Danmarks Nationalbank. Monetary Review 4th Quarter D A N M A R K S

Transcription

1 Danmarks Nationalbank Monetary Review 4th Quarter 1999 D A N M A R K S N A T I O N A L B A N K

2 Danmarks Nationalbank Monetary Review 4th Quarter 1999

3 The Monetary Review is published by Danmarks Nationalbank and is issued quarterly. Managing Editor: Jens Thomsen Editor: Anders Møller Christensen The Monetary Review can be ordered from: Danmarks Nationalbank, Information Desk, Havnegade 5, DK-1093 Copenhagen K. Telephone (direct) or Schultz Grafisk A/S, Copenhagen ISSN (Online) ISSN

4 Contents Recent Monetary Trends... 1 New Balance-Sheet Statistics for Monetary Financial Institutions Kjeld Ole Nielsen and Anders Mølgaard Pedersen, Statistics Department The background to and the planning of new balance-sheet statistics for banks and mortgage-credit institutes, etc. are described. To facilitate comparison with other European countries, the future balance-sheet statistics for MFIs will be compiled according to international guidelines. Measurement of Fiscal Policy Niels Lynggård Hansen, Statistics Department and Dan Knudsen, Economics Department A structural budget balance is calculated on the basis of the requirements which the exchange-rate policy makes of wage increases. According to this calculation the structural budget balance is now very close to equilibrium and has shown relatively modest deviations from this level for a number of years. Corporate Governance in the Danish Financial Sector Jens Verner Andersen, Financial Markets Department The interaction between business enterprises' ownership, equity capital and day-to-day management has attracted considerable attention. The special conditions in the financial sector are described. No unequivocal recommendations can be given, but focus on best practice is important. Press Release Tables and Graphs Section Vol. XXXVIII/No. 4

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6 1 Recent Monetary Trends This review covers the period from September to the middle of November 1999 INTERNATIONAL BACKGROUND There are signs of an economic upswing in the euro area. Recent years have seen strong economic growth in Ireland, Finland, the Netherlands, Spain and Portugal, but more moderate growth in the large countries France, Italy and Germany. However, the most recent cyclical indicators show that the upswing has spread to these countries, albeit with slight variations in strength. In Germany and France manufactured output and the business-climate indicators have shown a rising trend in the last six months. Unemployment is still high in both countries, however, and growth in private consumption is moderate. In October consumer prices in the euro area were 1.4 per cent higher than one year earlier, and hence inflation is still low. Price drops in the newly liberalised electricity and telecommunications markets contribute to the dampening of inflation. However, inflation is expected to rise in the coming months as a consequence of strong oil-price increases in 1999, but to stay below the level of 2 per cent which is considered compatible with price stability. The upswing has been favourably influenced by expansionary monetary conditions, particularly since April The rising exchange rates for the US dollar and the Japanese yen vis-à-vis the euro in the first half of 1999 have stimulated the export sector, and the low level of short-term interest rates has supported credit expansion in the euro area. In September the money supply, M3, was 6.1 per cent higher than the previous year's level and thereby higher than the ECB's reference value of 4½ per cent. On 4 November the Governing Council of the ECB decided to raise the official interest rates by 0.5 per cent against the background of the ample liquidity and an improved cyclical situation. The ECB thus redressed the lowering of interest rates in the spring of With effect from 10 November, the rate of interest for the main refinancing operations is thereby 3 per cent. The financial markets had discounted this raising of interest rates. Bond yields in the euro area had risen by approximately 1.5 per cent

7 2 BOND YIELDS AND MONEY-MARKET INTEREST RATES IN THE EURO AREA, 1999 Chart 1 Per cent p.a Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. German 10-year bond yield 1-month euro interest rate ECB's main refinancing operations Note: Most recent observation is 16 November. since April. The prospects of higher official interest rates reversed the trend of rising bond yields and the decline continued after the decision was published, cf. Chart 1. The fact that a higher short-term interest rate can push down bond yields may be explained by the dampening of inflation expectations as a consequence of the increase in interest rates. The development in the 1-month interest rate illustrates that the extent and timing of the raising of interest rates were expected. The interest rates for money-market transactions expiring after the turn of the year include an interest premium which reflects the high cost of trading liquidity at year-end, cf. the section on the money market at the turn of the year. Despite the improved economic outlook for Europe the dollar rose against the euro during the autumn. The dominating factor behind the development in exchange rates is the higher level of interest rates and continued high economic growth in the USA. For an extraordinarily long period the USA has seen strong growth in private consumption, low unemployment and a low inflation rate. However, over the last six months the annual rate of increase in consumer prices has shown a rising trend, reaching 2.6 per cent in October. The higher rate of increase is primarily related to the oil-price increases. Fears of rising inflation and the debate on whether the US stock market is overvalued caused stock prices to fall from their record-high level at the end of August. The Dow Jones stock market index dropped by ap-

