ISDA PRESS REPORT - MAY 29, 2001

ISDA PRESS REPORT - MAY 29, 2001

CREDIT DERIVATIVES
* ISDA restructuring welcomed - FOW
* Credit Derivatives - FOW
* Restructuring - the solution? - FOW
* ISDA Prepares To Tackle 'Soft' Credit Event
Definitions - Derivatives Week

RISK MANAGEMENT
* It's the end of the 'w' as we know it - FOW
* ISDA fights for right to counterparty - FOW
* Bankers Call Credit Their No. 1 Risk Fear - American
Banker
* BoE's Clementi Cautions Knowledge Of Systemic Risk
Low - Dow Jones

COLLATERAL
* EU collateral Directive - FOW

ASIA
* China to Ease Rate Rules - The New York Times
* Devaluation Talk Just That, And No More - Dow Jones
* New CEO Helps Build Future For Singapore Exchange -
Asia Wall Street Journal

ACCOUNTING
* ISDA Opposes the FASB's Proposed Changes on Hybrid
Instruments - Hedge World
* Banks account - (commentary) Financial Times
* IASB Taking Tentative Steps on Agenda... - BNA

ENERGY
* Asian Airlines Tender For Jet Fuel Through Jet-A.com
- Dow Jones

OTHER ISSUES
* Weak euro 'may be what the doctor ordered -
Financial Times
* Central bank chief resists calls for advance
distribution of euro notes - BNA
* Fed Chairman Warns Economic Slowdown Is Not Yet
Over, Further Cuts May Be Needed - BNA
* Three Areas of Contention Threaten To Derail EU
Effort at Economic Reform - BNA

ISDA restructuring welcomed
FOW - May 2001
By Jane Sandiford

The impact of ISDA's new restructuring supplement is only lust being felt in
the credit derivatives market. While not viewed as the final word on the
tricky issue of 'R', the modifications have been broadly welcomed.

When Ernest Goodrich, md of Deutsche Bank, announced at ISDA's recent AGM
that a "consensus" had been reached on the credit derivative market's
restructuring problem, the audience held its breath. Despite the heavy hints
that ISDA was going to make such a timely announcement, things had not
looked promising. However, at the eleventh hour ISDA announced its
Restructuring Supplement to the 1999 ISDA Credit Derivatives Definitions.

Clarity
"The 1999 definitions of restructuring were a huge improvement on the
previous ISDA confirmations," says Thomas Riggs, vp and associate general
counsel of Goldman Sachs. "However, they were a compromise and exposed
credit protection sellers to risks that cannot easily be priced or managed."

Clearly, something had to be done. "A clearer definition of 'R' will be
beneficial," says Paolo Josca, head of credit derivatives in New York for
Banca Commerciale Italiana. "Restructuring is often the first sign of a
company in distress." Josca admits, however, that even if the ISDA
modification becomes adopted as a market standard, variations will still
exist.

Brian Barrett, director at Merrill Lynch agrees: "The main complaint
following Conseco was that the restructuring clause exposed credit
protection sellers to the protection buyer's cheapest-to-deliver option. To
address these complaints, dealers have proposed to substantially limit the
permitted maturities of deliverables if the buyer triggers the settlement of
a default swap based on 'R' as a credit event. Despite dealers' attempts to
find this common ground, I am not sure that the modified 'R' will be
acceptable to all." Many traders are sceptical that a single uniform
contract for credit derivatives is possible.

However, there is broad agreement that a clear standard framework is needed.
ISDA expects that trades will still continue without 'R', but hopes that the
new supplement will ease levels of confusion and reduce the 'RINR' spread.
In fact, Dennis Oakley, ISDA treasurer and md of JP Morgan cites a recent
five-year default swap that traded with the new 'R' supplement only two
basis points more expensive than 'NR'. The old restructuring clause has been
as much as 1O-l5bp more expensive.

The main elements of the new restructuring definition:
* Limit the number of alternatives to one revised approach, which is
preferable to having more options
* Impose a maturity limitation on deliverables
* State that deliverables must be fully transferable
* Take into account the BIS proposals on the restructuring compromise.

Of course, the new Basel capital adequacy proposal requires restructuring in
credit derivatives in order for them to qualify for capital relief. What
impact will ISDA's new modification have on this document? ISDA states that
the BIS proposal is still at an early stage and argues that it made more
sense for the Association to develop its restructuring modification first,
introduce it to the market, and then take it to the regulators.

"This new option is structured on the same lines as other ISDA supplements,"
explains Richard Kennaugh, md of JP Morgan. "You can specify the extent to
which you want to incorporate the supplement into your transaction - it is
easily done within a sentence or two. We hope everyone utilises the modified
version.

Positive
While this may not be the final word on restructuring, and while it may come
under attack for being too 'US big bank' biased or not going far enough,
ISDA's new restructuring supplement is generally considered to be a positive
development for the credit derivatives market. "There has been a high degree
of noise about restructuring in recent months," says Blythe Masters, global
head of credit derivatives at JP Morgan. "This is only natural and is
indicative of the fact that the credit derivatives business has grown
sufficiently to be on the financial radar screen."

Credit Derivatives
FOW - May 2001
By Jane Sandiford

Underpinning recent, well-publicised, developments in the industry, the
credit derivatives market is seeing a steady flow of business with volumes
up on the same time last year. "We have been doing some quite interesting
portfolio trades," says one trader. 'We have also structured some tax
arbitrage trades, synthetic collateralized debt obligations, and completed a
lot of relative value trades. Interestingly, we have been pricing up some
spread options again - we have not done that since 1999. This is probably
the result of recent market volatility and credit spread widening. While we
have not seen anything ground breaking, we have been doing some interesting
I deals recently."

Another trader points to the increasing accessibility of more structured
credit derivatives deals. "At one stage in the not too distant past we would
not have attempted to get involved in the more exotic transactions such as
synthetics," he explains. "However, now we are quite involved in this market
the mystery has gone and we can now see what we can do with these
instruments."

In addition, Deutsche Bank has recently structured an interesting deal. The
deal's floating-rate notes -have been provisionally rated by S&P. At
closing, Deutsche Bank will issue euro-denominated notes. As there is no
collateral for the notes, Deutsche Bank will -pay the principal and interest
on the notes. Deutsche Bank's obligation is, however, linked to the
performance of a static EUR2.25bn reference portfolio of 150
investment-grade reference entities.

"There exists, therefore a credit risk not only on Deutsche Bank's ability
to repay the notes, but also on the performance of the reference pool,"
explains Katrien Van Acoleyen, associate at S&P's structured finance ratings
group in London. "Both of these issues are adequately addressed by the BB+
rating."

