion can spread; banks still have a lot of financing to do; and a double-whammy of higher interest rates and slower economic recovery could push households and companies over the brink.
The Report also highlights some interesting new risks, quite a few of which are the result of actions to tackle the old ones. That does not mean that it is wrong to attempt regulatory reform. In fact, I find it rather reassuring that the regulator is min
dful of the way that undesirable incentives are inevitably created by new rules: failure to think through the implications of, for example, capital requirements helped create the conditions for the financial crisis.
The Bank now recognises that financial institutions will always try to keep a step ahead, so regulators must also move rapidly. In fact, the Bank wants new powers to adapt rules and range more widely. This makes sense: the recent tightening of bank rules will inevitably push more risky activities outside the regulated financial system, into what is known loosely as the "shadow" banking system. But, again, the Bank must perform a balancing act. Financial stability requires stable rules which allow banks, and their clients, to plan for the long term.
In fact, parts of the shadow banking system will be indirectly constrained by the new rules anyway. Hedge funds, for example, which relied on big, cheap bank credit lines to take highly leveraged bets on market movements will find that they can no longer do so. Not because anyone has told them not to, but because new capital rules will make it uneconomic for the banks to lend to them on such favourable terms.
But the Bank's concerns are justified. Similarly, the post-crisis channelling of trading and settlement through central counter-parties, which was designed to reduce counter-party risk, will also concentrate risk in a single entity. Another unintended consequence - of interest rate policy rather than regulation - has been to encourage yield-hungry investors to take more risks in emerging markets, again increasing systemic risk.
In relative terms, the health of the British banking system has improved in the past year: British banks have higher capital ratios than counterparts in either the US, Germany or France, as well as Spanish and Irish banks. But there is always a flipside, it seems: weakness of some of these carries its own dangers for the financial system.
Our regulators remain nervous – and I prefer them that way. After all, the April 2007 report stated that "the UK financial system remains highly resilient, with banks well capitalised and highly profitable. But strong flows into riskier assets and a gradual increase in corporate indebtedness have caused risks to the UK financial system to edge up."
By Tracy Corrigan
Source: Telegraph Media Group Limited
http://www.telegraph.co.uk
The Bank of England's Financial Stability Report must be a tricky thing to put together. Its purpose is to lay bare the risks to the financial system, in the hope of encouraging remedial action and improving market transparency. But there is a thin line between warning of risks, in order to mitigate them, and raising the alarm too loudly and inducing a panic.
Furthermore, the steady increase in the Bank's responsibilities since the financial crisis has been such that its senior executives must now lie in bed at night not only worrying about the risks to the system, but worrying about which risks to worry about. And that is rather how I felt after reading Thursday's Financial Stability Report.
Since 2009, the Bank has had a much keener focus on financial stability, under the still new-ish Financial Stability Committee chaired by Paul Tucker - a recognition of the failure to pay sufficient attention to the big picture, rather than what individual banks were doing, in the run-up to the crisis. Europe-wide scrutiny of the financial system will also grow more intense under the new European Systemic Risk Board.
The Financial Stability Committee is laudably thorough both in categorising the manifold risks to the system and in attempting to gauge their severity. It is true that British banks have made considerable progress in raising the large amounts of financing they will need to meet new capital requirements, and that low interest rates and obliging banks have combined to keep default and repossession rates at surprisingly low levels; but as the Report points out, the fact remains that the old risks have not all gone away, and upon close examination there are some new ones to fret about, too.
Indeed, some of the old worries are still quite scary: British banks are in better shape than many of their European counterparts, but we should not be complacent, now that we know how swiftly contagion can spread; banks still have a lot of financing to do; and a double-whammy of higher interest rates and slower economic recovery could push households and companies over the brink.
The Report also highlights some interesting new risks, quite a few of which are the result of actions to tackle the old ones. That does not mean that it is wrong to attempt regulatory reform. In fact, I find it rather reassuring that the regulator is min
dful of the way that undesirable incentives are inevitably created by new rules: failure to think through the implications of, for example, capital requirements helped create the conditions for the financial crisis.
