Monday, October 27, 2008
Bankrupt Central Banks
I recently stumbled across a 17 May 2008 paper titled, "Can Central Banks Go Broke?", by William Buiter (WB), a London School of Economics professor. WB writes of a topic on which I have long speculated. "The Central Bank of Iceland's balance sheet, shown in Table 7, is unique in two respects. First, it appears to hold effectively no securities issued by the government of Iceland. ... Second, the country's foreign exchange reserves (which are held by the central bank) while large by international standards in relation to GDP (14 percent at the end of 2007), are tiny (at around $2.8 billlion on 31/03/08) in comparison to the foreign currency exposure of the private sector. ... The country as a whole is a net external debtor, with a net international investment position of minus 119 percent of annual GDP at the end of Q3/2007, if FDI is measured at book value. When marked-to market, Iceland's net international investment position is minus 27 percent of annual GDP. ... This massive mismatch between the currency of the lender of last resort/market maker of last resort and the foreign currency exposure of the banking sector ... is unique among developed countries, as far as I know". Here's a link: http://www.cepr.org/pubs/PolicyInsights/CEPR_Policy_Insight_024.asp.
After reading this, I wonder if WB was short krona. I'm sure if he was, he's too discrete to tell us. I wish I had read this paper when it came out.