News This Issue:

• Fraga's Days Are Numbered
• Mboweni Gets Tough On The Media
• Misinformation? Or Misinterpretation?
• Houenipwela Champions The Public Cause
• Dinkic Tells PM To Mind His Own Business
• Bank Bombers Convicted
• It's Just Very Difficult, You See...
• Ian's Second Coming?

Fraga's Days Are Numbered
The wholehearted endorsement of Luiz Inácio Lula da Silva’s presidency by the Brazilian populace last weekend has significant implications for the governorship of Brazil’s central bank, and consequently for the country’s economy. Lula, as Brazil’s new president is affectionately known, has long stated his intention to replace Arminio Fraga as governor of the central bank - along with other bigwigs in charge of the economy - to signal his serious intention to cure Brazil of its economic woes. Some have questioned this decision: Financial Times columnist Martin Wolf recently said in an open letter to da Silva that it was a “great pity” that he had not decided to keep the “superb” (this word, interestingly, was edited out of a translation of the letter in one of Brazil’s main newspapers, the ‘Estado de São Paulo’) Arminio Fraga, but now that he had made the decision, he had better choose a worthy successor.

Therein lies what some consider to be the first great dilemma of Lula’s government - what to do about replacing Arminio Fraga? How soon should his successor be named? The outgoing president, Fernando Henriqu Cardoso, has already offered to fast-track the procedure, and submit to the senate the new directors that Lula might choose. If Lula waits until he assumes the presidency proper on January 1 to say who he wants to succeed Fraga it may be that his successor will not be able to be approved until after the Carnival (the beginning of March).

Some in the markets say the changeover should be made without delay, arguing that if there is going to be change, get it over and done with, it is best for the transition process to be as short as possible. The flipside of the argument is that the announcement of a new successor now will undermine the credibility of the remainder of Fraga’s time as governor, particularly if they do not see eye to eye. Some think it would greatly improve investor confidence if he remained. He is seen as “extremely competent”, and a “prestigious figure” that would smooth the transition into a Lula government. However, it is not denied that there are other people who could do his job just as well.

But who will it be? On national television recently Lula was vague about the qualities he sought in the next central bank president, saying it would be “a person in whom I trust, someone who I know is competent, who is capable… I have many friends in many places. Obviously [the president of central bank] will be someone who understands the market, he will be someone in my confidence; he does not necessarily need to be affiliated to the PT [Lula’s party], but he will be a person who knows how to look after our economy correctly.”

The name that is currently on everyone’s lips is Paulo Leme, emerging markets strategist for Goldman Sachs in New York. Perhaps it is hoped that such an appointment would quell the suspicions of nervous Wall Street traders when they see a kindred spirit appointed. Interestingly, on the subject of how soon to replace Fraga, Leme has said (presumably before these rumours began), “Excepting the fact that I still think the best option would be to keep Fraga, it is fundamental that the matter is decided on soon.” He also thinks “this exclusive obsession with [Fraga’s successor at] the central bank is a mistake, when we should really be worrying about the economic team as a whole, and how it works together... Working together is very important, the concept of acting as one, with everyone rowing in the same direction.” Leme, who is an orthodox economist, recently met some PT leaders, although not explicitly to talk about his replacing Fraga, and he commented: “The talks were very good, and I was surprised at how receptively and interestedly they listened to my opinions, which does not mean, of course, that they might have agreed with everything I said.”

It is expected that there will be change among the directors of the bank also, and it seems unlikely that the successors will be from the central bank. At present, half of the directors at the bank are previous employees at the bank, and if they are not invited to remain, they will have to relinquish their positions. The people in this rather uncomfortable position are the director for financial system regulation and organisation Sérgio Darcy, the director of supervision Tereza Grossi, the director of administration Edison Bernandes, and the director of bank liquidation and privatisation Carlos Eduardo de Freitas. The other three, as well as Fraga, were appointed from outside the bank. Furthermore, the new governor will be able to change the heads of department, although the successors will have to come from within the bank. According to the bank’s charter, only career employees at the bank can head the 22 departments. Also, four of the five existing secretaries as well as the two managers must be bank employees.

