World economies to meet amid currency threat

Wednesday, 6 October 2010 19:05 -     - {{hitsCtrl.values.hits}}

Washington: A looming currency war and the fate of the global recovery will dominate a meeting of economic powers in Washington later this week, with China’s policies in the line of fire.

Finance ministers and central bankers from the IMF’s 187 member states will gather from Friday amid mounting concern that the slow recovery is fueling increasingly protectionist policies.

US mumblings that Chinese exports unfairly benefit from an artificially weak yuan have escalated to a din that threatens to dominate the meeting as currency spats also proliferate elsewhere.

In recent weeks nearly a dozen governments from Colombia to Japan have admitted to buying up local currency in the hope of driving down its price to make exports cheaper.

A trio of top eurozone officials on Tuesday urged Chinese Premier Wen Jiabao to live up to a June vow to make the yuan more flexible, signaling Europe’s willingness to weigh in as the euro gains against other currencies.

Even as the US Congress pursues punitive sanctions against China, Washington and others are calling for the IMF to do more to stop a wider dispute from erupting.

“Addressing exchange rate issues should also be a key priority for multilateral negotiations among a core group of major economies,” said Charles Dallara, head of the Institute of International Finance, a group of the world’s largest banks.

In a letter to the IMF, Dallara called for a global accord and warned that resurgent protectionism could “sap the economic recovery and further undermine market confidence.”

IMF Director General Dominique Strauss-Kahn however has urged governments to resist using currencies as “a policy weapon.”

“Translated into action, such an idea would represent a very serious risk to the global recovery... Any such approach would have a negative and very damaging longer-run impact,” he warned in an interview Tuesday with the Financial Times.

US officials are adamant that the IMF meetings address the need for “market oriented exchange rates” and the fund’s growing role in “rebalancing” the global economy.

“As America saves more those countries that were overly reliant on exports to the United States in the run up to the crisis will need to change their policies,” a senior US official said on Tuesday.

“The IMF has a very important role to play, in this process of surveillance, insuring progress toward rebalancing strengthens.”

As part of that rebalancing IMF members are also expected to discuss how to reform decision-making at the fund, giving more say to emerging and developing economies.

Europe, seen as a major loser from the reshuffle, has been reluctant to reduce its voting share or representation on the IMF’s decision-making board.

European finance ministers last week agreed to review representation at the Washington-based international lender, but attached significant conditions.

Of the 24 seats on the IMF’s board, Europe currently holds nine and said it was willing to rotate two of those spots with emerging markets.

Observers have called for a five per cent shift in the institution’s voting power from advanced to emerging and developing economies.

But after a series of delays thanks to the global economic crisis, the reforms may yet be derailed by worries about currency wars and persistent concerns about the health of government finances.

More than two years after the collapse of Lehman Brothers , the IMF on Tuesday warned that the financial system was still the “Achilles’ heel of the economic recovery.”

Particularly at risk are the richest regions – Europe, Japan and the United States – while emerging markets remain “very resilient.”

But despite these concerns, the upcoming IMF meeting is likely to see pressure piled on Europe not to pull away from stimulus spending too quickly, which the United States fears could risk plunging the global economy back into recession.