Bloomberg News

ECB Risks Repeat of Ruble Zone Failure, Citigroup’s Buiter Says

February 15, 2012

(See EXT4 for more on Europe’s debt crisis)

Feb. 14 (Bloomberg) -- The European Central Bank risks repeating the mistakes of policy makers after the Soviet Union’s break-up that led to the collapse of the ruble as a regional currency, according to Citigroup Inc. chief economist Willem Buiter.

By allowing national central banks to expand their balance sheets at varying rates, the Frankfurt-based ECB’s policies echo condition following the collapse of the Soviet Union, Buiter wrote in a report today. Successor states initially shared a monetary union called the ruble zone only for it to collapse because of a lack of policy cohesion.

The ECB may be following a “road at whose end awaits the complete ‘Rublezonefication’ of the common monetary, credit and liquidity policy into 17 different national policies and, ultimately, a fracturing of the monetary union into multiple independent national monetary regimes,” Buiter wrote.

In the aftermath of the Soviet Union’s break-up in 1991, all 15 states used the ruble. While Russia’s central bank was the only one that could issue notes and coins, the others could create bank credit. This led to hyperinflation and eventually countries were pushed out or introduced their own currencies, Buiter said.

The ECB last week said seven national central banks in the euro-area could expand the assets they accept when providing liquidity to the financial system, paving the way for banks to borrow more when a second round of unlimited three-year loans are issued this month. It had previously said national central banks could grant emergency liquidity assistance in return for collateral that wouldn’t usually qualify for ECB operations.

Pooling Profits

These policies conflict with how a currency union should be operating, the former Bank of England policy maker wrote. Central control should be applied to the size of balance sheets and any loses or profits should be pooled, said Buiter.

“One would have hoped that by now a uniform set of rules, standards and practices would have emerged for the operation implementation of the common monetary, credit and liquidity policy,” he wrote. “The opposite appears to be happening.”

--Editors: James Hertling, Paul Abelsky

To contact the reporter on this story: Simon Kennedy in London at

To contact the editor responsible for this story: Craig Stirling at

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