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Convergence criteria and the stability and growth pact

The euro area member states were selected in the spring of 1998. On 25 March 1998 the EMI and the European Commission each published a convergence report on the convergence position of the 15 EU member states. These convergence reports were the basis for the selection procedure as described in Article 109j⁽¹³⁾ of the Maastricht Treaty. As a result of these assessments the European Commission recommended 11 member states (Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland) as participants in the third stage of EMU.

Against this background, on 1-3 May 1998 the EU heads of state or of government adopted the recommendation of the ECOFIN Council of the 11 member states to participate from the start on 1 January 1999. Box 8 presents an overview of other significant decisions made by the heads of state or of government and the ECOFIN Council during that weekend in May.

In order to ensure sustained budgetary discipline in the euro area after the introduction of the euro the EU member states have adopted the Stability and Growth Pact, which entered into force on 1 January 1999 simultaneously with the introduction of the euro. The Stability and Growth Pact imposes an obligation on all EU member states to aim for a medium-term budgetary position close to balance or in surplus. The euro area member states shall on an ongoing basis prepare and publish stability programmes specifying their medium-term budgetary objectives and how these objectives will be achieved. Sanctions may be imposed on the euro area member states. In the first instance a non-interest-bearing deposit will be required⁽¹⁴⁾, should the member state fail to take effective measures to remedy a budget deficit exceeding 3 per cent of GDP. This deposit may be converted into a fine, should the excessive budget deficit persist for more than two years. However, in special cases the member state may avoid sanctions if a deficit exceeding 3 per cent of GDP is considered exceptional and temporary. This is the case if the deficit is resulting from an unusual event outside the control of the relevant member state, or resulting from a severe economic downturn entailing an annual fall of real GDP of at least 2 per cent.

Box 8 EMU DECISIONS 1-3 MAY 1998

Selection of the 11 participating countries. Adoption and pre-announcement of the bilateral conversion rates between the currencies of the participating member states as from 1 January 1999. Recommendation on appointment of the ECB's Executive Board and declaration concerning the rotation principle applying to appointments to the ECB's Executive Board. Adoption of the Council regulation concerning the introduction of the euro as the single currency of the participating member states. Adoption of the Council regulation on the technical specifications for the euro coins. Abrogation of the decision on the existence of excessive budget deficits in Belgium, Germany, Spain, France, Italy, Austria, Portugal, Sweden and the UK.

Non-euro area member states such as Denmark are subject to the objectives and requirements of the Stability and Growth Pact on equal terms with participating member states, although no sanctions may be imposed in the event of non-compliance.

In order to strengthen the coordination of economic policy in the euro area the Ministers of Economic Affairs of the euro area - the euro-11 group - hold informal meetings. The European Commission and, occasionally, the ECB, may participate in these meetings. The final decision-making body will still be the ECOFIN Council, in which all 15 EU member states are represented.

Euro banknotes and coins

Euro banknotes and coins will be introduced in 2002. The banknotes will have a uniform design throughout the euro area, while the coins will have a common side and a national side, the design of which is up to the participating member states. The design of the euro banknotes and the common side of the euro coins were already decided in 1997. All member states participating in the single currency from the start, except Luxembourg, have published the design of their national euro coin sides. Several member states commenced production of euro coins in 1998, while the rest are expected to begin during 1999. Test production of the euro banknotes has also begun in several euro area member states. The euro banknotes are the responsibility of the ECB, while the euro coins are subject to the authority of the ECOFIN Council, since in most countries the minting of coins is a government responsibility. The technical specifications of the new euro coins are expected to be finalised in the spring of 1999. The series of euro coins will comprise eight coins (1, 2, 5, 10, 20 and 50 cents and 1 and 2 euro) and the banknote series will comprise seven euro banknotes (5, 10, 20, 50, 100, 200 and 500 euro).

The International Monetary Fund

In 1998 the activities of the International Monetary Fund, IMF, were characterised by efforts to contain the effects of the crisis which started on the foreign-exchange and capital markets in Asia in 1997. The IMF concluded agreements for economic and political stabilisation programmes with Russia and Brazil. Very substantial loan commitments are associated with the agreements. The stabilisation programmes were to redress imbalances in these countries and ensure sustainable economic development. The ongoing programmes with the crisis-ridden Asian countries were monitored and agreements on new stabilisation programmes were concluded with e.g. Argentina and the Philippines. Furthermore, discussions on restructuring the architecture of the international financial system were initiated.