8 proximately 10 per cent from the end of August to mid-october. However, in October and November key economic indicators showed that the strong economic growth was intact, with no significant inflationary pressure as yet. This buoyed up stock prices. Recent years strongly rising stock and property prices have made a major contribution to the high growth in demand and output in the USA. Capital gains on stocks and homes have been the principal factor behind the strong decline in the savings ratio in recent years. The consequences for economic activity of a steep decline in stock prices are a source of substantial concern. Unemployment fell to 4.1 per cent in October the lowest level for 30 years. In the long term the problems business enterprises face in recruiting additional manpower may pose a threat to low inflation. In consideration of the tight labour market the Federal Reserve on 16 November raised the target for the fed funds rate by 25 basis points to 5.5 per cent. Since the summer the dollar has weakened against the Japanese yen, partly against the background of Japan's improved economic prospects, and partly due to the USA's rising current-account deficit which now exceeds 3 per cent of GDP. During the autumn the Bank of Japan continued to intervene in the foreign-exchange market in an attempt to dampen the yen's rise. One of the Bank of Japan's objectives is to protect the export sector which shows moderate growth and contributes to the Japanese economy's fragile recovery. Another objective is to support the recovery by supplying ample liquidity to the banking sector via bond purchases. At a meeting in October the Bank of Japan decided to expand the operations to include purchases of short-term Treasury bills on issue. This is a very radical approach to expanding liquidity and dampening the yen. Despite the Bank of Japan's massive extension of liquidity to the banking sector lending by the retail banks declined strongly in 1999, primarily as a result of extremely low willingness to assume credit risks. The recovery in the UK appears to be robust. It is most evident in private consumption: retail sales in October were 4.7 per cent above the level for the same month of the previous year. Growth in manufactured output and exports is more sluggish in the face of the strong pound sterling. The contribution to growth from the UK's service sector is considerable. In October unemployment was 4.2 per cent, the lowest level for almost 20 years, and in September the average wage rose by 4.7 per cent against the previous year. The increasing economic activity brings with it the risk of inflation exceeding the government's target. Against this background the Bank of England raised the official interest rate by 25 basis points on 8 September, and again on 4 November. This brought 3

9 4 the lending rate to 5.5 per cent. The Bank of England named strong property price increases as one of the factors behind its raising of interest rates. Growth in the Swedish economy is strong, with declining unemployment and low inflation. However, labour costs are accelerating and may be a threat to stable economic development. On 12 November Sveriges Riksbank raised the repo rate by 35 basis points to 3.25 per cent in order to counter inflationary pressure. The bank evaluates that a stronger exchange rate for the Swedish krona will offset the inflationary pressure. In Norway private consumption has stagnated in 1999 and a moderate cyclical downturn has set in after several years of strong economic growth. In response, for the fifth time in 1999, Norges Bank with effect from 23 September lowered the official interest rates by half a per cent. This brought the current-account rate down to 5.5 per cent and the lending rate to 7.5 per cent. Greece, the other member of the ERM II besides Denmark, has recently drawn closer to compliance with the Maastricht Treaty's criteria for participation in the third stage of EMU. Its government-budget deficit has been reduced considerably and the year-on-year rate of increase in the Harmonised Index of Consumer Prices has fallen steadily from approximately 5 per cent in mid-1998 to 1.9 per cent in October On 20 October the Bank of Greece lowered official interest rates by 50 basis points so that the deposit rate is 11.5 per cent and the Lombard rate 13 per cent. The Greek government has announced its intention to submit an official application for EMU membership in March Central banks' sales of gold from their foreign-exchange reserves have contributed to the downward pressure on the gold price in recent years 1. On 26 September European central banks announced their conclusion of a five-year agreement on sale of gold from foreign-exchange reserves. The purpose is to reduce uncertainty in the gold market. This announcement had an immediate strong impact on the gold price which rose by approximately 25 per cent in the course of two weeks, cf. Chart 2. Under the agreement the central banks will not enter the market as sellers of gold during the next five years, with the exception of already decided sales. Such sales will be achieved via a concerted programme whereby as a maximum approximately 400 tonnes of gold per year and 2,000 tonnes for the entire period are sold. Moreover, the central banks which are signatories to the agreement will not expand their gold leasings during the 5-year period. 1 The development on the gold market is described in further detail in Ulrik Bie and Astrid Henneberg Pedersen, "The Role of Gold in the Monetary System", Danmarks Nationalbank, Monetary Review, 3rd quarter 1999.

