G20 wrangles over imbalance indicators, inflation

G20 wrangles over imbalance indicators, inflation

Paris: The world’s major economies were split on Friday over how to measure imbalances in the global economy to help avert future financial crises, Japan’s finance minister said, but negotiators said a compromise was possible.

Speaking hours before the start of a meeting of G20 finance ministers and central bankers, Yoshihiko Noda said he was not sure they would reach any agreement on a set of indicators to assess economic equilibrium.

“It is uncertain whether the countries will agree on all indicators, but I think agreement on some is possible," Noda told reporters.

“From working group discussions, I get the impression countries are now split in half about their opinions."

G20 sources said China and Germany were dragging their feet in preparatory talks over a balance of payments indicator while Beijing was resisting including measurements of the real foreign exchange rate and currency reserves in the package.

Differences over the causes and cure of global economic imbalances were on display at a public debate among the world’s top central bankers on Friday.

Bank of England Governor Mervyn King, reflecting the view of many Western policymakers, said the world risked protectionism or another financial crisis if policymakers failed to tackle currency distortions and other imbalances.

Chinese central bank governor Zhou Xiaochuan said Beijing would decide the pace of the appreciation of the yuan on its own and would not be swayed by pressure from other countries. Simply adjusting exchange rates would not influence Asians’ savings behaviour, he said.

“A reform of the international monetary system is in order so as to prevent the over-concentration of foreign assets in one particular currency," he said in a reference to the dollar, urging greater use of IMF Special Drawing Rights instead.

A German source cast doubt on a deal at the two-day Paris meeting, saying Berlin wanted nothing less than a full list of five indicators to be used to tackle global mismatches.

“It is hard for us to imagine leaving some out, for example leaving out the currency-related ones while holding on to the current account one," the German source told Reuters.

But another European source said a possible compromise could involve listing the other indicators - exchange rates, currency reserves, public debt and deficits, and private savings - while making clear the initial focus would be on current accounts.

France has run into opposition with its push for greater transparency and regulation of commodities prices and a reform of the international monetary system and is pinning its hopes on measuring imbalances in the world economy, where the G20 nations account for around 85% of GDP.

Finance minister Christine Lagarde said she hoped the first ministerial meeting of France’s year-long G20 presidency would agree a preliminary list of indicators in a two-step process leading to guidelines for unwinding distortions later this year.

With world shares near 30-month highs, driven by bullish views of economic growth, investors seem content for the G20 to take its time, whereas at the height of the crisis two years ago markets were baying for policy action.

“Some may view this sort of outcome as a lost opportunity to prevent future risks, but markets would probably not welcome a heavy-handed attempt to subjugate domestic priorities for the sake of external balance, which could be disruptive unless done just right," Barclays Capital wrote in a research note.

Bank of Japan Governor Masaaki Shirakawa acknowledged that loose monetary policy in the developed world was pushing capital into emerging economies and helping inflate commodities prices but said it was necessary nonetheless.

Emerging powerhouses China and India have already raised interest rates to combat inflation and complain that “hot money" risks destabilising their economies.

Pressure is mounting on the Bank of England to follow suit, with UK inflation double its 2% target.

The European Central Bank is not expected to tighten policy until late in the year at the earliest while the Federal Reserve continues to print money to pump prime its economy via a $600 billion bond purchase programme, the source, emerging powers say, of the surge of capital inflows buffetting their economies.

Pressure on Yuan

In a paper prepared for the two-day G20 meeting, the International Monetary Fund said euro zone debt tensions still posed a threat to global recovery, while fast-growing emerging nations risked overheating and surging food prices posed an inflationary risk.

The U.S. quantitative easing could cause a destabilising flood of capital - the charge levelled by China and others - the IMF said, though it conceded this had not happened so far.

US treasury secretary Timothy Geithner has been urging China to let the yuan rise more swiftly, something Washington says is vital for balanced global growth.

But People’s Bank of China Governor Zhou said on Thursday evening: “External pressure has never been an important factor of consideration and we have never paid special attention to it."

On the sidelines of the G20 meeting, European policymakers may take the opportunity to discuss possible financial support for Portugal, which faces sharply increased borrowing costs.

A euro zone source told Reuters on Thursday that European Union states were increasingly concerned about Lisbon’s ability to fund itself in financial markets and believe it will need to seek a bailout by April, following in the footsteps of Greece and Ireland.

German finance minister Wolfgang Schaeuble was quoted on Friday as telling Japan’s Nikkei daily that Berlin was readly to support Portugal provided it adopted structural reforms but that it was not in a state of emergency.