IMF programmes in 1998 to contain the financial crisis
For a long period Russia had suffered economic problems. In connection with the crisis in Asia the country was affected further by falling energy prices. In addition, a government crisis in Russia in the spring of 1998 resulted in the postponement of IMF disbursements to Russia. In July the IMF programme was renewed in an attempt to stabilise the Russian economy and support a continued economic reform process in Russia. It was agreed that Russia's government budget deficit would be reduced by half in 1999. Monetary and exchange-rate policies would remain unchanged.

On 17 August 1998 the Russian authorities abandoned their efforts to stabilise the currency. All payments to service Russia's debt were suspended, a mandatory restructuring of domestic government debt was introduced, and currency restrictions imposed. All these measures were in conflict with the IMF programme and in practice isolated Russia from the international capital markets and prevented further drawing on the IMF loan.

Box 9 IMF LOANS TO RUSSIA AND BRAZIL

On 20 July 1998 Russia was granted a loan extending the IMF's previous commitment to a total of USD 20.4 billion. In 1998 the World Bank and Japan granted further loan commitments totalling USD 2.7 billion. The IMF loan was raised by USD 11.2 billion, of which USD 8.3 billion was financed by activation of the IMF's GAB facility (General Arrangements to Borrow), a standing loan agreement with the G10 countries which in special cases finance the IMF's loans. The first tranche of the IMF loan, amounting to USD 4.8 billion, was disbursed immediately after the approval of the loan. No further disbursements were made under this loan commitment since Russia has failed to comply with the economic and political conditions of the IMF programme. On 2 December 1998 Brazil was granted an IMF loan commitment of USD 18.1 billion as an element of a package totalling USD 41.6 billion. Other commitments were given by the Bank for International Settlements (BIS) (USD 14.5 billion), the Word Bank and the Inter-American Development Bank (totalling USD 9 billion). The first tranche of the IMF loan totalled USD 5.3 billion, of which Brazil withdrew 90%, i.e. USD 4.8 billion, on 15 December. After approval of the loan the IMF also activated the NAB facility (New Arrangements to Borrow), a new credit agreement with a number of countries, including Denmark, which finance the IMF's loans in special circumstances, cf. Box 10. This was the first time that NAB was activated. 70 per cent of the IMF loan to Brazil is financed via the NAB facility. Under the agreement the IMF will repay the loans to the NAB creditors, including Denmark, once the IMF quota increase already decided is finalised.

The collapse in Russia led to renewed unrest on the international capital markets. The Brazilian currency came under pressure. In order to prevent the crisis from spreading further, in December 1998 Brazil was granted an international assistance package. The associated stabilisation programme focused especially on solving Brazil's fiscal-policy problems. The IMF loans to Russia and Brazil are described in Box 9.

Thailand, Indonesia and Korea all continued their IMF programmes in 1998. The recession in these countries proved to be stronger than expected and the IMF programmes were adjusted accordingly, by relaxing fiscal policy. A planned disbursement in March 1998 in Indonesia was postponed due to problems in complying with the programme. In July the IMF loan was extended and increased by USD 1.3 billion. The revised IMF programme has broadly been on track for the rest of the year.

Furthermore, the IMF has granted loans to and concluded agreements on economic and political programmes with e.g. the Philippines and Argentina. In February 1998 Argentina was granted a loan commitment of USD 2.8 billion and in March 1998 the Philippines was granted a commitment of USD 1.4 billion. The loan commitments to Argentina and the Philippines respect the IMF's normal terms, in contrast to the loan commitments to Thailand, Indonesia, Korea, Russia and Brazil which were all extraordinarily large, as urgent crisis measures. Argentina has made no drawings on the commitment, which serves solely as a safety measure.

The restructuring of the architecture of the international financial system
The international financial crisis whereby the IMF granted very large loans has led to discussion of a restructuring of the architecture of the international financial system. The purpose is to create new instruments to prevent crises and to limit the adverse effects of any crises that do arise.

This will be achieved by such measures as improvement of data publication standards, requirements of the presentation of accounts of private and public business enterprises, prospectus standards, deposit-guarantee schemes and the structure of the supervision of financial enterprises. At the same time it is being discussed how to create a more transparent regulatory framework for the involvement of private business enterprises and bond holders in debt restructuring negotiations for countries which default on their payment commitments.

Financing of the IMF and Denmark's contribution
In 1998 the IMF granted loans totalling USD 44 billion, corresponding to kr. 284 billion, of which a good two thirds have been disbursed. The large loan commitments in recent years have reduced the IMF's liquidity, making it necessary to activate the IMF's two standing arrangements to borrow. The GAB facility was activated in connection with the loan commitment to Russia, and the NAB facility was activated in conjunction with the commitment to Brazil, cf. Box 10.