10 5 MARKET PRICE FOR GOLD Chart 2 Dollar per troy ounce Note: Most recent observation is 16 November. At the end of September 1999 the Ecuador government decided to suspend interest payments on a class of its Brady bonds. These are loans previously converted to negotiable securities at a time when the country faced payment difficulties. This class of Brady bonds comprises bonds totalling approximately 1.4 billion dollars against collateral in US government bonds for approximately 25 per cent of the value. Ecuador is the first country to suspend payments on its Brady bonds and is to negotiate further reduction of its debt with the bond holders. The international financial markets reacted strongly to this measure. Since mid-september the Ecuadorian currency has depreciated by more than 30 per cent against the US dollar. DEVELOPMENT IN INTEREST AND EXCHANGE RATES IN DENMARK Against the background of the ECB's raising of interest rates Danmarks Nationalbank with effect from 5 November raised the discount rate and the current-account rate by 25 basis points to 3 per cent. At the same time the lending rate and the rate of interest for certificates of deposit were raised by 45 basis points to 3.3 per cent. In anticipation that official interest rates would be raised the 1-month money-market interest rate in Denmark had risen towards the end of October, as in the euro area. However, the money-market interest rate rose by slightly less in Denmark than in the euro area. The rising trend

11 6 10-YEAR GOVERNMENT BOND YIELD AND THE SLOPE OF THE YIELD CURVE Chart 3 Per cent p.a year government bond yield Differential between 10-year and 1 month yields Note: Weekly averages. Most recent observation is week 46. for long-term bond yields in Denmark was curbed as the prospect of a raising of interest rates by the ECB led to falling bond yields in the euro area, cf. Chart 3. This curbed the strong increase in the slope of the yield curve measured as the difference between the 10-year bond yield and the 1-month money-market rate of interest. At the start of the year the DANISH AND GERMAN 10-YEAR BOND YIELDS AND YIELD DIFFERENTIAL Chart 4 Per cent p.a Danish 10-year yield German 10-year yield Yield differential Denmark/Germany Note: Weekly averages. Most recent observation is week 46.

12 7 NOMINAL AND REAL EFFECTIVE KRONE RATES Chart = Nominal effective krone rate Real effective krone rate (consumer prices) Note: Monthly averages. Most recent observation is November for the nominal index and October for the real index. 10-year bond yield and the 1-month interest rate were almost identical, while in mid-november the spread was around 2 per cent. In Germany the increase in bond yields from April to October 1999 was of almost the same magnitude as the increase in 1994, cf. Chart 4. Denmark experienced a particularly strong rise in yields in 1994, when the yield differential to Germany widened by more than 1 per cent. In contrast, the interest-rate differential remained remarkably stable at around 0.5 per cent when interest rates rose in The yield differential narrowed slightly during the autumn and was approximately 0.4 per cent in mid-november. The krone has been very stable against the euro at a level which is a little stronger than the central rate under the ERM II agreement. The nominal effective krone rate fell to its lowest level since 1997 as a consequence of the euro's weakening during the autumn, cf. Chart 5. There was no equivalent decline in the real effective exchange rate since for a certain period the rate of increase in consumer prices was higher in Denmark than in our trading partner countries. The lifting of currency restrictions in the 1970s and the beginning of the 1980s, as well as the technological development, have led to a great increase in cross-border capital flows. Danish business enterprises and households have also participated in this integration of the international financial markets. Residents' exposures in foreign securities have risen considerably since the middle of the 1990s. From the beginning of 1998

13 8 RESIDENTS' ACCUMULATED NET PURCHASES OF SECURITIES ISSUED BY NON-RESIDENTS AND HEDGING OF EXCHANGE-RATE RISK SINCE JANUARY 1998 Chart 6 Kr. billion Residents' net purchases of securities issued by non-residents Residents' net forward sales of foreign exchange and net loans in foreign currency from Danish banks Note: Most recent observation is September to the end of September 1999 residents' net purchases of foreign securities totalled almost kr. 90 billion, cf. Chart 6 1. Business enterprises and households' net purchases of foreign shares account for approximately kr. 50 billion of this amount. Residents can hedge the exchange-rate risk on holdings of foreign securities in the forward foreign-exchange market or via loans in foreign currency. Since mid-1998 these financial positions have risen almost in parallel with the increase in holdings of foreign securities. If the exchange-rate risk associated with residents' holdings of foreign securities is hedged the impact on the krone market is subdued. Non-residents' krone position has been stable in recent months. Their holdings of krone-denominated debt securities have changed very little, with similar variation in the hedging of the krone-rate risk in the forward foreign-exchange market and via krone-denominated loans. The upward trend for market interest rates in 1999 has had an impact on the Danish mortgage-credit market, thereby braking recent years' wide-scale conversion to loans at a low coupon rate. Early redemptions of mortgage-credit bonds for the ordinary settlement dates in October 1999 and January 2000 were the lowest since The demand for euro-denominated mortgage-credit loans continues to be moderate. 1 The development in residents' holdings of foreign securities up to 1997 is described in Lill Thanning Hansen, "Residents' Holdings of Debt Securities and Equity Securities Issued by Non-residents", Danmarks Nationalbank, Monetary Review, 3rd quarter 1998.