The Bank now recognises that financial institutions will always try to keep a step ahead, so regulators must also move rapidly. In fact, the Bank wants new powers to adapt rules and range more widely. This makes sense: the recent tightening of bank rules will inevitably push more risky activities outside the regulated financial system, into what is known loosely as the "shadow" banking system. But, again, the Bank must perform a balancing act. Financial stability requires stable rules which allow banks, and their clients, to plan for the long term.
In fact, parts of the shadow banking system will be indirectly constrained by the new rules anyway. Hedge funds, for example, which relied on big, cheap bank credit lines to take highly leveraged bets on market movements will find that they can no longer do so. Not because anyone has told them not to, but because new capital rules will make it uneconomic for the banks to lend to them on such favourable terms.
But the Bank's concerns are justified. Similarly, the post-crisis channelling of trading and settlement through central counter-parties, which was designed to reduce counter-party risk, will also concentrate risk in a single entity. Another unintended consequence - of interest rate policy rather than regulation - has been to encourage yield-hungry investors to take more risks in emerging markets, again increasing systemic risk.
In relative terms, the health of the British banking system has improved in the past year: British banks have higher capital ratios than counterparts in either the US, Germany or France, as well as Spanish and Irish banks. But there is always a flipside, it seems: weakness of some of these carries its own dangers for the financial system.
Our regulators remain nervous – and I prefer them that way. After all, the April 2007 report stated that "the UK financial system remains highly resilient, with banks well capitalised and highly profitable. But strong flows into riskier assets and a gradual increase in corporate indebtedness have caused risks to the UK financial system to edge up."
By Tracy Corrigan
Source: Telegraph Media Group Limited
http://www.telegraph.co.uk
Wednesday, December 22, 2010
Bailout bonds on sale
THE EUROPEAN Union is to sell off the first round of bonds to raise funds for Ireland's financial aid package.
The financial aids for distressed states will sell off bonds to raise up to €34.1bn for Ireland next year and then a further €14.9bn in 2012.
The EU will issue bonds under the auspices of the European Financial Stability Mechanism (EFSM) and European Financial Stability Facility, which will sell a total of seven to eight benchmark bonds.
Ireland's €85bn rescue last month includes €22.5bn from the EFSM -- which is managed by the commission -- and €17.7bn from the EFSF, overseen by euro-area governments.
Source: www.herald.ie
The financial aids for distressed states will sell off bonds to raise up to €34.1bn for Ireland next year and then a further €14.9bn in 2012.
The EU will issue bonds under the auspices of the European Financial Stability Mechanism (EFSM) and European Financial Stability Facility, which will sell a total of seven to eight benchmark bonds.
Ireland's €85bn rescue last month includes €22.5bn from the EFSM -- which is managed by the commission -- and €17.7bn from the EFSF, overseen by euro-area governments.
Source: www.herald.ie
Tuesday, December 21, 2010
China Supports EU Efforts At Financial Stability
China supports measures taken by the European Union and the International Monetary Fund to stabilize Europe's debt crisis, Vice Premier Wang Qishan said Tuesday.
China has also taken steps to help European nations combat the sovereign debt crisis, Wang said at the opening of the third China-EU High-Level Economic and Trade Dialogue.
Wang said the two sides "should have confidence and enhance cooperation to work together for a robust, sustainable and balanced growth," according to the official Xinhua News Agency.
Last week, EU leaders agreed to the creation of a permanent rescue mechanism for debt-laden countries in 2013 that would replace an existing bailout fund.
Ireland last month agreed to borrow up to euro 67.5 billion ($90 billion) from the EU and International Monetary Fund and implement severe spending cuts as its economy staggered under the weight of massively indebted banks.
The Irish rescue followed the EU-IMF bailout of Greece earlier this year and added to fears that other financially weak countries including Portugal and Spain would need bailouts, imperiling the future of the euro common currency.
China has also been involved in bailing out European countries, offering in October to buy Greece's debt. Last week, Portugal said that China had pledged increased support for its efforts to climb out of a financial crisis, reportedly promising to buy $4 billion in Portugese government debt.
The EU is China's largest trading partner, while China is the EU's second-largest trading partner behind the United States, Wang said. Two-way trade for the first 11 months this year reached $433.9 billion, an increase of 33 percent from the previous year.