If a credit event occurs in the reference portfolio, all the conditions to
payment have been met, and the total losses with respect to the portfolio
exceed the threshold amount, then the repayment of the notes will be reduced
with the cash settlement amount (defaulted amount less recovery), as
calculated by Deutsche Bank as calculation agent. At the same time as the
notes are issued, Deutsche Bank will also enter into two unfunded credit
default swaps, which are senior to the notes. Final maturity of the notes is
April 2006 but the notes can redeem early if the notional amount has been
reduced to zero and (ii) when an event of default or adverse tax change
occurs on the notes.

Meanwhile credit derivative brokers are looking to market the product to new
potential users. "We have been looking to target energy and utility houses,"
says one. "The credit risk aspect of energy has really hit home over the
past year, especially following the bankruptcy filing from the US Pacific
Gas and Electricity Company. Those companies that are exposed to such energy
risk are now seeking the protection that can be offered via credit
derivatives."

Energy companies are not the only institutions feeling the pain, of energy
risk. One market source warns that some synthetic securitisation structures,
issued by major credit derivatives players, may be under pressure and may be
downgraded as a result of the impact of the Californian power crisis. "Some
of these deals have exposure to US power utilities," says the source. "This
is something we are watching very closely indeed."

As FOW went to press, the full impact of ISDA's new restructuring
modification had yet to be felt. "We are waiting for our lawyers to go
through the supplement and come back with their recommendations," says one
structurer. "However, it seems a sensible solution and is along the lines of
what we have seen developing in the market. I would agree with comments that
the new supplement will narrow credit spreads. While this may not be the end
of the matter, it is good news for credit derivatives."

Restructuring - the solution?
FOW - May 2001

Any or all of the following definitions and provisions may be incorporated
into a document by wording in the document indicating that, or the extent to
which, the document is subject to the 1999 ISDA Credit Derivatives
Definitions, as supplemented by the Restructuring Supplement. All
definitions and provisions so incorporated in a document will be applicable
to that document unless otherwise provided in that document, and all terms
defined in these Definitions and used in any definition or provision that is
incorporated by reference in a document will have the respective meanings
set forth in these Definitions unless otherwise provided in that document.
Any term used in a document will, when combined with the name of a party,
have meaning in respect of the named party only.

The Definitions are supplemented by the following Sections:
Section 2.29 - Restructuring Maturity Limitation
If Physical Settlement is specified in the related Confirmation,
Restructuring is the only Credit Event specified in a Credit Event Notice
for which Buyer is the Notifying Party, and "Restructuring Maturity
Limitation Applicable is specified in the related Confirmation, then a
Deliverable Obligation may be included in the Portfolio only if it is a
Fully Transferable Obligation with a final maturity date no later than the
Restructuring Maturity Limitation Date (RMLD).

RMLD means the date that is the earlier of (x) 30 months following the
Restructuring Date and (y) the latest final maturity date of any
Restructured Bond or Loan, provided, however, that under no circumstances
shall the RMLD be earlier than the Scheduled Termination Date (STD) or later
than 30 months following the STD.

Section 4.10 -. Limitation on Obligations in Connection with Section 4.7
Notwithstanding anything to the contrary in Section 4.7, the occurrence of,
agreement to, or announcement of, any of the events described in Section
4.7(a)(i) to (v) shall not be a Restructuring where the Obligation in
respect of any such events is not a Multiple Holder Obligation (MHO).

MHO means an Obligation that (i) at the time the Credit Event Notice is
delivered, is held by more than three affiliated holders and (ii) with
respect to which a percentage of holders (determined pursuant to the terms
of the Obligation) at least equal to 66 2/3 is required to consent to the
event which would otherwise constitute Restructuring as a Credit Event.

Section 2.30 - Pan Passu Ranking; Section 4.7(a)(iv)

For purposes of determining whether an obligation satisfies the "Pan Passu
Ranking" Obligation Characteristic or Deliverable Obligation Characteristic,
the Reference Obligation(s) shall be deemed to have that ranking in priority
of payment which such Reference Obligation(s) had as of the later date of
(i) the Trade Date specified in the related Confirmation and (ii) the date
on which such obligation was issued or incurred and shall not reflect and
change to such ranking after such date.

For purposes of Sections 4.7(a)(iv), "a change in the ranking in priority of
payment of any Obligation, causing the subordination of such Obligation"
means only the following:
an amendment to the terms of such Obligation or other contractual
arrangement pursuant to which the requisite percentage of holders of such
Obligations (Subordinated Holders) agree that, upon the liquidation,
dissolution, reorganisation or winding up of the Reference Entity, holders
of any other Obligations (Senior Holders) are entitled to receive assets of
the Reference Entity distributable to the Subordinated Holders to the extent
that the Reference Entity's assets otherwise fail to satisfy the claims
represented by Senior Holders until the claims of the Senior Holders against
the Reference Entity are paid in full. For the avoidance of doubt, the
provision of collateral, credit support or credit enhancement with respect
to any obligation will not, of itself constitute a change in the ranking in
priority of payment of any Obligation causing the subordination of such
Obligation.

Section 3.11 - Credit Event Notice Upon Restructuring Notwithstanding
anything to the contrary in the Credit Derivatives Definitions, in the event
that the relevant Credit Event is Restructuring, a Notifying Party may
deliver a Credit Event Notice (CEN) with respect to all or a portion of the
Floating Rate Payer Calculation Amount of a Credit Derivative Transaction.
In the event a Notifying Party delivers a CEN with respect to a portion of
the Floating Rate Payer Calculation Amount of a Credit Derivative
Transaction, the following shall apply:

* The CEN must set forth the amount of the Floating Rate Payer
Calculation Amount to which such CEN applies (the Exercise Amount), which
must be in the amount of 1,000,000 units of the currency in which the
Floating Rate Payer Calculation Amount is denominated or an integral
multiple thereof; and

* A Notifying Party must deliver multiple CENs with respect to a
Credit Derivative Transaction, provided, however, that under no
circumstances shall the sum of the Exercise Amounts specified in each CEN
delivered pursuant to a Credit Derivative Transaction exceed the Floating
Rate Payer Calculation Amount of such Credit Derivative Transaction.

ISDA Prepares To Tackle 'Soft' Credit Event Definitions
Derivatives Week - May 28, 2001
By Victor Kremer

The International Swaps and Derivatives Association over the next several
weeks will canvass credit derivative dealers, hedgers and investors with a
view to revising so-called 'soft' credit event definitions in credit
derivative documentation. Bob Pickel, executive director and CEO of ISDA in
New York, told DW there will be changes to the credit event definitions,
declining to put a timeframe on the move. The issue has been a focus of
discussion as the synthetic CDO and credit default swap markets have grown
but raised eyebrows recently when Moody's Investors Service and Deutsche
Bank engaged in a skirmish--via conflicting research reports--on the
potential magnitude and probability of soft credit events, according to
market professionals.

