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Tuesday, 30 June 2015

Innovations in monetary policy measures: The view from Slovenia

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

On Tuesday May 5, PEFM was treated to a rare and candid insight into non-standard monetary policy measures, as Governor Boštjan Jazbec of the Bank of Slovenia discussed the effectiveness of these policies both at the European and national level.

How to evaluate European experiments with unconventional monetary policy measures? On the one hand, some analysts claim that the European Central Bank’s (ECB) experimentation was too little too late, lagging behind the quantitative easing (QE) programmes of the US Federal Reserve and the Bank of England. And yet, the most far-reaching of these policy measures, the expanded asset purchase program was launched just under four months ago, too little time to evaluate its effectiveness.

Jazbec has been governor of Slovenia’s central bank since July 2013. He insisted that non-standard policy measures in the Eurozone must be understood as a whole package, encompassing a range of temporary measures aimed at shoring up the effectiveness of monetary policy in a context of financial system distress: refinancing operations, currency swap arrangements, collateral requirements, securities purchase programmes, and negative deposit rates and forward guidance.
Slovenia’s contribution to Eurozone QE, launched in January 2015, is a monthly purchase of €200 million of bonds, a small fraction of the combined monthly €60 billion in asset purchases for the whole currency union. Jazbec says it’s working. Slovenia is feeling the effects of accommodative monetary policy, even if they are indirect: stimulating recovery in Eurozone partners is essential for the country, whose 2.6% growth in 2014 was largely driven by exports (Slovenia’s export sector grew 8.4% year-on-year in the final quarter of 2014).

ECB measures combined with Slovenian interventions massively reduced Slovenian bond spreads: down from 7% in 2013 to a current 1%. And yet, some ECB programmes, including purchases of asset-backed securities and covered bonds, will not help Slovenia where the relevant securities were not issued locally. Even the QE bond purchases by the Slovenian central bank are disproportionately benefiting non-resident investors, since Slovenian banks are not holding Slovenian bonds.

Jazbec insists the ECB’s unorthodox monetary measures are not aimed at the exchange rate, denouncing central bank attempts to influence the exchange rate: any possible benefits are likely to be short-lived, he argues. Competitive devaluation no longer works in today’s open economies. This would also suggest that any competitive benefits an economy might gain from leaving the Euro would be short-term and at too high a cost.

Slovenia did not only experience crisis through the Eurozone. It also had a homegrown banking crisis in 2013, and was for a while branded the ‘next Cyprus’. The banking sector, which remains heavily dominated by state-owned banks, was highly fragile. In 2013, the banks underwent an expansive recapitalization and non-performing loans were isolated through the creation of a ‘bad bank,’ the Bank Asset Management Company. In Jazbec’s view the delays in recapitalization meant that restoring confidence in the banking system was more costly.

While growth has returned to the economy, domestic credit has failed to pick up and has in fact continued to contract. In part, Jazbec suggested, this is because it will take a while for confidence in the banking sector to return after the 2013 crisis and recapitalization. Household indebtedness is also very high, a product of the mass privatization of the housing stock in the 1990s.

The Slovenian central bank has also resorted to its own unconventional measures (in addition to the ECB-mandated measures) to attempt to stimulate domestic credit growth. It has introduced a gross loan-to-deposit ratio, a requirement to issue a certain amount of loans or liquidity for each Euro deposited. While most focus on macroprudential measures has been on their ability to slow excessive credit growth, these Slovenian initiatives show how such measures can possibly be used the other way--to stimulate lending.

Small economies with shallow financial markets face particular challenges in restarting productive lending to foster growth. Jazbec pointed out that in these economies the only tangible collateral available for credit growth is often related to trade or real estate. In those cases, credit growth will either foster property bubbles or a trade deficit. Tangibility of collateral remains a concern in economies with shallow financial sectors.

At the IMF and World Bank spring meetings in April 2015 Slovenia was fêted as a success story amidst dispiriting Eurozone performance. Jazbec echoed this optimistic tone, if somewhat more cautiously. Bank recapitalization has worked, and the ECB’s continued accommodative monetary stance is supporting the economy’s recovery. Now the country faces the challenge of re-starting domestic credit growth, overseeing the consolidation of banks, and further restructuring in the enterprise sector.

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