Archive for November 5th, 2009

IMF sells Gold to RBI – a bit more details

November 5, 2009

On Tuesday morning (3 Nov 2009), I saw this press release at RBI website and just kind of ignored it.

However, it is pretty interesting from historical point of view.

First, the RBI press release says:

The Reserve Bank of India (RBI) has concluded the purchase of 200 metric tonnes of gold from the International Monetary Fund (IMF), under the IMF’s limited gold sales programme. This was done as part of the Reserve Bank’s foreign exchange reserves management operations. The purchase was an official sector off-market transaction and was executed over a two week period during October 19-30, 2009 at market based prices.

It may be recalled that the Executive Board of the IMF, on September 18, 2009 announced  its decision to sell 403.3 metric tonnes (or 12,965,649 fine troy ounces) of gold as a central element of its New Income Model and in order to increase its resources for lending to low-income countries. The IMF also decided that the initial offer of the sale of the gold would be directly to official holders, including central banks.

 I was wondering where did 403.3 MT came from? IMF has a detailed factsheet which explains this:

The IMF holds 103.4 million ounces (3,217 metric tons) of gold at designated depositories. The IMF’s total gold holdings are valued on its balance sheet at SDR 5.9 billion (about $9.2 billion) on the basis of historical cost. As of August 28, 2009, the IMF’s holdings amounted to $98.8 billion at current market prices.

A portion of these holdings was acquired after the Second Amendment of the IMF’s Articles of Agreement in April 1978. This portion, amounting to 12.97 million ounces (403.3 metric tons) with a market value of $12.4 billion as of August 28, 2009, is not subject to restitution to IMF member countries (see below), unlike gold the IMF acquired before 1978.

Hmm. So it is this 403.3 MT which IMF acquired in 1978 which is being used in this transaction. Anything more than this, it would have been complex as sales of Gold requires permission from member countries and the 403.3 MT is free from the restitution clause, Restituion clause means any gold IMF has before 1975 could be sold to member countries (members as on 1975) as the former price of SDR 35 per ounce. So, just to prevent any hassles they first went forward with the 403.3 MT not part of the restitution clause.

I was also seeing this transript of IMF conference Call on sale of 200 MT to RBI. One questioner asks:

QUESTIONER: Thank you. When you planned this sale, you planned on $850/oz price. Now it’s more than $1,000. Do you have a feeling that you couldn’t have been more lucky?

SENIOR IMF OFFICIAL: Obviously, it’s a good price relative to the original assumptions. You might recall, as part of the agreement on stepping up our financing to low-income countries, we had already agreed that part of the proceeds from the sale would be used to generate resources for concessional lending. So this certainly helps with that.

Of course, this is only half the sale that we have completed, so we don’t want to get ahead of ourselves. We still have another half to go. I hope we’ll still be lucky.

:-) Lucky IMF…

The transcript also explains that RBI was discussing this for a while and the final transaction happenned over 14 days:

QUESTIONER: And I was wondering why the sales—this is just for my knowledge—take place over two weeks?

SENIOR IMF OFFICIAL: Well, given its size, I think both from the Fund’s point of view and also the Reserve Bank of India, this was a really to give some protection against short-term fluctuations in the price. Obviously this is an off-market sale, but we do it based on the price prevailing on the day. The price can fluctuate up and down for various reasons on a day-to-day basis. So we felt it would give some protection against short-term fluctuations to do it on a phased basis over two weeks, rather than just all at the price prevailing on one day.

There were 2 modes via which IMF planned to sell:

And at the time, we noted that the Board approved two broad modalities for the sale. One was direct off-market sales to official purchasers, if there was interest from official purchasers. And the second was on-market sales which would be conducted in a phased manner consistent with the approach followed by central banks that participate in the Central Bank Gold Agreement.

So, this is an off-market deal based on market prices.

IMF press release on sales to RBI is here, IMF press release to start this facility in Sep-09 is here and FAQ’s on IMF Gold Sales is here.

Lessons from Japan’s exit policies in 1990s crisis

November 5, 2009

Apart from World Economic Outlook, IMF also releases regionwise Economic Outlooks. Both are bi-annual publications. In its latest Asia outlook, IMF has an interesting chapter on Japan’s exit policies in its 1990s crisis and lessons that can be drawn from the same.

It breaks the Japan’s crisis in 3 phases (1990-97, 1997-2000, 2001-03)  and shows how the crisis kept coming back. Each time there was some recovery, the policymakers pulled a bit of stimulus, there was an external shock (first Asian crisis and then dot com crisis) which pulled the economy again into recession. Infact, just like we saw in Great Depression , the second phase of recession in Japan was more severe.

The main reason for this slipping was Japan’s demand never picked up and the initital support was only seen in equity indices and export markets. It was only when there were proper plans to restructure the finance sector and unmask the full scale of problems, the economy recovered in the 3rd phase. This is in line with what Simon Johnson also said recently.

What are the lessons from Japan?

  • A sustained upturn was possible only when indicators across all the components—trade, financial conditions, and private domestic demand—were displaying signs of tangible recovery by flashing green.
  • In all three episodes, exports and industrial production seemed to be recovering strongly, but there was little spillover to private demand during the first two recovery attempts
  • In the final episode, private demand was stronger—in particular, corporate investment— as firms had made progress in cleaning up their balance sheets and deleveraging
  • Although it is difficult to tease out a precise sequence, it appears that certain financial market indicators, in particular the stock market, were typically the first to show signs of recovery, together with a cyclical correction in inventories that supported production. In the middle stages, there was a tendency for consumer and business sentiment to improve, bolstering domestic demand. In the final stage, only reached at the third attempt in Japan, private credit, house prices, and the labor market turned, sealing the recovery.

The article then points to lessons which can be applied today:

  • Green shoots” do not guarantee a sustained recovery. On two occasions, emerging recoveries allowed stimulus to be withdrawn. However, both times the external environment subsequently deteriorated dramatically, and the shock to the economy was magnified by a still-fragile financial system. A more severe downturn ensued, necessitating even more aggressive stimulus.
  • Sustained recoveries may not take hold until balance sheet problems at the heart of the crisis are addressed. A durable recovery took hold only after Japan’s banks became more aggressive about dealing with problem loans and capital shortages; and corporations finally shed the “triple excesses” of debt, capacity, and labor. 
  • While this restructuring is under way, policy stimulus may need to be maintained. 
  • Policymakers need to clarify “exit strategies.”  At an early stage, they should set out medium-term plans for fiscal consolidation and specify the conditions under which monetary accommodation will be withdrawn

So keep them on but have some exit strategy in place is the one line lesson.


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