The debate centers on credit events that are short of outright bankruptcy or
default, being included in credit derivative contracts. ISDA documentation
recognizes credit events that do not necessarily entail a default, such as
the 'in furtherance of' clause of the bankruptcy definition, which could
cover an obligor considering filing for bankruptcy, explained Jeffrey Tolk,
v.p. and senior credit officer at Moody's in New York. If publicly reported,
Tolk continued, these considerations could trigger a loss payment under a
credit default swap, even if the obligor does not enter bankruptcy.

In a report published at the beginning of the month Deutsche Bank concedes
that "synthetic credit instruments may carry an element of documentation
basis risk that is not present in a conventional cash security." However,
John Tierney, the report's author, continues: "We think Moody's goes too far
in implying that the presence of certain credit events in synthetic
securities exposes investors (ie protection sellers) to a materially greater
degree of default risk and loss."

"It's an unquantifiable risk and that makes us and investors uncomfortable,"
said Moody's Tolk. Rather than overstating the issue the rating agency
asserts that the definition of these soft credit events is so broad that
their inclusion in documentation exposes investors to an unknown level of
risk. "ISDA seems to be considering our point of view," he continued. ISDA's
Pickel confirmed that the association is moving towards Moody's definitions.
The association's G-6 subcommittee of the Credit Derivatives Market Practice
Group met last Tuesday to set an agenda for tackling the credit definitions.

Several investors said they share Moody's concerns with the inclusion of
soft credit event definitions in ISDA documentation. "That's where it gets a
little dicey," one investor noted, adding that the soft credit definitions
should be dropped. A credit derivatives trader in London noted ISDA is in
the early stages of looking at the definitions, but agreed that some credit
event definitions might be taken out of the ISDA documentation. "You don't
have to wait for ISDA," he said, adding that counterparties can agree to
strike the language from their documentation when they enter transactions.

It's the end of the 'w' as we know it
FOW - May 2001
By Jane Sandiford

Is the end nigh for 'w'? Judging from comments at ISDA's AGM last month, the
future looks bleak for Basel's now infamous proposed capital charge for
credit derivatives. Derided by the very regulators you would expect to
defend it, traders now question how 'w' can survive.

"Market views on the whole have been negative," explains Roger Tufts, senior
economic advisor, capital policy division, at the Office of the Comptroller
of the Currency. "I expect that 'w' will eventually go away.

The credit derivatives market has condemned the charge in no uncertain terms
and the comments from the ISDA ACM have been broadly welcomed. "It is good
to hear the regulators admit that 'w' makes no sense to them either," says
one trader. "I would now expect 'w' to be clarified and, at the very least,
the capital charge reduced."

The need for clarity on this and other features of the Basel proposal was
noted at the ISDA AGM by William McDonough, chairman of the Basel Committee
on Banking Supervision and president of the Federal Reserve Bank of New
York: "I know that it is of particular concern that we may be confusing
legal risks with 'other' risks. I think this is right."

Emmanuelle Sebton, head of risk management at ISDA, is particularly
heartened to hear McDonough's comments. She hopes by bringing more clarity
on the nature and purpose of the 'w' charge, the debate that ISDA has had
with the regulators will eventually lead to the conclusion that the charge
is unjustified and should be removed from the proposed Capital Accord.

"I agree with McDonough's comments on the 'w' factor," says Thomas Boemio,
senior supervisory financial analyst, policy development section, on the
board of governors of the Federal Reserve System. "We call 'w' the ~whatever
factor'. We are not sure what it is for - it is mainly a legal risk." As
such, the market believes 'w' should be consigned to the operational risk
area.

The US regulators seem to be in agreement - what is not so clear is the
position the European regulators will take. However, with criticism coming
from all sides of the debate, traders believe that 'xv' will soon be
consigned to the dustbin of history - a lucky near miss for credit
derivatives.

ISDA fights for right to counterparty
FOW - May 29, 2001
By Corinne Smith

The International Swaps & Derivatives Association (ISDA) announced at its
recent AGM its proposals for the treatment of counterparty credit risk, as
part of its response to the easel Committee's proposed new Capital Accord.

ISDA responded to Basel's first consultative paper in February last year,
saying that the current treatment of counterparty risk could be improved,
and needed further work before setting a new framework for a regulatory
capital charge. "In October last year we created the Counterparty Risk
Working Group to formulate ISDA's response, which was chaired by Tom Wilde,
director at Credit Suisse First Boston, and which represented 26
institutions, nine of which participated in a quantitative calibration
exercise," says Katia D'Hulster, policy director at ISDA in London. "We have
now finalised our proposals and they will be included as an annex to our
official Basel response, which is due by the end of May."

Although ISDA completed the major part of its work on counterparty credit
risk before the publication of Basel's second consultative paper in January,
the Association was pleased to note a paragraph about the Committee's
willingness to accept potential future exposure (PFE) modelling in the
document, a sign of progress towards addressing counter-party risk on a more
risk sensitive basis.

Internal models
The current rules for counter-party risk require institutions to calculate a
credit equivalent exposure for derivatives as the sum of the current value
(if positive) and an 'add on', obtained by multiplying the derivative
notional by fixed regulatory factors depending on the underlying market.
"This is a very crude way of calculating a regulatory capital charge for
counterparty risk," explains D'Hulster. "What we propose is that the Basel
Committee allow banks to calculate these credit equivalent exposures using
their internal models. Just as in the current rules, however, these
exposures would then be risk weighted in the same way as other credit
assets.

This two-step approach is one aspect of the current rules that we are not
proposing to change. In the first step, banks calculate credit equivalent
exposures; and in the second step, these exposures are treated as normal
credit assets. The alternative is to use internal models to calculate
capital directly from derivatives positions. ISDA regards this as the
ultimate goal, but recognises that it must follow in the footsteps of
internal modelling for fixed exposures, which the regulators are not yet
ready to accept."

For firms that do not have internal models of counter-party risk, the
existing method could remain in place with some modification. However, many
banks already have appropriate internal models for these calculations,
although they would need to be reviewed and approved by regulators. "We
recommend that for the calculation of credit equivalent exposures, banks use
the concept of expected positive exposure," says Wilde.

"By the end of this year, the Basel Committee will have prepared its final
proposals, so we would like it to consider our work on counterparty risk. We
would also like to see the European Union consider our work in its Capital
Adequacy Directive."

Bankers Call Credit Their No. 1 Risk Fear
American Banker - May 29, 2001
By Nicole Darn

WASHINGTON - Bankers say credit, economic capital, and systems risk - in
that order - are their top three risk management concerns. Capital Market
Risk Advisors, a New York financial advisory firm specializing in risk
management, surveyed 40 bankers worldwide on their risk management concerns
and thoughts about economic capital.

The firm found emerging-market and investment banks were more gravely
concerned about integrating market and credit risk than did
non-emerging-market foreign banks, U.S. banks, and other financial
institutions. Of the banks surveyed, 65% said they use internal models for
market-risk regulatory capital and 35% use the Basel standardized
measurement method. Of those using the Basel method, 69% said they plan to
move to internal models. None of the emerging-market banks said they use
internal models now, but 71% said they plan to. Most of the major banks and
investment banks said they are currently using internal models.

Sixty-three percent of all bank respondents said that if the Basel Committee
on Bank Supervision would let banks use their own credit risk models now,
they would not yet be ready to make the switch.

BoE's Clementi Cautions Knowledge Of Systemic Risk Low
Dow Jones Newswires - May 23, 2001
By David Cottle

LONDON -- The Bank of England's role in combating systemic risk arouses far
more internal debate than its monetary policy, the Bank's Deputy Governor
David Clementi said Wednesday. In a speech on Banks and Systemic Risk at the
Bank of England's annual conference, Clementi said that while the 2.5%
target for inflation is "clear and transparent" the global understanding of
systemic risk is in a "very preliminary stage." He added that the very
definition of such risk along with the problems of measuring it and the
policy weapons used to combat it remain fundamental questions which the
international banking community so far has provided only partial answers.
He pointed to a lack of evidence of systemic shocks.

"Whilst banking crises are not exactly rare, they are episodic rather than
regular and they tend to exhibit a number of idiosyncratic characteristics,"
he said. What is not in doubt, Clementi added, is that "financial crises,
specifically banking crises produce real economic costs." He highlighted
the immediate costs to the public sector if ailing banks have to be bailed
out in addition to longer- term costs to growth.

He pointed out that banking crises have become more common, with four out of
the G10 most developed countries suffering one in the last decade. Clementi
said that the increasing trend in global banking towards consolidation may
lead to safer banks in the long run, it could also make bank failure more
damaging in its impact. Additionally, the changing nature of bank activity
also affects risk profiles, he said. "New markets, new customers, new
products, new technology increase the risk of something going wrong if the
industry's risk assessment procedures do not keep pace," he said. He
highlighted the need to "risk proof" the global banking system through
measures such as the Basel Accord on capital adequacy.

Market discipline and disclosure are two cornerstones of this process,
Clement said. He added, however, that there is no point in enhancing
disclosures if the "market has no incentive to apply the information because
it believes that banks will not be allowed to fail." The goal of improving
and harnessing market discipline has to go hand in hand with the continued
rolling back of state guarantees to banks, whether formal or implicit, he
said. On the implications of the Basel accord for the level of capital in
the banking system, Clementi stressed the need to achieve a balance. Erring
on the low side of a minimum capital standard could result in an
unacceptable risk, whereas to err on the high side is likely to result in
wasteful and costly regulatory arbitrage," he said.

EU collateral Directive
FOW - May 29, 2001
By Jane Sandiford

ISDA is now asking 17 jurisdictions around the world to update their legal
opinion on the document. "We anticipate that the process, depending on the
jurisdiction, should take six months," says ISDA's assistant general
counsel, Kimberley Summe. "Those requests for counsel will go out this month
and I would anticipate that by late fall we should have them in and we'll
then make them available on our Website."

While the new provisions have been broadly welcomed, significant hurdles
remain. "There are considerable technical constraints to be overcome to
enact the documentation," says James Crabb, head of collateral management at
Barclays Capital. Crabb warns that the documentation is biased in favour of
larger banks that have access to a wider range of collateral.

Meanwhile, the EU has proposed a new Directive to create a uniform EU legal
framework to limit credit risk in financial transactions through the
provision of securities and cash as collateral. The Directive is largely in
keeping with ISDA's new Provisions. "This Directive promises to support the
growing use of collateral in the EU, removing many unnecessary obstacles,"
says Robert Pickel, ISDA's Executive Director and CEO.

The EU's internal market commissioner, Frits Bolkestein, says that the
proposal is "the first step towards integration of the financial market for
collateral in the EU". He adds that the proposal tackles a major
disincentive to cross-border transactions". Market operators currently face
15 different legal regimes for the provision of collateral, complicated
potential conflicts between jurisdictions and uncertainties surrounding the
law applicable to cross-border transfers of securities. "This proposal would
determine which law governs cross-border collateral arrangements and would
make it possible for market participants to conclude such arrangements in
the same manner throughout the EU," says Bolkestein.

China to Ease Rate Rules
The New York Times - May 28, 2001

SHANGHAI, May 28 - China plans to relax its control of foreign currency
lending rates by the second half of the year, China Securities News has
reported.

Banks will be permitted to adjust their foreign currency lending rates to
bring them more into line with market demand than they are permitted to now.
Foreign currency lending rates are now set by the central bank.

The change is part of a plan to permit banks to set all lending rates within
3 years and all deposit rates within 5 to 10 years, the paper said. Relaxing
state control is a critical step toward achieving the government's goal of
making the country's currency fully convertible.

Devaluation Talk Just That, And No More
A Dow Jones Newswires Column - May 27, 2001
By James Areddy

HONG KONG -- Markets make it a rule to ignore government promises not to
devalue a currency. But it also makes sense to disregard statements from
Beijing that sound as if its commitment to a stable currency has waned. In
Malaysia, economists have glazed right over promises from Prime Minister
Mahathir Mohamad that the ringgit's peg is secure, since sentiment is
widespread that the exchange rate is unsustainable. It was the same thing in
February when Turkey's government expressed its support for the lira before
it crashed, and the way markets also cast a suspicious eye toward indebted
Argentina's peso.

Some even regard devaluation plans as one of the few times a government has
a good reason to lie, since officials have a mandate to maintain market
confidence in the national currency as long as possible. So it's strange to
hear Chinese officials - not market players - hint they have lost the faith.
Instead of highlighting China's strong balance of payments position or that
it has the world's second largest trove of foreign exchange reserves, as
other governments might, officials have made headlines in recent weeks by
pointing out the yuan exchange rate's stress points.
Their statements bring many traders back to 1998, and the then downward
spiral of the Japanese yen.

When the U.S. currency started climbing toward Y147 in the middle of that
year, China led the rest of Asia with acrimonious statements that Japan's
failure to address its economic problems undermined market confidence in the
yen. Threatened by China with a competitive devaluation of the yuan at a
time of extreme global financial turmoil, authorities in the U.S. and Japan
put an end to the yen's slide with well-timed intervention in world currency
markets. Chinese devaluation fears receded as the yen rebounded on worries
about more intervention.

Now, some think they hear echoes of the past in China's rhetoric. A clouding
of the U.S. economic picture, sour relations with Washington and - most of
all - the new vulnerability of Japan's yen help make the latest Chinese
arguments sound shrill. "A consistent depreciation of the yen against the
dollar would create pressure on the stability of the yuan exchange rate,"
the People's Bank of China warned this month. "China needs to take measures
to improve the competitiveness of its exports," the country's Ministry of
Foreign Trade and Economic Cooperation chimed in a few days later.

No Face Value
Yet, the way things stand now, virtually no one takes China's worries at
face value. Gray market rates of the yuan in Hong Kong are stable and point
to strengthening, while purveyors of derivatives who offer plays on the
non-convertible yuan are having a dull spell. One analyst says China is
merely reminding the market that its commitment doesn't equate stability in
the yuan forever and no matter what. Another said Asia collectively wants to
keep pressure on Japan, noting South Korea also hackled when the yen headed
south.

And it's not a critical situation. China's current account balance is
expected to remain in surplus of 0.7% of gross domestic product this year,
albeit down from 1.5% of GDP last year, according to Goldman Sachs & Co. The
firm's "early warning signals" pick up no financial risk regarding China.
Yes, analysts say, Beijing is concerned that another big fall in the
Japanese currency would weaken its ability to compete with Japanese
companies in third-party export markets, like the U.S. It would also reduce
China's ability to carve out space in the liberalizing Japanese market and
to draw investment from Japanese companies.

But China's actions speak louder than its words on the currency. The yuan
has remained rock solid for over seven years in the face of both downward
and upward pressures, some of them severe, as in 1998. And it's worth
noting the words themselves have been anything but alarmist so far. In fact,
analysts say Beijing has reassured that it will allow market forces to set
the yuan only gradually. PBOC Gov. Dai Xianglong's bottom line is that the
yuan "will remain stable, although not fixed...so please, rest assured."

China's myriad political and economic considerations - growing oil import
dependency, budding statesmanship and hopes to get top dollar in its
privatizations - make it difficult to argue that devaluation would provide a
net benefit. Nor is it easy to say China has less "responsibility" to the
rest of Asia than it did three years ago when the region's economies were
being pummeled. Chinese devaluation then most certainly would have forced a
new round of currency instability throughout a highly indebted and
crisis-hit Asia.

But while a 10%-20% weaker Chinese currency now probably wouldn't collapse
Asian economies, it would be hard to pull off without making Beijing look
greedy. China's buoyant, albeit weaker, export figures support the view
that it continues to take market share away from the rest of the region,
increasingly in the critical electronics sector. The region is already
unsettled by the singular focus foreign investors have on China. China has
accounted for virtually all of the region's equity fund raising so far this
year, up from 77% of the total last year, according to Deutsche Bank AG.

The argument that China would use a devaluation to punish the U.S. for
downgrading relations also fails to hold water. The punch it would give
other Asian countries would undermine the Chinese leadership's recent
whirlwind of diplomacy through Asia. And, with U.S. relations in the dumps,
"China now needs friends in the region more than at any time during the past
decade," according to Yiping Huang, a Citigroup Inc. economist in Hong Kong.
A devaluation would also upset the country's existing foreign investors.
People who last year pumped US$20 billion into Chinese stocks and US$40.8
billion into factories and such on the mainland would look like suckers who
paid too much.

A sudden drop in the currency would also probably crash the Hong Kong stock
market, denting the interests of a lot of those China is counting on to
provide recurrent FDI and demand in future stock offerings, analysts point
out. The Ministry of Finance sent no devaluation signals this month to the
investors around the globe who demonstrated an overwhelmingly positive
response to its first sovereign bond offering in about three years,
according to Dennis Zhu, who helped organize the US$1.485 billion
dollar-euro deal.

Zhu, JP Morgan Chase & Co.'s China head of investment banking, said that may
be because investors think China has the ability to control its currency,
and he downplayed the risks altogether. "It would be different for a country
like Thailand or Malaysia," where balance of payment weaknesses make a
controlled devaluation less of a certainty, Zhu said. Or consider the U.S.
export market. China is trying to climb the technology ladder, but where it
competes most is in the consumer realm where weaker demand would surely
affect its sales of clothes and toys.
Increasingly for these type of goods, says Coudert Bros. trade attorney Owen
Nee, "the choice is do you buy from China or do you buy from Mexico?" And
the peso is trading near three-year highs against the U.S. dollar.

Credit Lyonnais Securities Asia Ltd., like many other houses, was wrong in
1998 to bet on a Chinese currency fall, and it still sees Beijing as
"frantic" at the prospects of seeing exports or foreign exchange reserves
slip. "The obvious solution would be to allow the currency to depreciate,"
according to Chief Economist Jim Walker. But now he puts the currency
question in a broader context. When top posts are shifted in the Chinese
government next year, reformers like Prime Minister Zhu Rongji will want
incoming policy makers to back their decisions such as to join the World
Trade Organization. Devaluation, according to Walker, would make China
appear weak in the face of the global competition the reformers have so
embraced. Still, according to CLSA, "expect the rhetoric and the risk to
increase sharply if the yen trades through Y130."

New CEO Helps Build Future For Singapore Exchange
Asia Wall Street Journal - May 27, 2001
By Shu Shin Luh

Singapore -- A year ago last month, Tom Kloet became the most senior
foreigner ever appointed to Singapore's stock and futures exchanges since
the island's colonial times. The American's appointment as the chief
executive of the Singapore Exchange Ltd., after a year-long search, fits
with the Singapore government's push to attract foreign talent who will
advance the island nation's position as a cutting-edge regional financial
hub.

The Singapore Exchange became Asia's first integrated securities and
derivatives exchange after a merger of the Singapore Stock Exchange and the
Singapore International Monetary Exchange in December 1999. The exchange saw
an exodus of long-time executives during its early days. Mr. Kloet, who had
been a senior managing director at ABN Amro in Chicago and a board member at
the Chicago Mercantile Exchange, arrived in April 2000 and spent his first
months rebuilding a senior management team.

Since then, the exchange has gone public and established various alliances
such as with the American Stock Exchange and the Australian Stock Exchange,
among other highlights. Three weeks ago, the exchange joined a growing
number of Singapore companies that are reporting financial earnings
quarterly as part of the city-state's effort to improve corporate
transparency. Mr. Kloet speaks about his first year at the exchange in an
interview. The following is an edited excerpt:

Q: What do you think are the highlights of your first year as CEO?

A: We've embarked on a number of exciting initiatives, including everything
from a solid new management team to new alliances. Seven out of 10 of the
people on my team weren't with the institution 13, 14 months ago, plus me.
But we've hired a group that is great. We have a cohesiveness being built
that's very important. Together with that, we have successfully completed
the transfer of our company from an entity that operated like a member-owned
organization to a customer-driven organization. It takes time but we're
making progress on that, including privatizing and taking the company public
with the stock. . . . If I may borrow Winston Churchill's words: that's not
the end, not even the beginning of the end, but the end of the beginning to
create the future of the exchange. As an institution with a smaller domestic
market, we believe we have to reach out to enter a network of relationships.

Q: Was it difficult to build a new management team?

A: When I came, there were definitely a few holes we had to fill. There were
a few who chose to leave. . . . We didn't tell them to do it. . . . There's
a lot of talent here in Singapore. But we also brought in people from
outside Singapore where we thought we needed expertise that we couldn't find
in Singapore.

Q: Many multinationals aim to recruit locally for their offices in Asia. Do
you also try to do the same for the exchange?

A: Some jobs will require us to go outside because the business line simply
doesn't exist here. Clearly our first choice would be to look domestically
for people we see every day and who know this market. But we will look where
we can get for the best people and that's the only thing that drives us.

Q: Recently, Singapore has encouraged local companies to recruit "global
talent." You are certainly one of them. What are your thoughts on global
talent?

A: Whether I'm Singaporean, American, French or from wherever, is not the
issue. The most important thing is will I help (the exchange) fulfill its
ambition in the global marketplace. I would interpret the government's move
to be: bring the talent as needed . . . I wouldn't say it's easy to attract
people to move. But Singapore is an easy place to get acclimated to. The
commute is short; the lifestyle here is pretty good. I personally like the
climate. People find it easy to raise families here. In relative terms,
Singapore is a pretty easy sale.

Q: How difficult was it for the exchange to transition from a government-run
organization to a commercial one?

A: I think it's still evolving. That's not a cultural change the CEO
dictates. It's a cultural change the institution moves toward. I think we're
moving as fast as we could. Certainly, members and participants are
important to listen to. We want to make sure our team doesn't lose the focus
to listen . . .

The change to a commercial entity requires one to consider the
(profit-and-loss) ramifications of the services you provide. We also provide
a regulatory function. I think we've found the balancing act. Doing it is
not as easy.

Q: How has the exchange benefited from going public?

A: First off, it gives the institution a certain freedom to act as a
commercial entity . . . Also, it puts a financial discipline on the
organization that a member organization generically might not have. Like any
new public company, we make sure we're as transparent as we can be. We gave
third quarter results (three weeks ago). We think it's the right thing to
do. We want to make sure the exchange is setting a standard for global best
practices. We are making an effort to be as transparent and still be
effective in the marketplace. We're learning.

Q: Being transparent goes hand in hand with good corporate governance, a
topic frequently discussed here. How do Singapore companies measure up to
that?

A: Over the last three years, I think Singapore has made terrific strides to
improving the corporate governance. . . . We announced we would adopt the
corporate governance code and require our listed companies to disclose
non-compliance to that code. . . . Rather than prescribing a set of
corporate governance requirements that says here's what the standards should
be, we think we should tell shareholders when something's wrong. That's the
best for the market at this time. I admire Singapore, as somebody who's come
on scene late, for - not withstanding the improvement that have been made -
to yet take the next step. They are not sitting and resting on the laurels
but taking the next step.

Q: How have you applied your experiences serving as a board member of the
Chicago Mercantile Exchange to your management of the exchange here?

A: It's the ability to think outside the box a bit. Our whole management
team is learning to do it here. You have to make sure your people know that
it's not bad to be wrong. . . . One can't be afraid to be wrong, but don't
be wrong because you haven't done the research. An idea should be able to
come up from anywhere in the organization. . . . There should also be a
trust level between colleagues. . . . As the CEO, I try to encourage having
an institution where anybody in the institution can e-mail me. I tell
everyone to call me Tom. I would say that's quite unusual in the Singapore
context.

ISDA Opposes the FASB's Proposed Changes on Hybrid Instruments
HedgeWorld - May 29, 2001
By Christopher Faille

NEW YORK (HedgeWorld.com)-The International Swap Dealers Association wishes
the Financial Accounting and Standards Board would adhere to the old adage,
"if it ain't broke, don't fix it."
That is the gist of the ISDA comment, filed on April 30, in response to an
FASB exposure draft on accounting for compound financial instruments that
have characteristics of both liabilities and equity, such as convertible
bonds. "The amount of change to the accounting model that has taken place
in the last four years has been enormous. Such change has put a strain on
the resources of both the financial statement preparer community as well as
those of the financial statement users who are still tying to digest the
significance of the new guidance so far and adjust their analytics
accordingly," their comment argued.

The ISDA is particularly unhappy about what it calls "bifurcation,"-that is,
the idea implicit in the exposure draft that an instrument should be broken
down unto liability and equity components, which can then be assigned to
their place on the balance sheet and accounted for separately. The ISDA
acknowledges one important point in favor of the proposed change - it would
bring American standards in line with the approach employed by the
International Accounting Standards Commission, and thus contribute to
convergence. But the ISDA adds that it does not "consider their acceptance
of bifurcation to be an obligation for adoption by U.S. standard setters."

One industry authority consulted by HedgeWorld suggested that the volume and
sophistication of the market for convertibles in the United States makes
this country a special case, and justifies non-convergence. The source also
indicated that bifurcation is not a simple matter, because it may create the
misleading appearance that the liability and equity components of an
instrument are entirely unrelated, whereas in economic fact (and as
marketed) they are intertwined.

Some industry skepticism notwithstanding, this exposure draft seems not to
have stirred up the same sort of hornets' nest as have other recent FASB
initiatives, such as the recent elimination of asset pooling for mergers.
All mergers initiated after June 30, 2001 must use the purchase method. In a
closely related move, the FASB has also lately determined that effective
next year, pure goodwill recorded on corporate balance sheets will no longer
be amortized, but will be subjected to an "impairment" approach.

In a 14-page report, issued in mid May, a financial services firm, Friedman,
Billings, Ramsey & Co. concluded that the net effects of these changes will
be bullish for stocks. "We anticipate the psychological perception of
applying current P/E ratios to higher future GAAP earnings will result in
higher stock prices," wrote the FBR's senior analyst, Laurie Hunsicker. Ms.
Hunsicker acknowledges that the new accounting methods do not change the
underlying economic realities, but expects that psychology will trump such
matters.

Banks account
Financial Times - May 28, 2001

Who could argue against the disclosure of fair values in company accounts?
Bankers, who are seething over plans to change the way they account for
financial instruments such as derivatives and loans to customers. The plans
have been drawn up by the Joint Working Group, a body made up mainly of
accounting standard-setters from the world's biggest economies. Bankers say
the results would lead to dramatic swings in the value of balance sheet
assets that would often be meaningless and potentially damaging.

It is certainly the case that the existing accounting rules often fail to
reflect the impact of changes in interest rates or credit risks on bank
earnings. Fair value accounting would force banks to adjust their accounts
in the light of rises and falls in the values of all financial instruments.
The result would be greater volatility in profits but proponents of the
change say it would give investors a truer picture of corporate health.

Not so, say the banks. While fair value accounting is appropriate for
trading activities, it would not reflect the real business of making
long-term loans to customers, which are largely held to maturity and
therefore rarely traded. Banks manage loan portfolios to make a stable
interest margin over the terms of the loans - not on the profits determined
each year in relation to the interest rate at the time.

This is more than an academic argument. Supporters of fair value accounting
say the existing state of affairs masks the real financial position of banks
- one reason why banks are often given lower stock market ratings than
securities houses which mark their loans to market. Opponents say the
volatility of fair value accounting would not only confuse consumers and
investors, it could lead banks to withdraw from lending that caused
volatility even though it was safe. At worst, the result would be to amplify
the economic cycle, with sudden withdrawals of credit accentuating the
downturn when markets slow.

The issue is further complicated by the continuing international
negotiations over the amount of capital banks have to hold. The new Basle
accord would base capital requirements on risk assessments rather than
market pricing, leading some bankers to fear a divergence between the Basle
formula and accounting standards. It is impossible to argue against greater
transparency in bank accounting but it should be recognised that there is
more than one way to capture financial reality. Much more work is needed
before fair value accounting can be proclaimed as the right answer for
banks.

IASB Taking Tentative Steps on Agenda With Help From National Rulemaking
Groups
BNA - May 29, 2001
By Steve Burkholder

LONDON--The International Accounting Standards Board took more steps May 25
to set its rulemaking agenda, placing fast-track efforts to improve existing
standards and to ease companies' switching to international rules at the
front of a long docket.

The steps are tentative, however. Under its constitution, IASB must consult
with its advisory council--which is yet to be named--before it can formally
fix an agenda. A meeting with the advisory panel is expected to take place
in July. The improvements project is an omnibus effort intended to mend a
variety of rules IASB inherited from its predecessor board, the
International Accounting Standards Committee, and to rid those standards of
inconsistencies and inappropriate choices in accounting methods.

The transition, or first-time application, project is being watched closely
by the Big 5 accounting firms and their European client-companies. That
audience is mindful of the planned European Union directive that would
require some 7,000 companies in the region to carry out their financial
reporting using international standards by 2005.

New Rules by End of 2003
For that to occur, and to remedy the concerns of securities regulators, IASB
effectively has to significantly improve a variety of accounting rules and
issue new ones by the end of 2003. In addition, IASB expects to tackle a
project on business combinations quickly and hopes to have it done in
comparatively short order. The focus of the planned work on merger and
acquisition accounting would be to consider barring the pooling-of-interests
method of accounting and adopt the purchase method instead. IASB also plans
to target the treatment of goodwill, a key element in purchase accounting,
and weigh a possible adoption of impairment against the survival of the
writedown of goodwill acquired in a combination.

As with all standard-setting projects and less substantial efforts, the
board has its eye on convergence. It is working toward issuing a single set
of high quality accounting rules that could be used by companies around the
world in raising capital.

Heavy Involvement of National Boards
The path to that goal will include heavy involvement of major national
standard-setting bodies in the rulemaking of IASB. The mechanisms for that
work--which are to include joint projects and other "partnership working
arrangements"--were detailed in a meeting May 24 with the heads of
standard-setting panels from Australia, Canada, France, Germany, Japan, New
Zealand, the United Kingdom, and the United States. IASB has formal
"liaison" relationships with those boards.
A sharing of human resources by the sparely staffed IASB and groups such as
the U.S. Financial Accounting Standards Board would be complemented by a
trading of knowledge, the rulemakers suggested. "I expect that the FASB
will gain as much as it gets out of the work of IASB," FASB Chairman Edmund
Jenkins told the international board and his counterparts from around the
world.

IASB 'Not a Dictator'
At the May 24 meeting, IASB Chairman David Tweedie and his colleagues sought
to provide assurances that the newly restructured international panel will
not usurp the authority of the national standard-setters. In forging
shared-work arrangements on topics such as stock-based compensation, or
share-based payments, revenue recognition, and consolidations policy, there
will be no directives to national boards to arrive a particular conclusion,
Tweedie suggested.
"IASB is not a dictator. It's simply a facilitator," he said.

Earlier in the meeting, Hans Havermann, chairman of the German accounting
standards board, discussed the IASB-national boards model for working toward
converging rules and stated that "the autonomy and independence of the local
standard-setters" must remain intact. In response, James Leisenring, a
former long-time FASB member now serving on IASB, suggested the model of
joint projects and shared labor and research is not intended to be a threat
to the autonomy of any national board. The notion behind convergence, he
added, is to "put some pressure on all of us to get to the same answer" and
work "with a spirit of cooperation."

That does not mean, however, that IASB and a national board with which it
works on a particular project will be assured of arriving at the same
answer, Leisenring said. "They always have the right to reach different
conclusions," he said of the national boards. In summarizing the May 24
discussion on rulemaking-by-partnership, Tweedie said that there would be a
method of resolving conflicts, which he called "an important issue." The
IASB chairman noted that rulemaking agendas of the international board and
the major national standard-setters will have to be aligned. Such an
alignment means also that due process schedules--for example, comment
periods on draft rules--will have to be coordinated, as at least one
participant in the meeting suggested.

Tentative Listing of High-Priority Projects
Besides the improvements, transition, and combinations project, IASB's list
of high-priority technical efforts includes:

* share-based payments, or stock-based compensation, a controversial
project that would have an expected goal of expensing stock options (101 DTR
G-7, 5/25/01);
* reporting financial performance, which IASB and FASB members have
suggested could hold the key to acceptability of controversial moves toward
fair value in accounting, especially for financial instruments;
* financial instruments, which possibly could mean a near-term repair
of the flawed International Accounting Standard 39, while moving more
deliberately toward full fair value-based measurement and recognition of
financial assets and financial liabilities;
* distinguishing between liabilities and equity, a project similar to
the pending FASB project focusing on classifying such items as mandatorily
redeemable preferred securities;
* consolidations policy, or determining on what basis a company should
consolidate subsidiaries it effectively controls despite lack of equity
ownership, a project that has bedeviled FASB for some 18 years;
* measurement objectives, which would focus on such questions as fair
value versus "deprival value"--the latter an accounting concept in Great
Britain--as an avenue to better use of present-value-based methods of
measurement and associated notions of discounting and estimating future cash
flows (100 DTR G-7, 5/23/01);
* revenue recognition, with the related tasks of devising rules on
liability recognition and possibly having to revise or devise bedrock
definitions, a likely prospect in the liabilities-equity effort, also;
* insurance contracts;
* impairment; and
* derecognition.