14 9 However, as a consequence of the wider differential between short-term and long-term interest rates more and more home owners are raising adjustable-rate mortgage loans at a rate of interest which is not fixed throughout the lifetime of the loan. Adjustable-rate mortgage loans accounted for only around 5 per cent of total outstanding mortgage-credit loans at the end of October, but the proportion is increasing. In September and October adjustable-rate mortgage loans accounted for a large proportion of the newly issued mortgage-credit loans. With effect from 21 June 1999 the Nationalbank's monetary-policy instruments were adjusted in several respects, cf. Monetary Review, 2nd Quarter The adjustments were primarily of a technical nature and did not affect the overall framework for the conduct of monetary policy. The adjustments included the introduction of an individual limit for each bank or mortgage-credit institute's current-account deposits. These limits amount to kr. 19,930 billion in total. If the total limit is overstepped, deposits exceeding the limit for each bank or mortgage-credit institute are converted into certificates of deposit. The overall limit has not been exceeded, although on a few occasions the total current-account balance was close to the limit. THE MONEY MARKET AT THE TURN OF THE YEAR Rates of interest for money-market transactions with maturity after the turn of the year are somewhat higher than for transactions with maturity before New Year, cf. Chart 7. The difference primarily reflects the high cost of trading liquidity in the money market at that time of the year. An interest premium for money-market transactions around New Year is normal. The volume of transactions is low since accounts are closed at year-end, and positions which may affect the bottom line are avoided. However, on this occasion the premium for the coming year-end is higher than in the previous years. Most central banks have made arrangements to be able to provide for increased liquidity demand around the turn of the year if necessary. Potential IT problems have also been taken into account. The Danish Financial Supervisory Authority and Danmarks Nationalbank do not believe that any general problems will arise in the financial sector on account of the millennium roll-over, since all systems have been exhaustively tested. Furthermore, each credit institution has tested its internal systems for year 2000 problems. The Nationalbank will give access to both purchase and sale of certificates of deposit on 30 December 1999 and 3 January 2000 so as to ac-

15 10 THE YIELD CURVE FOR MONEY MARKETS IN DENMARK, THE EURO AREA AND THE USA, 17 NOVEMBER 1999 Chart 7 Per cent p.a Beginning of Term-to-maturity in months Denmark (Cibor) Euro area (Libor) USA (Libor) Note: The Cibor rates at 7 to 11 months are calculated by linear interpolation. commodate any extraordinary demand for liquidity. This entails that on those days certificates of deposit will be fully liquid. It is evaluated that lending by the Nationalbank to the financial sector against securities as collateral will be able to function smoothly in view of the ample collateral basis. Since September the Nationalbank's liquidity prognosis, which normally covers the following two months, has been extended to include the period up to and including January The European Central Bank, ECB, has announced that no new main refinancing operations will be initiated during the first week of the year 2000 and that no such operations will mature during that week. The maturity of the main refinancing operation of 21 December 1999 will be lengthened exceptionally to three weeks from the normal two weeks. To avoid two main refinancing operations maturing on the same day, i.e. 12 January 2000, the maturity of the last operation of 30 December 1999 will also be lengthened to three weeks. The allotment for longterm refinancing operations with a maturity of three months concluded in the 4th quarter of 1999 has been raised to euro 25 billion from the normal allotment of euro 15 billion. Most central banks have increased their stocks of banknotes to accommodate any extra demand for cash around the turn of the year. The Nationalbank has chosen to follow this international trend and has for some time refrained from destroying the banknotes which are returned

16 11 to the Nationalbank. This has considerably increased the Nationalbank's stocks of banknotes. This should be regarded as an extraordinary security measure since as stated above the Financial Supervisory Authority and the Nationalbank do not believe that the millennium roll-over will present significant problems in the financial sector. Should problems nevertheless arise, there is an extensive network of back-up and emergency procedures to ensure that no data is lost. There is therefore no reason to hoard cash as the year-end approaches since this will merely increase the risk of theft and robbery. DOMESTIC ACTIVITY AND THE BALANCE OF PAYMENTS After five years of high economic growth the economy shifted to a lower gear in GDP growth was moderate in the 2nd quarter of 1999 and, according to the latest national accounts, was 1.5 per cent higher than one year before. Net exports made a good contribution to growth, while domestic demand was dampened. In the 2nd quarter private consumption was 1 per cent lower than in the same quarter of the previous year. The activity indicators for the 3rd quarter point to moderate growth. Private consumption is estimated to have recovered a little and the improvement in the export sector continued in the light of an improved cyclical situation abroad. During the recent years of high demand in the domestic market and high capacity utilisation the export sector has lost market shares abroad. In view of the lower pressure from the domestic market this development appears to be reversing. Credit expansion continues to be high, but with signs of a dampening. In October lending by banks to residents was approximately 12 per cent above the 1998 level, while lending by the mortgage-credit institutes was approximately 7 per cent higher than in Especially the banks' lending to households has shown receding growth in October the annual rate of increase was approximately 4 per cent, against 10 per cent at the beginning of the year. During the 3rd quarter turnover on the housing market rose and recent years' strong increases in cash prices continued, according to statistics from the Association of Danish Mortgage Banks. Price development in the 3rd quarter showed considerable geographical variation, however, whereby price increases were generally moderate in provincial areas and high in the Greater Copenhagen area. Recent years' strong increases in cash prices have had a great impact on private consumption via the augmentation of net worth. The households' consumption ratio

