The aspects of money supply policies

A message delivered on the 27th of October that the firepower of the Europe’s rescue fund will be increased to 1 trillion euros, the bondholders will accept a 50 percent loss on their holdings of Greek government debt, the European banks will be recapitalized to meet the target of the core Tier 1 capital equal to 9 percentage of assets, the bond purchase of distressed European countries will be maintained by the ECB and the EFSF as well as expectations that the IMF and countries those possess excessive foreign exchange reserves will support the European leaders plan revitalized financial markets. It also revealed how political decisions are flexible according to the external threats and prevailing demand to keep stability. As long as the intermediation role of the financial institutions in macroeconomic development is incontrovertible, different aspects of money supply policies should be considered.


A pool of traditional deposit funding might be increased by the securitization of various types of debt including the banks’ debts those are sold to the investors. However, increased money supply through market based funding can limit investors’ ability to estimate risks. Off-balance sheet treatment for securitization as well as guarantees those are provided from the issuer may hide the leverage of the securitizing firm, accordingly encourage risky capital structures. Moreover, debt securities depend on the market valuations, thus investors, including financial institutions, may experience significant losses those could have contagious effect.

In general, the money supply depends on the requirement to keep percentage of deposits that banks required to hold as reserves. The higher the reserve requirements, the tighter the money supply which may result to the decrease in lending and restrictions for business development if banks are not able to raise required capital in the markets. Moreover, considering the context of international businesses, the multipliers’ principle in one region may not have impact on its domestic economy growth; consequently increased capital requirements could mainly be associated with the strengthening banks' solvency.

The steering short-term money market interest rates and responding to the demand for the money is the other mode of money supply. Central banks buying government securities or other financial instruments through open market operations increase liquidity in the markets. However, such measures may create conditions for passive governance when central banks respond to the demand of money supply instead of being proactive and generating monetary policies those could relieve current economic circumstances and shift trends to the desirable outcomes.

Proposals of the G20 Finance Ministers’ meeting - temporary solutions to avoid default

The G20 official website provides only the calendar of the G20 meetings and therefore leaving the rest of the public only with expectations regarding the agenda. Moreover, reports about discussed issues and reviews of official statements are also primarily released by public media. However, the main idea of this article is not to criticize the publicly available information. The most important is the objectives of the meetings and the content of proposals discussed.

According to the public media, the G20 Finance Ministers mainly discussed the Europe’s plan to handle sovereign debts and banks stability in the meeting held on the 14th-15th of October in Paris. The solution for European banks to write down Greek debt was discussed alongside with the proposals to support capitalization of the banks those need to be protected against banks' exposures to other bad European countries sovereign debts. It was proposed to enhance the European Financial Stability Facility and leverage the fund for the insurance purposes to protect investors against European debt losses. The considerations regarding the write down of Greek debt ranged from a 21% to 50% were taken and additional options such as exchange of Greek bonds for new debt at a lower face value collateralized by the euro area’s AAA-rated rescue fund, or to set up an European-level backstop capitalized by the rescue fund were discussed. According to the final option the established entity would have the power to take direct equity stakes in banks and provide guarantees on bank liabilities. The IMF officials estimated that additional €100 billion to €200 billion in extra capital is needed to recapitalize banks.

Equilibrium is required to sustain well functioning systems. However, the transfer of possible default from sovereigns to banks and the transfer of banks losses to the European level backstop entity is just a temporary solution to avoid the announcement of the default until clear proposals to boost competitiveness of the region by improved conditions for the capital inflows through stimulation of investment in new technologies and optimization of processes are not accepted.