“Unofficial euroization describes a situation in which economic agents of a specified jurisdiction use a foreign country's currency thereby partly replacing the domestic currency as a unit of account, a medium of exchange and a store of value.” (ECB Occasional Paper 170, April 2016)  Although this may be rational and justifiable, both on account of individual investor and risk management behavior and the underlying progress towards EU and euro area accession, it imposes significant costs on the conduct of policy.   

This learning initiative folded two workshops into one to kickstart a series of learning initiatives in the 2017-2020 CEF program designed to support constituency efforts in developing sound and efficient monetary policy frameworks and promoting financial market development.

It shed light on a critical component of CEF constituency efforts to restore and maintain macroeconomic stability and strengthen trust in their institutions, namely de-euroization strategies and the development of local currency markets.

What was covered

This learning initiative provided: 

• an introduction to the causes, symptoms and costs of unofficial euroization; and a focus on what determines trust in local currencies and institutions;
• an overview of the determinants of the technical and effective lower policy bound in euroized economies and an explanation of how euroization impinges upon the transmission mechanism, and its unintended consequences on how the market functions, how much economic agents save, and the risk of asset bubbles;
• a discussion of the prospect and scope for developing unsecured interbank markets in euroized economies through liquidity management, looking at market structures, operations, policy tools and approaches and the institutional allocation of responsibilities; 
• an illustration of a central bank’s relations with its counterparts, in the communication of autonomous factor forecasts with banks and interaction on the active management of government’s account;
• a presentation of local currency sovereign debt management, how to develop a risk-free yield curve and encourage secondary market development;
• highlights of challenges encountered in developing a secured market in a small and eulogized economy including the role of repo operations, legal, accounting, taxation, trading, settlement and transaction issues; 
• insight into how market infrastructures provide an efficient platform for facilitating, securing, and reducing the cost of market transactions; 
• exchanges on the challenges of producing IOSCO compliant financial benchmarks for secured and unsecured money market transactions in small markets;
• a discussion of the central bank’s role in supporting the development of spot and forward FX markets in euroized economies with flexible exchange rate arrangements, reviewing regulatory and prudential, FX reserve adequacy, intervention strategies, policy communication and market organization. 

In keeping with the CEF approach, and in spite of the technical nature of the subject matter, an interactive approach was favored, together with a peer knowledge exchange that maintains an operational focus to support the efforts of practitioners in the region. 

In particular, country experience was shared on topics such as:

• the impact of low/negative euro area interest rates; 
• the articulation of communication policies in liquidity management; 
• the determination of size and composition of local currency securities portfolios; 
• the relationship and agreements between the central bank and the ministry of finance;
• the structure of the interbank market;
• the nature of FX transactions, instruments and markets. 

Who was it for

The event was designed keeping the specific needs of central bank staff engaged in monetary policy and foreign exchange operations in mind, as well as their counterparts in Ministries of Finance, and others involved in the area of market development including from Debt Management Offices. Participants should come prepared to actively intervene in the discussion, raising practical questions and offering insight of relevance to their country cases. A pre-workshop questionnaire was circulated ahead of time to facilitate peer learning.

Faculty

Romain Veyrune, Senior Economist in the Technical Assistance Division, Monetary and Capital Market Departments, IMF
From 2012 to 2014, Romain was Market Operation Expert in the Money Market and Liquidity division of the Directorate General Market Operations of the European Central Bank. His main interest is in exchange rate and monetary policy design and implementation. He co-authored the IMF working paper “De-dollarization” (WP/10/188).

Guido Della Valle, Monetary Policy Resident Advisor for the Technical Assistance Division, Monetary and Capital Market Department, IMF
Guido advises Bank of Albania on monetary policy design and implementation. From 2003 to 2015, he was Principal Expert at the ECB in the Directorate General Market Operations of the European Central Bank working in different Divisions in both the reserve management and monetary policy implementation sub-areas. His main interest is FX reserve management and monetary policy design and implementation.

Thordur Jonasson, Senior Financial Sector Expert in Debt and Capital Market Instruments Division, Monetary and Capital Markets Department, IMF
Prior to joining the IMF, Thordur was a Sr. Securities Markets Specialist in the Global Capital Markets Practice of the World Bank working on developing public and private debt markets and participating in FSAPs. He has also been an term expert on public debt management and debt market development for the IMF, the World Bank and the Commonwealth Secretariat participating in Technical Assistance and Financial Sector Assessment missions that has overall taken him to 45 countries in all major regions.  His professional experience also includes 11 years in the National Debt Management Agency in Iceland where he worked in different capacities until appointed Chief Executive. He has also held positions in the private sector as an advisor to municipalities and state owned corporations on debt management, treasury and international funding.

Ulrich Windischbauer, Senior Economist in Financial Stability Department, Deutsche Bundesbank
Ulrich joined the Bundesbank in 2001 and has held several positions in International Relations, Technical Cooperation and Financial Stability. From 2013 to 2015 he worked in the International Relations and Cooperation Division of the European Central Bank's Directorate General International and European Relations. Between 2007 and 2011 he was an Economist in the European Commission's Directorate General Economic and Financial Affairs in the Candidate and Pre-Candidate Countries Unit of the Directorate International Economic and Financial Relations, Global Governance. His main interest is macroeconomic policy design and implementation in the context of EU enlargement. He is the author of the ECB's Occasional Paper "Strengthening the role of local currencies in EU candidate and potential candidate countries" (ECB OP No. 170 from April 2016).

Thomas Scheiber, Senior Economist, Foreign Research Division of the Economic Analysis and Research Department, Oesterreichische Nationalbank (OeNB)
Thomas has been working at the OeNB since 2006. His work at the Foreign Research Division has been focused on the analysis of asset and liability euroization in CESEE countries using micro data from the OeNB Euro Survey. Furthermore, he is engaged in the monitoring of the economic performance of the euro area and the preparation of monetary policy. He co-authored the recent OeNB study “Currency substitution in CESEE: why do households prefer euro payments” (Focus on European Economic Integration Q4/16).

Partners

This learning initiative was supported by: