NEWS | Tuesday, 31 October 2007

Central Bank slams Sunday Times front page story

Charlot Zahra
The Board of Directors of the Central Bank of Malta (CBM) dismissed as “speculative claims” an article carried on the front page of last Sunday’s edition of The Sunday Times about what might happen to the external reserves of the Central Bank once Malta adopts the euro next January.
A key assumption underlying these claims is that once the euro becomes the national currency, the Central Bank will be at liberty “to release excessive reserves”, quantified later in the article in the amount of “between Lm250 and Lm300 million.”
“This assumption is based on an erroneous interpretation of the implications for the balance sheet of the Central Bank of Malta once it becomes a member of the Eurosystem,” the CBM Board of Directors insisted in an irate statement yesterday evening.
The Bank explained that upon euro adoption, while those assets that are now described as “foreign reserves” will no longer need to be held in the form of foreign assets, these assets will still be needed to back the currency in circulation and the deposits with the Bank, which feature on the liabilities side of the balance sheet and which, at that time, will have been converted into euro.

The former “foreign reserves” will appear instead as “financial assets”. “The opening totals for both these asset and liability items on 1 January 2008, however, will be no different from what they were at the close of business on 31 December 2007,” it said.
The only change that will occur on the liabilities side of the balance sheet with the adoption of the euro is a presentational one. “It derives from the fact that the currency in circulation in Malta will become part of the wider pool of euro issued by all the euro area central banks and circulating not only in Europe but globally,” the CBM said.
As a result, two figures, instead of one at present, will start to appear on the liabilities side in this respect. The first figure, shown as “Currency in Circulation”, will be a Eurosystem calculation of the share of euro currency allocated to Malta from this pool.
The figure, worked on a formula which takes into consideration Gross Domestic Product (GDP) and population, is used by the Eurosystem to periodically reallocate the share in the euro note issuance of each euro area central bank.
“It will likely be smaller than the amount currently shown as currency in circulation on the Bank’s balance sheet because, as is well known, average per capita cash holdings in Malta are much higher than in other euro area countries,” the Central Bank explained.
From January, therefore, a second currency item, shown as an intra-Eurosystem liability, will appear on the liabilities side of the balance sheet.
This is the difference between the Currency in Circulation figure and the total value of euro in circulation on the Central Bank of Malta’s books on the euro adoption date. “In other words, this second amount represents the portion of the currency in circulation that is in excess of Malta’s allocation and, as such, ‘belongs’ to the other members of the Eurosystem.
“It is, however, no less of a liability than the Bank’s other liabilities and as such assets must be held against it,” the Central Bank explained.
“Therefore, the statements in the newspaper article to the effect that: ‘once the euro is introduced, liability for the converted cash in the economy will be assumed by the European Central Bank’, ‘Malta’s central bank will still need a portion of its current reserves to back up its share of the world euro currency, but the amount is significantly reduced’ and ‘The Central Bank will only require some Lm70 million in reserves and may release the rest’ are without foundation,” the CBM Board of Directors insisted.
More surprisingly, they ignore a basic accounting principle, namely that any reduction on the assets side of a balance sheet must be accompanied by a simultaneous and equal reduction on the liabilities side. In this context, neither the article nor the newspaper’s sources have explained how the ‘release’ of the perceived ‘excessive’ reserves might be accomplished.
The newspaper article, penned by newly-appointed deputy editor Herman Grech for the very first issue of The Sunday Times under the editorship of Steve Mallia, makes two further inaccurate claims according to the Central Bank.
With regards to the first inaccurate claim that “The Finance Ministry and the Central Bank are currently in discussions over the release of the reserves and a decision is expected before December,” the Bank’s Board of Directors declared that they “are unaware of any such expectation”.
The second inaccurate claim that “in reality, the government can direct the Central Bank Board members to approve the move…” is ruled out by Article 7 (3) of the Central Bank of Malta Act.
“The Board of Directors find it disconcerting that a leading newspaper should have published an article purporting to speak authoritatively about such a technical central banking matter without previously consulting the Central Bank of Malta,” the irate statement ended.

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