Mboweni Gets Tough On The Media
How to deal with self-interested journalists who really only care about producing an interesting ‘story’ - often at the expense of the truth - is a perennially bothersome issue for central bankers. Quite often journalists simply lack respect for the sage utterances of central bankers, and irreverent hacks are all too willing to mangle their words to suit their own purposes. This kind of impudence has certainly riled Tito Mboweni, the governor of the South African Reserve Bank, of late.

Mboweni has now been misquoted twice by the same wire service and has been forced to dismiss as entirely fanciful the statements they credited to him. They lifted sentences from the bank’s publications - which were independently researched and included the usual disclaimer explicitly stating that the views were not those of the bank - and attributed them to Mboweni, alongside real statements that he had made, thus making him look inconsistent and foolish.

Inaccurate reporting has been something of a scourge for Mboweni and it does present a serious problem. As he has observed, even the most intelligent people often just don’t question what they read in the media - and the consequences can be serious, as Mboweni is all too well aware, attributing part of the reason for the rand’s fall to reckless journalism. As a result, Mboweni now has a policy of not giving one-to-one interviews with the wire services, and has even given serious consideration to not giving interviews at all. Failing that, he has mulled following Mr Greenspan’s example: “Another option, which seems very attractive, is to speak on the basis of a written text and not answer questions like the United States' Alan Greenspan does.” But can the South African central bank mimic the US? Not quite. Alan Greenspan can get away with arrogant attitudes that a South African central bank governor cannot. Sorry, that’s life.

Misinformation? Or Misinterpretation?
In neighbouring Zimbabwe, similar oddities have appeared in the media. A quite extraordinary article appeared recently in one of the country’s main newspapers, the Financial Gazette, confidently alleging that one of President Mugabe’s stooges, Gideon Gono, would be taking over from the incumbent governor of the central bank, Leonard Tsumba, next month. The newspaper said that as Tsumba’s term ends in November, a replacement is being sought, and that it was pretty sure Gono would be the man, currently chief executive officer of the Commercial Bank of Zimbabwe but with humble origins as a tea boy. The story claimed that Gono had recently been seen touring the central bank’s headquarters in Harare, and had held informal meetings with the senior management there; he has independently been spotted pouring over the bank’s organogram.

All rather odd when you consider that Tsumba’s term doesn’t end until next July, as both the bank and Central Banking Publications’ Central Bank Directory will confirm. Moreover, the bank told me that no replacement is being sought. Indeed, it says that this whole story is claptrap, and wonders whether it might not have to do with the fact that Mr Gono in fact owns the newspaper in which the story in question was published - he currently chairs the Zimbabwe Broadcasting Corporation’s board of governors. Intriguingly, however, Gono professes of the reports of his imminent appointment: “That is news to me… I am not aware of that appointment at all.” The plot thickens... Furthermore, Tsumba has got himself into Mugabe’s bad books for, heaven forbid, backing former (take note) finance minister Simba Makoni’s plans to refloat the overvalued Zimbabwe dollar - probably well-advised if Zimbabwe’s economy is to stand any chance of recovery in the long run. Watch this space.

Houenipwela Champions The Public Cause
In the far-flung Solomon Islands, the central bank has become entangled in the kind of problem that does not commonly afflict its brethren. A disquieting amount of islanders have been duped into buying into a get-rich-quick scheme which promises that with an investment of just 250 Solomon Island dollars, they will be rewarded with millions in return. An attractive proposition you may think, but these days most people have accepted the folly of trying to turn base metals into gold. The concerned central bank governor, Rick Houenipwela, has been doing his best to make people think otherwise, but faces an uphill battle: “We have been trying to inform and educate the public about this. Unfortunately, there are many people in our community here who have probably been converted to a cargo cult kind of mentality, to the extent that common sense no longer is any sense to anyone.”