17 12 EXPORTS, IMPORTS AND CURRENT ACCOUNT Chart 8 Kr. billion 29 Kr. billion Current account, 12-month sum (right-hand axis) Export Imports -20 Source: Statistics Denmark. Note: Seasonally-adjusted exports and imports of goods, excluding ships and aircraft. Most recent observation is August has risen considerably since 1995 due to such factors as the increase in housing assets. In 1999 the consumption ratio has been at the same high level as during the upswing in the mid-1980s. The reduction of the value of the tax deductibility of interest rates as part of the Whitsun package of economic measures and the increase in interest rates in 1999 will probably curb the rising cash prices and contribute to a dampening of private consumption. The value of the tax deductibility of interest payments will be further reduced in Preliminary current-account statistics show a surplus of kr. 1.8 billion for the 12-month period ending in August 1999, compared to a deficit of kr. 7.3 billion one year before, cf. Chart 8. A number of special factors have contributed to the improvement in the current account in the first half of The development in this period among other things appears particularly favourable in the light of the negative statistics in the spring of 1998 as a consequence of the labour-market dispute. Moreover, interest payments and other transfers to abroad helped to improve the first half of 1999, but they are probably affected by time-lags which will have a negative impact on the 2nd half of the year. The improvement in the balance of payments is also attributable to improvement in the trade balance during the past year. For the 12-month period until August 1999 the trade surplus was approximately kr. 24 billion. The prospects for the export sector are brighter in view of the cyclical improvement in the euro area, while the stagnating private

18 13 consumption has a dampening effect on the growth in imports compared to the substantial increases in previous years. In 1998 there were considerable deviations between Statistics Denmark's compilation of the current account and the compilation of net current external payments in the Nationalbank's payments statistics, but in 1999 the two statistical compilations are more in line. The net payments in the Nationalbank's payments statistics indicate a small improvement in the current account in However, the sum of the net payments during a 12-month period was still negative up to September 1999, showing a deficit of approximately kr. 1 billion. The most recently published payments statistics for September contained an important adjustment of the previous statistics. The surplus on the net current payments was adjusted downwards by kr. 1.2 billion for 1998 and kr. 3.0 billion for This adjustment can be attributed particularly to an increase in trade payments to abroad. The background is a reporting error concerning minor goods transactions. LABOUR MARKET AND WAGES The labour market is still tight, but the very high wage increases in recent years have subsided in According to the wage statistics of the Danish Employers' Confederation in the 3rd quarter of 1999 average wages rose by 3.9 per cent against the same quarter of the previous year. At the close of 1998 the annual rate of increase was 5 per cent. Wage increases for public-sector employees were higher than average and in the 3rd quarter were 4.8 per cent higher than one year before, according to Statistics Denmark. Wage increases over the last 12 months have been particularly high for employees subject to the central government's new salary systems. This group accounted for an increase of 8.6 per cent in the 2nd quarter of 1999 compared to the same quarter of 1998, according to the Budget Statement for October of the Ministry of Finance. Unemployment declined further during the 3rd quarter, and was 5.6 per cent in August. Employment compiled on the basis of payments to ATP (the Danish Labour Market Supplementary Pension Fund), which has shown great variation in recent years, fell in the 2nd quarter. In general, wage increases and unemployment show opposite variation. After a few years of relatively low unemployment during the boom in the mid-1980s wage increases rose steeply in 1987, and after a few years with high and rising unemployment wage increases at the beginning of the 1990s were low. The reaction of wage increases to the cyclical trend and to unemployment is by no means a fixed relation. Currently the unemployment rate

19 14 UNEMPLOYMENT AND WAGE INCREASES Chart 9 Per cent Wage increase, year-on-year Unemployment Unemployment plus early retirement and transitional benefits Source: The Danish Employers' Confederation and Statistics Denmark. Note: Most recent observation is 3rd quarter has fallen to below the level of , but wage increases have not really drawn closer to the 1987 level, cf. Chart 9. This may reflect favourable development whereby the labour market has become more flexible and bottleneck problems are less pronounced than was previously the case with a similar unemployment level. Another contributing factor may be that the present unemployment statistics cannot be compared immediately with previous statistics, cf. Box 1. Registered unemployment includes the unemployed receiving unemployment or cash benefits. If people receiving early retirement or transitional benefits are added, this broader group is not e.g. reduced by the large number of new recipients of transitional benefits in The size of the extended group of unemployed is no less today than in This may explain why there is less pressure on the labour market today than in the mid-1980s, despite the lower registered rate of unemployment. Nevertheless, the pressure on the labour market is substantial. As was the case during the upswing in the 1980s increases in labour costs are now excessive and are at a level considerably above those of Denmark's currency partner countries, cf. Chart 10. The consequence of the strong divergence is a deterioration in competitiveness, making it untenable in the longer term. If the favourable development in employment and real wages in recent years is to be maintained, there is very limited scope for

