It was not a creditable first issue for The Sunday Times last Sunday under its new editorial team. Having misquoted the Prime Minister in an interview (see story below), with the misquote causing outrage at the Labour Party, the paper also got the Central Bank of Malta on its back for its page one lead story.
In fact, the Central Bank was outraged too. As can be seen from the final paragraph of its lengthy rebuttal statement: “Finally, 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 board accused the paper of making “speculative claims concerning what might happen to the external reserves of the bank once Malta adopts the euro in January 2008”.
A key assumption underlying these claims was that once the euro became the national currency, the bank would be at liberty “to release excessive reserves”, quantified later in the article in the amount of “between Lm250 and Lm300 million”. This assumption was based on an erroneous interpretation of the implications for the balance sheet of the Central Bank of Malta once it became a member of the Eurosystem.
“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,” the bank said.
The only change that would occur on the liabilities side of the balance sheet with the adoption of the euro was a presentational one, it added. It derived from the fact that the currency in circulation in Malta would become part of the wider pool of euro issued by all the euro area central banks and circulating not only in Europe but globally. As a result, two figures, instead of one as at present, would 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 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 would likely be smaller than the amount currently shown as currency in circulation on the bank’s balance sheet because, as was well known, average per capita cash holdings in Malta were much higher than in other euro area countries.
From January, therefore, a second currency item, shown as an intra-Eurosystem liability, would appear on the liabilities side of the balance sheet. This was the difference between the first figure (explained above) 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 bank said that 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
“More surprisingly,” it went on, “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 bank added that The Sunday Times article made two further inaccurate claims: the first is 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 was unaware of any such expectation. The second claim was that “In reality, the government can direct the central bank board members to approve the move, …”. But, the central bank said, Article 7 (3) of the Central Bank of Malta Act rules out this possibility.
“Finally,” it added, “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.”