Such a large amount of the island’s inhabitants have fallen for this ploy - several thousands of the impoverished island’s half a million - that it is beginning to pose a genuine threat to the liquidity of its financial system, prompting Houenipwela to intervene - although not in the normal sense. He has challenged to a public debate the unscrupulous mastermind of this knavish scheme, who goes by the name of “Dr Jenny”, a retired local nurse who claims to have graduated from a medical school in Fiji. If this scheme, disingenuously labelled the Family Charitable Trust, is for real, then they should prove it.

Apparently they have been claiming that the source of the money for payouts will include the central bank and aid donors, although this is evidently untrue. Promoters of the scheme have since declared - falsely - that the central bank is interfering with the transfer of funds to the Solomon Islands by advising commercial banks not to open accounts for the funds. They are now, in a vain attempt to try and save face, trying to shift the blame onto the central bank, as befuddled investors are wondering why their money is still not yielding any returns. A spokesman for the central bank confidently tells me that “Dr Jenny still has not admitted her lies, but sooner or later they will catch up on her.”

Dinkic Tells PM To Mind His Own Business
Yugoslavia’s central bank governor, Mladjan Dinkic, seems to be lumbered with the irritating task of having to set things to right every time his economically ham-fisted prime minister blurts out inappropriate statements. Much to Dinkic’s horror, he has recently been making ill-advised comments about the exchange rate. Dinkic seemed exasperated: “I consider the kind of statement made by Prime Minister [Zoran] Djindjic in respect of a change of the dinar exchange rate to be irresponsible and incompetent.” This is not the first time the PM has been blabbering about changing the exchange rate, and Dinkic prefers him to stay off his patch, firmly drawing a line between their respective duties: “If that is what Djindjic wants, I, as the central bank governor, cannot uphold it and I consider that the prime minister should concern himself with matters on which he is competent. That means he should focus more on corruption in state institutions and on combating crime.”

Dinkic suggested that if the prime minister was worried about exports, he should first think about stimulating domestic growth. With a certain amount of good humour, he reassured any who might have taken the prime minister’s comments seriously: “The people have already grown accustomed to Prime Minister Djindjic's excursions with regard to the dinar rate of exchange. However, as nothing has happened so far, I think that his philosophising and theorizing will not upset them. The National Bank of Yugoslavia and the republican ministry of finance are taking care of the dinar rate of exchange, and as both institutions pursue a responsible policy, the dinar rate of exchange will remain stable.”

It's Just Very Difficult, You See...
No one doubts that the situation in Argentina is very complicated. It is now ten months since the country experienced the largest sovereign debt default in history, and this was always going to be tricky to clean up. But asked by a reporter at the IMF’s most recent press briefing why he thought the Fund still hadn’t reached an agreement with Argentina, and why it is so difficult for Argentina to have a political consensus, the usually silver-tongued Tom Dawson, the IMF’s head of external communications, was lost for words, and seemed just to repeat the question - over and over again...

“Well, I mean, I think there are any number of difficulties. It is a complex situation. The economic situation is quite difficult. The political situation, there are not only issues of consensus, you have issues of the prospective election. So it's a difficult situation I would say not just for the Argentines, for the Fund as well, and for the international financial community. So it is quite difficult - quite clearly one of the most difficult cases that we have ever had to work on, but that doesn't deter us from doing our very best to work with the authorities. And I think the authorities certainly are committed to continuing to work as closely with us as they possibly can. But it is in a number of areas, economic and political, an extremely difficult situation.”

Ian's Second Coming?
Ian Plenderleith, who only recently bid farewell to the Bank of England, at a ceremony where most people were crying, and Eddie George gave a most moving obituary, is set to make a comeback. Some say he is being considered for the next (second) deputy governor of the Bank, when Mervyn King gets his due promotion to the top slot. That would leave Sir Andrew Large as one deputy, but nobody to mind the ship as the second deputy governor. Newsmakers cannot yet confirm this rumour. But it would make sense, given Ian's huge competence, and the apparent dearth of other competent candidates. If he is not to be DG, then some other eminent role is surely beckoning.

Then he can time his second tearful departure. Two pensions are better than one. They say that some former BOE employees have collected three or four. And quite right too. Good central bankers are not two-a-penny.