20 15 HAS WAGE FORMATION CHANGED? Box 1 The wage relation in the Nationalbank's economic model, Mona, determines the rate of wage increase on the basis of unemployment, price inflation, unemployment benefits as a ratio of wage level and the development in working hours 1. The relation is estimated using data from the period The result reflects the labour market during that period, including activation schemes for the unemployed. The introduction of schemes such as the early retirement scheme in 1979 and the leave scheme in 1994 immediately reduced the registered unemployment on the basis of which the relation is estimated. If the labour market changes significantly compared to the estimation period the relation gives inaccurate estimates of wage increases. The difference between actual wage increases and the rate of wage increases compiled using the wage relation can be used to test whether the labour market is more flexible during the boom in the 1990s. The estimation period shows random variation in the residuals of the wage relation around zero. Predominantly negative residuals after 1995 indicate that a given rate of unemployment, and a given value of the other explanatory variables, generates a lower wage-increase rate today than before There is a tendency for residuals in the wage relation to be negative in recent years, cf. the blue curve in the Chart. RESIDUALS IN THE MONA WAGE RELATION Per cent Normal relation, registered unemployment Registered unemploymnet plus recipients of early retirement and transitional benefits For a more detailed analysis the registered unemployment applied in the relation is replaced with registered unemployment plus recipients of early retirement benefits and transitional benefits. The relation for is then re-estimated using the extended group of unemployed as the explanatory variable. This adjustment has no significant effect on the residuals for the last 10 years of the estimation period. The residuals are raised after 1995 and the tendency for negative residuals after the estimation period is reduced. The adjusted relation is based on an extended group of unemployed which is not reduced by the large number of new recipients of transitional benefits in This means that with the adjusted relation a lower wage increase after 1995 is calculated than with the normal wage relation. This reduces the need to subtract an amount from the estimated rate of wage increases in the relation in order to achieve the actual wage increase. The apparent break with the usual wage relation outside the estimation period may reflect more factors than a more flexible labour market and adjustment to low inflation in the 1990s. Other contributing factors may be that the groups no longer included in registered unemployment had a relatively small impact on wage formation. 1 See also Niels Lynggård Hansen, "Wage Development in Denmark", Danmarks Nationalbank, Monetary Review, 2nd Quarter 1998.

21 16 HOURLY WAGE COSTS IN DENMARK AND THE EURO AREA Chart 10 Per cent, year-on-year Denmark Euro area Source: The Danish Employers' Confederation (Denmark) and Eurostat (the euro area). Note: Most recent observation is 2nd quarter for the euro area and 3rd quarter for Denmark. cost increases as either payroll disbursements, pension payments or more leisure time. Persistently higher wage increases in Denmark than in the euro area present a problem with regard to our price stability and market shares, and emphasise the need for a tight fiscal policy and ongoing labour-market reforms. DEVELOPMENT IN PRICES Rising energy prices and labour costs have pushed inflation upwards in In October the annual rate of increase in consumer prices was 3.0 per cent, against 1.7 per cent at the beginning of the year. Energy prices and prices for public services rose in particular. The upturn in energy prices is related to a strong rise in crude oil prices in Inflation is also extraordinarily affected by the bringing forward of the rent index. This added approximately 0.2 percentage points to the consumer price index in the period from August to October As from November this factor lapses. "Other factors" reflects the underlying inflationary pressure from wage development and profit margins, cf. Table 1. Normally, import and energy price increases do not have a full impact on the retail price of a certain product. Business enterprises can use the profit margin as a

22 17 DEVELOPMENT IN CONSUMER PRICES AND NET RETAIL PRICES Table 1 Consumer price index Index of net retail prices Energy Imports Total buffer. There may be room for small profit increases when import and energy prices drop, while profits may come under pressure when import and energy prices increase. In the 3rd quarter energy prices rose, while the drop in import prices was braked. This may have contributed to slight downward pressure on underlying inflation. Another contributing factor was the decrease in wage inflation during the 3rd quarter. The dampening of domestic demand may curb the increase in consumer prices, but in the short term this effect will barely offset the pressure on costs generated by large increases in wages and energy prices. The annual rate of growth in consumer prices measured by the Harmonised Index of Consumer prices (HICP) was 2.6 per cent in October, compared to a rate of increase of 1.4 per cent in the euro area. In October Denmark still complied with the inflation criterion for participation in EMU laid down in the Maastricht Treaty, cf. Chart 11. HICP observations over the last 24 months are applied to the calculation basis for this cri- Foodstuffs Domestic prices Rent Public services Other factors Weights HICP CPI Year-on-year growth, per cent st. qtr nd qtr rd qtr th qtr st qtr nd qtr rd qtr Note: Weighting basis as of September The index of net retail prices is the consumer price index adjusted for indirect taxes, duties and subsidies for general price reductions. "Other factors" is a measure of domestic market-determined inflation. "Other factors" normally increases faster than the index of net retail prices due to an overweight of services for which the price development is typically stronger than for other commodities. At the same time the demand for services viewed in a more long-term perspective will typically increase faster than the demand for other products. HICP is the Harmonised Index of Consumer Prices.

