Leaders of the world economy failed to narrow differences over currencies as they turned to the International Monetary Fund to calm frictions that are already sparking protectionism.
Exchange rates dominated the IMF’s annual meeting as Treasury Secretary Timothy F Geithner, People’s Bank of China Governor Zhou Xiaochuan and their counterparts split over whose policies are the biggest threat to the world economy on concern countries are relying on cheap currencies to aid growth. China was accused of undervaluing the yuan, while low US interest rates were blamed by emerging markets for flooding them with capital. Brazil took aim at both the US and China.
Finance ministers and central bankers pledged to improve cooperation, yet did little to show how they would alter their ways beyond agreeing to let the IMF study the matter. With the dollar down 11 per cent against the yen since mid-June, compared with less than 3 per cent versus the Chinese yuan, the focus turns to Group of 20 talks in South Korea in coming weeks to prove international policymaking isn’t in tatters.
“Policy makers seemed to be trying to diminish concerns about currency wars,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc in New York. “There did not seem any commitment to change behaviour, however. There is little to suggest that the dollar’s direction is anything but down.”
Days after Brazilian Finance Minister Guido Mantega set the tone for the gathering by declaring a “currency war” was under way, officials meeting in Washington held their traditional battle lines. Geithner and European Central Bank President Jean- Claude Trichet were among those to signal irritation that China is restraining the yuan to aid exports even as its economy outpaces those of other G-20 members.
“Global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery,” Geithner said. “Our initial achievements are at risk of being undermined by the limited extent of progress toward more domestic demand- led growth in countries running external surpluses and by the extent of foreign-exchange intervention as countries with undervalued currencies lean against appreciation.”
Monetary expansion
At the same time, officials from emerging economies including China complained that low interest rates in the US and its developed-world counterparts mean investors are pouring capital into their markets, threatening growth by forcing up currencies and inflating asset bubbles. The MSCI Emerging Markets Index of stocks has soared 13 per cent since the start of September.
More From This Section
Polish central bank governor Marek Belka, a former IMF official, said capital inflows have the potential to “derail monetary policy.”
“Brazil won’t pay the price for several countries’ imbalances,” central bank president Henrique Meirelles told reporters. “Our position is: ‘Brazil will protect its economy regardless.’” Chinese officials repeated they will allow a gradual advance in the yuan and warned that a hasty revaluation would do the world economy more harm than good.
Greece may get more time to repay loans
Greek bonds rose after International Monetary Fund Managing Director Dominique Strauss-Kahn said the lending institution is ready to give the nation more time to repay loans should European countries do so first.
The extra premium, or spread, investors demand to hold Greek and other so-called peripheral European nations’ debt over benchmark German bunds shrank. Greek officials are doing “exactly what they need to do” to rein in spending and meet benchmarks set out as a condition of aid, Strauss-Kahn said in a television interview with Bloomberg HT yesterday. “We are continuing to hear good news from the likes of Ireland, Portugal, Spain and Greece in terms of budgetary transparency, and that’s driving spreads tighter,” said Orlando Green, assistant director of capital-markets strategy at Credit Agricole Corporate & Investment Bank in London.
German opposition
Chancellor Angela Merkel’s government opposes any move to grant Greece more time for repayment, the German Finance Ministry said. Any such move would be “premature” given that Greece needs to show it can implement its deficit-reduction programme over time and ensure there is “no doubt” about the quality of its statistics, Bertrand Benoit, a spokesman for the ministry, said by phone today. Deutsche Bank AG advised investors to buy Italian and Spanish two-year notes versus so-called core European government debt securities.