G20 seeks to avoid currency war

The US treasury secretary urged G20 finance ministers to avert “excessive volatility” in global markets [AFP]

The world’s leading advanced and emerging countries have vowed to avoid potentially debilitating currency devaluations, aiming to quell tensions that experts have warned could threaten the global economic recovery.

The G20 – 19 industrial and emering nations and the European Union – also agreed to give developing nations more say at the International Monetary Fund (IMF), part of what it described as an ambitious set of proposals to reform the body’s governance.

After a two-day meeting in the city of Gyeongju in South Korea, the G20 said that it will “move towards more market determined exchange rate systems” and “refrain from competitive devaluation of currencies’.’

Saturday’s agreement comes amid fears that nations were on the verge of a so-called currency war in which they would devalue currencies to gain an export advantage over competitors – causing a rise in protectionism and damaging the already fragile global economy.

“We are all committed to play our part in achieving strong, sustainable and balanced growth in a collaborative and co-ordinated way,” the final communique said.

Distorted growth

The United States and European Union accuse China of keeping its yuan grossly undervalued to benefit exporters.
  
Beijing counters that Washington’s loose monetary policy is swamping emerging markets with destabilising capital inflows, as investors chase higher yields than they can secure from the dollar.

Following the meeting, Timothy Geithner, the US treasury secretary, pressed the emerging economies to allow their currencies to appreciate and raise domestic demand to help rebalance distorted global growth.

Without naming China, he said such countries should move “away from export dependence and towards stronger domestic demand-led growth”.

Geithner had also pushed in a letter to G20 members for a commitment to polices that would reduce current account and trade imbalances “below a specified share” of gross domestic product “over the next few years”.

The statement said that large imbalances – such as China’s vast trade surplus with the rest of the world – would be “assessed against indicative guidelines to be agreed”.

‘Unrealistic proposal’

The statement however, contained no numerical targets for current account surpluses or deficits. Instead, the group said that persistently large imbalances – to be assessed against indicative guidelines yet to be agreed – would warrant an assessment by the IMF.

Geithner’s proposal had drawn resistance from export-reliant countries such as Japan which called it “unrealistic.”

The finance ministers also agreed tougher rules for big financial companies blamed for the global economic crisis as they tackled the problem of companies deemed “too big to fail”.

“We are committed to take action at the national and international level to raise standards, so that our national authorities implement global standards consistently, in a way that ensures a level playing field and avoids fragmentation of markets, protectionism and regulatory arbitrage,” they said in a statement.

The rules, known as Basel III, will raise the minimum capital reserves that banks must hold as insurance against any new financial tumult.

The rules will be phased in over several years starting in 2013. They will be formally adopted by G20 leaders at a summit in Seoul, the South Korean capital, next month.

European governments see US failure to implement the previous bank capital standards, known as Basel II rules, as one cause of the 2008-09 crisis.

Under the Basel III reforms, banks of all sizes will be required to hold more reserves by January 1, 2015, with the “minimum requirement for common equity”, the highest form of loss-absorbing capital, raised to 4.5 per cent of overall assets from 2.0 per cent at the moment.

‘Periods of stress’

In addition, banks would be required by January 1, 2019 to set aside an additional buffer of 2.5 per cent to “withstand future periods of stress”, bringing the total of such core reserves required to 7.0 per cent.

Also approved were recommendations on implementing the central clearing and trade reporting of over-the-counter derivatives – a move intended to reduce risk in the huge derivatives market.

The G20 additionally backed the Financial Stability Board [FSB] watchdog principles for reducing reliance on credit rating agencies, which came in for widespread criticism for being too close to the firms they assessed and for failing to warn of problems.

The group of 20 also agreed to a doubling of IMF quotas, or membership subscriptions, as part of a broader deal to shift more than six percentage points of voting power in the fund to dynamic emerging economies such as India, China, Brazil and Turkey.

Acceding to a longstanding US demand, the G20 also agreed to empower the International Monetary Fund to exercise greater vigilance over its members’ economies, to prevent spillovers from skewed patterns of trade.

“The IMF was created to play this role but its ability to do so in practice has been constrained by the reluctance of its members to expose themselves to a candid, independent, external assessment of the effects of their policies on the global economy,” Geithner said in a veiled dig at China.