Wang said global economic recovery is being hampered by weak demand, while world markets have excessive liquidity and are turbulent.
He reiterated that China would implement a prudent monetary policy to ensure the world's second-largest economy can maintain steady growth.
"China is taking a proactive fiscal policy and stable currency policy, while the EU is actively taking measures to combat the debt crisis," Wang said. "China and the EU should strengthen cooperation to promote strong, sustainable and all-around growth for the economies of China and EU and even the global economy."
Other officials participating in the talks include EU Competition Commissioner Joaquin Almunia, EU Trade Commissioner Karel De Gucht and China's Commerce Minister Chen Deming.
Wang said he expected "substantive" progress during the talks on a wide range of trade and economic issue, including recognition of China's market economy status and the loosening of EU restrictions on high-tech goods exports.
Wang said China and the EU should cooperate in a variety of sectors, including new energy and environment protection, while fighting protectionist measures.
"We need to jointly resist trade protectionism, advancing Doha round talks for balanced and all-around success," he said.
By The Associated Press
Source: www.npr.org
China has also taken steps to help European nations combat the sovereign debt crisis, Wang said at the opening of the third China-EU High-Level Economic and Trade Dialogue.
Wang said the two sides "should have confidence and enhance cooperation to work together for a robust, sustainable and balanced growth," according to the official Xinhua News Agency.
Last week, EU leaders agreed to the creation of a permanent rescue mechanism for debt-laden countries in 2013 that would replace an existing bailout fund.
Ireland last month agreed to borrow up to euro 67.5 billion ($90 billion) from the EU and International Monetary Fund and implement severe spending cuts as its economy staggered under the weight of massively indebted banks.
The Irish rescue followed the EU-IMF bailout of Greece earlier this year and added to fears that other financially weak countries including Portugal and Spain would need bailouts, imperiling the future of the euro common currency.
China has also been involved in bailing out European countries, offering in October to buy Greece's debt. Last week, Portugal said that China had pledged increased support for its efforts to climb out of a financial crisis, reportedly promising to buy $4 billion in Portugese government debt.
The EU is China's largest trading partner, while China is the EU's second-largest trading partner behind the United States, Wang said. Two-way trade for the first 11 months this year reached $433.9 billion, an increase of 33 percent from the previous year.
Wang said global economic recovery is being hampered by weak demand, while world markets have excessive liquidity and are turbulent.
He reiterated that China would implement a prudent monetary policy to ensure the world's second-largest economy can maintain steady growth.
"China is taking a proactive fiscal policy and stable currency policy, while the EU is actively taking measures to combat the debt crisis," Wang said. "China and the EU should strengthen cooperation to promote strong, sustainable and all-around growth for the economies of China and EU and even the global economy."
Other officials participating in the talks include EU Competition Commissioner Joaquin Almunia, EU Trade Commissioner Karel De Gucht and China's Commerce Minister Chen Deming.
Wang said he expected "substantive" progress during the talks on a wide range of trade and economic issue, including recognition of China's market economy status and the loosening of EU restrictions on high-tech goods exports.
Wang said China and the EU should cooperate in a variety of sectors, including new energy and environment protection, while fighting protectionist measures.
"We need to jointly resist trade protectionism, advancing Doha round talks for balanced and all-around success," he said.
By The Associated Press
Source: www.npr.org
Monday, December 20, 2010
ECB Trichet: EMU Govts Must Do More Individually,Collectively
PARIS (MNI) - European Central Bank President Jean-Claude Trichet reiterated Monday that the Eurozone does not face a currency crisis but rather "a problem of financial stability due to the fact that some countries have not managed their budgets as they should have."
"For a long time we have determined that the problem is not the currency," Trichet said in a radio interview. "The currency has retained its value, the currency is credible, it inspires confidence."
"The problem is thus the credit rating of several states," he explained. "This is not astonishing. We have always said: 'Respect the Stability and Growth Pact, pay close attention to your deficit budgets. They are a weakness that absolutely must be corrected'."
"We are experiencing at this moment a very serious crisis, that has intensified over the past two and a half years," he stressed. "Thus everyone must take the necessary measures."