In connection with the disbursements, the IMF in 1998 drew an amount equivalent to kr. 2.9 billion on the Nationalbank from the ordinary quota funds. Denmark contributes to the loan to Brazil via its ordinary quota and in two further ways:

• The Nationalbank may contribute up to USD 150 million to the NAB loan. The IMF's first drawing on the Nationalbank was USD 48 million, corresponding to kr. 303 million.
• The Nationalbank made a government-guaranteed contribution to the loan extended by the Bank for International Settlements, BIS, with a gurantee of USD 50 million. Furthermore, a proportional guarantee has been issued for any interest owed to BIS.

Box 10 THE IMF'S CAPITAL BASE

Quota contributions from the member countries constitute the capital base of the IMF. The quotas are fixed according to the size of the countries' economies and they determine the member countries' access to IMF loans and their votes on the IMF's Executive Board and Board of Governors. At the close of the IMF's financial year on 30 April 1998 the quotas totalled SDR 145.3 billion, corresponding to kr. 1,339.2 billion. Denmark's quota amounted to SDR 1,070 million or kr. 9,606 million, and its voting share was 0.73 per cent. At the annual meeting of the IMF in 1997 approval in principle of a quota increase by 45 per cent was achieved. It entered into force on 22 January 1999. This brings the IMF's capital base up to SDR 212.0 billion and Denmark's quota contribution was raised to SDR 1,643 million. A member country requiring international liquidity may draw on the IMF in proportion to the country's reserve position with the IMF. The reserve position, i.e. the difference between the country's IMF quota and the IMF's holding of that country's currency, is therefore included in the foreign-exchange reserve. Payment of a country's quota must be as ¼ foreign currency and ¾ national currency, and the reserve position is therefore initially ¼ of the quota. A country's reserve position is reduced if the country draws on the IMF, i.e. purchases foreign currency from the IMF against sale of its own currency to the IMF. A country's reserve position is increased if the IMF in connection with financing of its operations requests payments in foreign currency against the IMF's reduction of its holding of the country's national currency. At end-1998 Denmark's reserve position with the IMF was kr. 7.122 billion, or 74 per cent of Denmark's quota. In addition to the IMF's quota capital the Fund may strengthen its liquidity by drawing on NAB (New Arrangements to Borrow). NAB is a standing loan agreement between the IMF and 25 member countries which gives the IMF credit for up to SDR 34 billion. The Nationalbank's loan commitment amounts to SDR 371 million. NAB was ratified by the participating countries on 17 November 1998 and was activated for the first time in connection with an IMF loan to Brazil in December 1998. The new arrangement to borrow will be used in conjunction with the existing GAB facility (General Arrangements to Borrow).

The introduction of the euro and SDR
As a consequence of the introduction of the euro as of 1 January 1999 the D-mark and the French franc were replaced by the euro in the IMF's special drawing rights, SDR, cf. Box 11.

Box 11 SPECIAL DRAWING RIGHTS, SDR

SDR (Special Drawing Rights) are a special international drawing right issued by the IMF. SDR are used by the central banks of the member countries and the IMF. Their value as an international reserve asset derives from the member countries' commitment to hold and accept SDR as a means of payment between central banks. The central banks receive SDR and convert them to foreign currency. Each country's SDR holdings are part of the foreign-exchange reserve. A country accrues interest on its SDR holdings and the country pays interest on the SDR allocated by the IMF. At the 1997 annual meeting of the IMF a special one-off allocation of SDR was adopted. All member countries are thus allocated SDR equivalent to 29 per cent of their quotas. This will double the existing amount of SDR to SDR 42.8 billion. The one-off allocation is subject to ratification by 3/5 of the member countries with at least 85 per cent of the voting rights. This ratification had not yet taken place by the end of 1998. Before the one-off allocation the Nationalbank's SDR allocation was SDR 179 million. At end-1998 Denmark's SDR holdings were SDR 246 million. This includes the allocated SDR as well as SDR purchased by the Nationalbank for foreign currency from other countries in connection with such countries' purchase of other foreign currencies. The value of SDR is calculated as a weighted basket of the currencies of the five member countries with the largest IMF quotas. On the introduction of the euro on 1 January 1999 the D-mark and the French franc were replaced by the euro in the SDR basket. The value of SDR is thereafter the sum of the value of the following currencies: EUR 0.3519, JPY 27.2000, GBP 0.1050 and USD 0.5821. The value of 1 SDR was kr. 8.98 on 31 December 1998.

Footnotes