23 18 INFLATION RELATIVE TO THE INFLATION CRITERION IN THE MAASTRICHT TREATY Chart 11 Per cent Threshold value 1, Greece Denmark UK Sweden Austria France Germany Luxemborg Belgium Finland Italy Spain Netherlands Ireland Portugal Source: Eurostat. Note: The most recent month in the compilation is October 1999 and for each EU member state the increase in the average HICP is shown for the period November 1998 October 1999 in relation to the average for the period November 1997 October The threshold value is determined as the average of the three lowest inflation rates plus 1.5 per cent. terion, so that the figure for the most recent month is only a small proportion of the calculation. The most recent 12-month average of the index is compared to the average for the preceding 12 months. The average of the index for the period from November 1998 to October 1999 was 1.8 per cent higher than the average of the index for the period from November 1997 to October For a candidate country this rate of increase may not exceed the average for the three EU member states with the lowest inflation rates by more than 1.5 per cent. In October this threshold limit was 1.9 per cent. Denmark is subject to stronger inflationary pressure than most euro-area member states as a consequence of the relatively high Danish wage increases. There is therefore a tendency for Denmark's inflation rate to approach the threshold value. FINANCIAL AID TO DEVELOPING COUNTRIES In connection with the annual meeting of the International Monetary Fund in September 1999 agreement was reached on financing of the IMF's two programmes for debt-ridden developing countries, i.e. the Enhanced Structural Adjustment Facility (ESAF) and the IMF s participation in the debt restructuring initiative for heavily indebted developing countries (HIPC).

24 ESAF is a special IMF loan facility reserved for poor developing countries with an average annual income of less than USD 925, or approximately kr. 6,600 per capita. This facility offers 5- to 10-year loans at an annual interest rate of 0.5 per cent. ESAF funds are kept separate from the IMF's ordinary resources. It has subsequently been agreed to rename the programme the Poverty Reduction and Growth Facility to emphasise the increased focus on poverty reduction. Under the HIPC initiative the IMF and other multilateral and bilateral creditors grant debt relief to heavily indebted developing countries, thereby reducing their debt burden to a bearable level. The HIPC initiative is expected to cover developing countries. Other donors under the HIPC initiative are the World Bank, regional development banks such as the Inter-American Development Bank and the African Development Bank, as well as 92 countries. For all multilateral and bilateral creditors taken as one the present value of the debt relief is expected to be approximately USD 27 billion, or approximately kr. 190 billion. The IMF's expenditure on the HIPC initiative accounts for a small proportion of the total expenditure. Denmark's preliminary commitment on condition of official approval of the approbation is for approximately kr. 180 million or around SDR 18.5 million. As for the Danish contribution to ESAF, the contribution will be disbursed by DANIDA. 19

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26 21 New Balance-Sheet Statistics for Monetary Financial Institutions Kjeld Ole Nielsen and Anders Mølgaard Pedersen, Statistics Department INTRODUCTION Statistics compiled according to international guidelines constitute a valuable tool for the comparison of the economic standing and development of various countries. In recent years considerable work has taken place in various international fora to improve the comparability of the individual countries' statistics. One of the results of this work is a series of revised guidelines ("statistics manuals") for the compilation of national accounts, including the balance of payments, and in the area of financial statistics 1. A significant European contribution was the new EU national accounts manual, the European System of National Accounts (ESA 1995), adopted as an EU regulation in By tradition substantial parts of the financial statistics are compiled by the central banks, in view of their thorough knowledge of financial institutions and markets. At the European level a significant part of recent years' work on the international harmonisation of the financial statistics was therefore conducted under the auspices of the European central banks. The importance of this work has been reinforced in the light of the transition to the third stage of Economic and Monetary Union on 1 January 1999, when the responsibility for the participating countries' single monetary policy was transferred to the European Central Bank, ECB. This task requires the ECB to have access to an extended set of uniform, detailed financial and economic statistics for the entire euro area. In July 1996 the European Monetary Institute, EMI, which was responsible for the preparations for EMU, published an important document 1 2 The most important are the national accounts manual The System of National Accounts (SNA 1993), prepared by the United Nations, the International Monetary Fund (IMF), the European Commission (Eurostat), the World Bank and the OECD, and the IMF's Balance of Payments Manual, fifth edition, In addition, the IMF has prepared a draft Manual on Monetary and Financial Statistics, Council regulation no. 2223/96 of 25 June 1996 on the European system of national and regional accounts in the Community.