Trichet urged the Eurozone governments to monitor each other collectively via "much better governance" and to establish "a stabilization fund capable of assuming all its responsibilities."
"That means, concretely, to do more individually and do more collectively," he insisted, adding that this message applied to France as well.
Trichet reiterated that the ECB had fulfilled its mandate for price stability -- "an essential element of stability in a very difficult period."
Concerning Ireland's consolidation program, the ECB believes "this plan must be applied in a very rigorous manner," he said.
Trichet again rejected the notion that a country could leave monetary union as "an absurd hypothesis."
Source: Imarketnews
www.imarketnews.com
"For a long time we have determined that the problem is not the currency," Trichet said in a radio interview. "The currency has retained its value, the currency is credible, it inspires confidence."
"The problem is thus the credit rating of several states," he explained. "This is not astonishing. We have always said: 'Respect the Stability and Growth Pact, pay close attention to your deficit budgets. They are a weakness that absolutely must be corrected'."
"We are experiencing at this moment a very serious crisis, that has intensified over the past two and a half years," he stressed. "Thus everyone must take the necessary measures."
Trichet urged the Eurozone governments to monitor each other collectively via "much better governance" and to establish "a stabilization fund capable of assuming all its responsibilities."
"That means, concretely, to do more individually and do more collectively," he insisted, adding that this message applied to France as well.
Trichet reiterated that the ECB had fulfilled its mandate for price stability -- "an essential element of stability in a very difficult period."
Concerning Ireland's consolidation program, the ECB believes "this plan must be applied in a very rigorous manner," he said.
Trichet again rejected the notion that a country could leave monetary union as "an absurd hypothesis."
Source: Imarketnews
www.imarketnews.com
Wednesday, December 01, 2010
Leaving the euro: how would it work?
Nils Blythe
Business correspondent, BBC News
Would Ireland be better off if it left the euro and revived the Punt? Would the Greek economy recover more quickly with a new Drachma?
Much has been written about the theoretical attractions for financially troubled countries in exiting the euro-zone.
But the question of how a country would go about it is less well explored.
And the more closely you examine the question of "how" - as opposed to "why" - a country might leave the euro, the clearer it becomes that the practical difficulties are huge.
Capital flight
To establish a new currency a country would have to convert all existing euro-denominated savings at a fixed rate on a given date.
But savers and businesses would not wait passively for that date to arrive.
The main reason for creating a new currency would be to increase the country's competitiveness by making its exports cheaper.
So savers and investors would assume that the new currency would depreciate against the euro - probably very rapidly - and want to keep their savings in euros, or transfer them to another well-established currency such as the US dollar.
The first practical problem, then, is that if it becomes clear that a country is seriously thinking of leaving the euro a huge amount of money will leave the country.
This is sometimes referred to as "capital flight".
The overall effect would be to trigger huge transfers of deposits out of the country and wreck the banking system.
The government in question would almost certainly try to impose controls to prevent this kind of capital flight, but senior policy-makers are very sceptical about whether such controls would be effective in 21st century Europe.
But if a prolonged national debate about leaving the euro creates a risk of capital flight, would the alternative be to prepare in secret and announce it suddenly?
Such a plan might work in a totalitarian state, but does not allow for parliamentary debate, legislation and all the other processes of a modern democracy.
And the idea that huge numbers of new bank notes could be prepared and distributed in secret - ready for the appointed currency conversion date - is absurd.
Risky approach
However, suppose for a moment that these practical problems could be overcome, where would the country leaving the euro stand financially?
It would have a large national debt denominated in euros.
Remaining committed to paying interest on that debt in euros while tax revenues are generated in the new currency would be a big risk.
The alternative would be to announce that national borrowings have been converted into the new currency.
For overseas bond investors, this would amount to a default.
When the country wanted to borrow more it would almost certainly have to pay punitive interest rates to persuade bond market investors to participate.
Unbreakable currency?
The counter-argument to all this is that currency conversions have been achieved successfully in the past.
The euro came into circulation without too many hitches, albeit with many years of preparation.
East Germany's Ostmarks were converted into Deutschmarks.
But the key difference is that in these cases the currency into which savings were being switched was perceived to be stable. The incentive for capital flight did not exist.
This does suggest that if the fundamental problem is substituting a weak currency for a strong one, the most practical solution would be for the strongest members of the euro-zone to leave the currency union.
It means that - in purely practical terms - Germany could leave the euro while weaker countries could not.
But while some Germans clearly feel nostalgic about the Deutschmark, it seems massively unlikely that a German government would initiate the break-up of the euro.
The euro was not designed with any possibility of break-up in mind.
Governments can choose to shadow another currency and then change their minds - the UK did just that in 1992.
Governments can create a supposedly fixed link to another currency which - in extreme circumstances - can be unfixed.
But the point of a currency union is that it is supposed to be unbreakable.
And whatever the theoretical attractions of breaking up the euro might be, the practical difficulties of doing so should not be under-estimated.
Source: BBC
www.bbc.co.uk
Business correspondent, BBC News
Would Ireland be better off if it left the euro and revived the Punt? Would the Greek economy recover more quickly with a new Drachma?
Much has been written about the theoretical attractions for financially troubled countries in exiting the euro-zone.
But the question of how a country would go about it is less well explored.
And the more closely you examine the question of "how" - as opposed to "why" - a country might leave the euro, the clearer it becomes that the practical difficulties are huge.
Capital flight
To establish a new currency a country would have to convert all existing euro-denominated savings at a fixed rate on a given date.
But savers and businesses would not wait passively for that date to arrive.
The main reason for creating a new currency would be to increase the country's competitiveness by making its exports cheaper.
So savers and investors would assume that the new currency would depreciate against the euro - probably very rapidly - and want to keep their savings in euros, or transfer them to another well-established currency such as the US dollar.
The first practical problem, then, is that if it becomes clear that a country is seriously thinking of leaving the euro a huge amount of money will leave the country.
This is sometimes referred to as "capital flight".
The overall effect would be to trigger huge transfers of deposits out of the country and wreck the banking system.
The government in question would almost certainly try to impose controls to prevent this kind of capital flight, but senior policy-makers are very sceptical about whether such controls would be effective in 21st century Europe.
But if a prolonged national debate about leaving the euro creates a risk of capital flight, would the alternative be to prepare in secret and announce it suddenly?
Such a plan might work in a totalitarian state, but does not allow for parliamentary debate, legislation and all the other processes of a modern democracy.
And the idea that huge numbers of new bank notes could be prepared and distributed in secret - ready for the appointed currency conversion date - is absurd.
Risky approach
However, suppose for a moment that these practical problems could be overcome, where would the country leaving the euro stand financially?
It would have a large national debt denominated in euros.
Remaining committed to paying interest on that debt in euros while tax revenues are generated in the new currency would be a big risk.
The alternative would be to announce that national borrowings have been converted into the new currency.
For overseas bond investors, this would amount to a default.
When the country wanted to borrow more it would almost certainly have to pay punitive interest rates to persuade bond market investors to participate.
Unbreakable currency?
The counter-argument to all this is that currency conversions have been achieved successfully in the past.
The euro came into circulation without too many hitches, albeit with many years of preparation.
East Germany's Ostmarks were converted into Deutschmarks.
But the key difference is that in these cases the currency into which savings were being switched was perceived to be stable. The incentive for capital flight did not exist.
This does suggest that if the fundamental problem is substituting a weak currency for a strong one, the most practical solution would be for the strongest members of the euro-zone to leave the currency union.
It means that - in purely practical terms - Germany could leave the euro while weaker countries could not.
But while some Germans clearly feel nostalgic about the Deutschmark, it seems massively unlikely that a German government would initiate the break-up of the euro.
The euro was not designed with any possibility of break-up in mind.
Governments can choose to shadow another currency and then change their minds - the UK did just that in 1992.
Governments can create a supposedly fixed link to another currency which - in extreme circumstances - can be unfixed.
But the point of a currency union is that it is supposed to be unbreakable.
And whatever the theoretical attractions of breaking up the euro might be, the practical difficulties of doing so should not be under-estimated.
Source: BBC
www.bbc.co.uk
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