Parts of that full plate of high priority items are expected to be taken up
at IASB's next meeting in late June. As described by Tweedie May 25, the
last day of the board's four-day meeting, the tentative agenda for that
meeting includes transition issues, "obviously a big issue"; business
combinations; performance reporting; more agenda-setting, with a refining of
assignment of priorities; and the measurement objectives topic.

Asian Airlines Tender For Jet Fuel Through Jet-A.com
Dow Jones - May 29, 2001
By Jeremy Bowden

SINGAPORE -- All Nippon Airways Co. Ltd. (J.ANA) and Japan Airlines Co. Ltd.
(JAPNY) are among several major airlines to have tendered for part of their
jet fuel needs through a new Internet platform, Jet-A.com, according to oil
traders.
The Internet site is backed by 24 major airlines, including the two Japanese
carriers and other Asian-based airlines including Singapore Airlines Ltd.
(P.SAL), Cathay Pacific Airways Ltd. (H.CPA) and Air New Zealand Ltd.
(A.AIZ).

The site is also backed by six major oil companies, including BP PLC (BP),
Exxon Mobil Corp. (XOM), Chevron Corp. (CHV) and the Royal Dutch/Shell Group
(RD). In total, Jet-A estimates its backers represent 60% of the global jet
fuel market.
According to oil traders, jet fuel is one of the most generic of oil
products and as such is easier to trade through an electronic system than
oil products with a greater variety of specifications, such as gasoline or
fuel oil.

Unlike most other online oil trading systems, Jet-A.com is designed for
physical trade, in the form of buy and sell tenders - with a facility for
direct one-to-one negotiation - rather than derivative trade. The web site,
however, provides links to derivative trading sites, as well as other
physical trading sites. As well as tenders, airlines will also be able to
make spot purchases from a variety of suppliers around the clock.

Jet-A has agreed to team up with Platts' PlattsDirect system, along with
business-to-business management software company TradeCapture.com, to
provide its online electronic cash exchange. Platts is a division of
McGraw-Hill Cos. (MHP). Jet-A estimates that 95% of worldwide jet fuel
transactions are already based on Platts' price assessments, and "qualified
trades" from the Jet-A.com PlattsDirect system will be used in Platts' own
market assessments, according to a Jet-A press release.

The Chicago-based site was formed Jan. 24. It also provides a data
collection point for ticketing information, and will maintain fuel contract
and price databases. Further services are expected to be launched in 2002.
Jet-A says its site should save the airline industry up to $100 million
annually in fuel procurement costs.

Weak euro 'may be what the doctor ordered' ECB WATCH:
Financial Times; May 29, 2001
By TONY BARBER

Slower economic growth, rising inflation and a tumbling euro make an
unpleasant combination for the European Central Bank. Each factor seems to
reinforce the others. As Ernst Welteke, Bundesbank president, observed last
Friday, the euro's weakness has contributed to the euro-zone's problem with
inflation over the past year.

Higher than acceptable inflation reduces the ECB's scope for cutting
interest rates. This in turn restricts economic growth, especially in
Germany. Pessimism about the growth outlook then causes currency markets to
sell the euro, and the vicious circle is complete. Is there any way out? In
the short term, probably not. One nasty blow for the euro was the revision
this month of the widely followed Morgan Stanley Capital International
equity market indices.

The resulting adjustments by portfolio managers could cause even more money
to flow out of the euro and into other currencies than was first thought.
Paul Meggyesi of Deutsche Bank estimates the net outflow will be about
Dollars 43bn, higher than his initial calculation of Dollars 26bn-Dollars
30bn.

However, the main beneficiary is likely to be not the dollar but sterling,
which Mr. Meggyesi thinks will receive an inflow of Dollars 44bn. Any
further strengthening of the pound against the euro will provide food for
thought for those, in the euro-zone as much as in the UK, who are
contemplating British adoption of the single currency.

Be that as it may, it is uncertain that the ECB would accept the "vicious
circle" diagnosis set out above.
"The ECB is only in a bind if its objective is to cut interest rates, rather
than to do what it can for the economy without prejudicing its inflation
objective," says Nigel Anderson, of the Royal Bank of Scotland.

This point becomes clear when one recalls that, since the euro's birth, the
ECB has always argued that real interest rates in the euro-zone have been
low by historical standards. The ECB's main interest rate stood at 2.5 per
cent between April and November 1999.

Coupled with oil price-induced inflation and the falling euro, the overall
effect was to create a monetary policy setting that was very lax for many
euro-zone member states. This explains the seven rate increases between
November 1999 and October 2000 that took the ECB's main rate up to 4.75 per
cent.

The mild cut that the ECB finally delivered on May 10, bringing the main
rate to 4.5 per cent, ended up being less mild than the ECB intended.
Because financial markets did not like the ECB's reasoning behind the cut,
it triggered a fall in the euro that may ease overall monetary conditions by
more than the cut itself.

The euro's weakness does make it harder for the ECB to bring down inflation
below its target ceiling of 2 per cent a year. But it also represents a
monetary easing that, as Mr. Anderson suggests, "might be just what the
doctor ordered for the euro-zone". Market suspicions that the ECB may be
thinking of intervention in support of the euro may therefore be overdone.

For sure, disorderly market conditions sometimes prompt central bank
intervention. But the euro's latest decline has taken place in an orderly
fashion. It is a better tonic for the euro-zone economy than a sharp rise
in the currency. If the ECB thinks otherwise, it is up to the bank's senior
members to say so.

Central bank chief resists calls for advance distribution of euro notes
Financial Times - May 29, 2001
By Peter Norman

Wim Duisenberg, president of the European Central Bank, yesterday insisted
that the changeover to euro notes and coins on January 1 next year would be
a success, rejecting pleas for small denomination euro notes to be
distributed to the public in advance.

He told the European Parliament's Committee on Economic and Monetary Affairs
that the bank's general council "does not intend to change its decisions" on
so-called front-loading to the public at this late stage in the changeover
timetable.

Disputing claims that all retailers wanted such a measure, he pointed out
that the advance distribution of euro notes to the public would upset the
existing logistical plans for the changeover. It would also be expensive
for individuals because they would have to pay for the euro notes in
national currencies yet not be able to use them before January 1.

Some retail groups, especially in the Netherlands, have warned of chaos on
"Euros -day" as consumers struggle to get used to the new currency and have
insufficient paper money. But Mr. Duisenberg said the difficulties would be
eased by the planned conversion of automatic teller machines to euros in the
early hours of January 1 and their loading with Euros 5 and Euros 10 notes.

He also said banks planned to open on that day in some euro-zone countries,
while consumers should also have benefited from information campaigns that
would provide details of the new notes to every household in advance. "The
challenges with regard to the cash changeover should not