27 22 presenting the ECB's statistical requirements for stage three of EMU 1. The Implementation Package covered several areas of financial statistics, balance-of-payments statistics and other economic statistics and was to a great extent based on the classifications and definitions used in the international statistics manuals, particularly ESA Denmark follows a long-standing tradition in its compilation of economic statistics according to international statistics manuals and other harmonised guidelines. Against this background, in the autumn of 1996 the organisations of the financial sector in Denmark, the Danish Financial Supervisory Authority, Statistics Denmark and Danmarks Nationalbank agreed in principle to implement the EMI Implementation Package in Denmark, to ensure the future international comparability of Denmark's financial statistics. The other EU member states not participating in EMU have adopted equivalent harmonisation measures. However, it was also agreed to implement the package in Denmark over a longer span of years than in the euro area member states. The main element of the EMI Implementation Package was the establishment of harmonised balance-sheet statistics for monetary financial institutions (MFIs), which are predominantly banks, mortgage-credit institutes and other credit institutions. The MFI balance-sheet statistics provide e.g. information on monetary growth in the euro area, which is given a prominent role in the ECB's monetary policy. Furthermore, the data used for the ECB's calculation of the minimum reserves which credit institutions in the euro area must hold ("reserve requirement statistics"), are incorporated in the MFI balance-sheet statistics. Regular collection of new balance-sheet statistics was initiated in mid In December 1998 a slightly revised version of the section on the MFI balance-sheet statistics in the Implementation Package was adopted as an ECB regulation 2. This article describes the new European balance-sheet statistics for MFIs. First, the MFI sector in the EU is described, as well as the harmonised requirements concerning balance-sheet statistics for this sector. This is followed by an account of the ECB's compilation and use of the consolidated MFI balance sheet for the euro area. Finally, the article describes the preliminary work on Denmark's implementation of the new balance-sheet statistics. The work commenced in 1996 and is expected to be completed by the end of Furthermore, the article compares the breakdown of the consolidated MFI balance sheet and the broad monetary aggregate for the euro area and Denmark. 1 2 Statistical Requirements for Stage Three of Monetary Union (Implementation Package), EMI. Regulation (EC) no. 2819/98 of December 1, 1998 of the European Central Bank concerning the consolidated balance sheet of the monetary financial institutions sector (ECB/1998/16). ECB regulations are binding on euro area member states only.

28 23 DELINEATION OF THE MFI SECTOR The ECB regulation on MFI balance-sheet statistics divides the MFI sector in the EU into three main categories of institution 1 : The ECB and the national central banks of the EU. Credit institutions as defined in Community law (the first and second EU banking coordination directives). Other financial institutions whose business it is to receive deposits and/or close substitutes for deposits 2 from entities other than MFIs and for their own account (at least in economic terms) to grant credits and/or make investments in securities. By far the majority of this type of financial institution are money market funds, i.e. mutual funds which primarily invest their members' assets in money-market instruments with a limited price risk 3. As described in further detail below, the ECB has defined the MFI sector as the money-issuing sector of the euro area, i.e. the financial institutions whose liquid liabilities are included in the monetary aggregates. The introduction of new balance-sheet statistics for the MFI sector and the ECB's definition of the broad monetary aggregate for the euro area provide a more homogenous definition of the money-issuing sector in the euro area member states. In most of these countries the moneyissuing sector has been expanded to include money market funds. Furthermore, the euro area member states have made various other adjustments to this sector. The ECB and the national EU central banks together maintain a list of all MFIs in the EU. The national central banks contribute information concerning inter alia additions and withdrawals of own national MFIs. The list of MFIs is available on the ECB's Web site 4, where it is regularly updated. In addition, once a year the ECB publishes the list of MFIs in paper form. Table 1 illustrates the composition of the MFI sector for October 1999 broken down by EU member states and main MFI categories. Germany has the largest number of credit institutions, followed by France, Italy and Austria. The table also shows that money market funds, as stated, constitute by far the largest part of the third main category of MFIs The MFI sector is identical to the subsectors central banks and other MFIs in ESA In simplified terms close substitutes for deposits are defined in the ECB regulation as very liquid financial instruments. In contrast to credit institutions there is no definition of money market funds in Community law. The ECB regulation on the consolidated balance-sheet statistics for the MFI sector states that the MFI sector also comprises money market funds. These are also defined in the regulation. (the menu item MFIs and Assets).

29 24 COMPOSITION OF THE MFI SECTOR IN THE EU, OCTOBER 1999 Table 1 Other MFIs Residents Central banks Credit institutions Money market funds Other institutions Total number of MFIs ECB Belgium Germany 1 3, ,044 Spain France 1 1, ,890 Ireland Italy Luxembourg Netherlands Austria Portugal Finland Euro area total 12 7,943 1, ,479 Denmark Greece Sweden United Kingdom EU total 16 8,860 1, ,508 Source: The ECB's Web site, October Money market funds are particularly dominant in France, Spain and Luxembourg, as well as Greece. STATISTICAL REQUIREMENTS OF THE MFI SECTOR The balance-sheet statistics for the MFI sector are collected on a monthly basis. More detailed quarterly statistics are also collected, cf. below. The collection of balance-sheet statistics from the MFIs is the responsibility of the national central banks. The ECB must receive the monthly balance-sheet statistics no later than the 15th working day after the end of the month, and the more detailed quarterly statistics at the latest by the 28th working day after the end of the quarter. The first monthly report submitted to the ECB from the central banks of the EU member states was for June 1998, and the first quarterly report for the close of the 4th quarter of The fundamental structure of the harmonised MFI balance sheet is a breakdown by instrument and maturity, cf. Table 2. The instruments are classified according to the principles of ESA 1995, while maturity is classified on the basis of original maturity. As a general rule the balance-sheet items are valued at current market prices. Loans and deposits are assessed at nominal values. As a conse-