William Cline and John Williamson of the Peterson Institute have updated their estimates of ‘fundamental equilibrium exchange rates’: an exceptionally valuable cheat sheet for working out which currencies are over and under valued. (In fact they have not updated the FEERs, just their estimates of over and under valuation). Read more
In September 2009 I blogged about the similarities between the Pittsburgh G20 framework for strong, stable and balanced global growth and the 2007 International Monetary Fund multilateral consultations, noting that when global leaders were wrong to say their commitments to get rid of imbalances were new or made significant progress.
Today it is genuinely déjà vu all over again as the “Seoul Action Plan” papers over long-standing divisions on currencies and trade imbalances. Leaders have been doing their best to say the summit was not a failure and that the engine of global economic cooperation is still firing on all cylinders.
What is the evidence? According to the G20 it is this new passage about indicative guidelines in the communique. Read more
The renminbi is 17 per cent undervalued against the dollar while the yen is 8 per cent overvalued…
William Cline and John Williamson at the Peterson Institute for International Economics have done a service to the currency wars debate by releasing an update to their estimates of fundamental equilibrium exchange rates (FEERs) for various countries against the dollar in a very interesting policy brief. Read more
Yowkers. Interesting timing for Japan to go back into the FX markets and sell the yen for the first time in six years. On Wednesday the US Congress cranks up its China currency campaign again, this time the House as well as the Senate coming up with a bill allowing the US to block Chinese imports on grounds of currency misalignment.
As I wrote before, it’s not clear which way this development cuts. Does it make it easier to confront China because another G7 country has been forced to deal with the effects of Chinese currency intervention, or does it make it harder to argue that China should stop intervening when Beijing can point at Tokyo and say “them too”? Read more
Washington returning to work after August and the Labor Day holiday, and some chatter about the prospect that currency intervention by Tokyo will complicate the diplomatic drive to get Beijing to ease off selling renminbi. The White House just despatched (who else?) Larry Summers on a charm offensive to China to ask for faster appreciation, and would dearly like the rest of the G20 to line up behind its campaign. The bad cop role is being played by Congress, which is holding a high-profile hearing on the issue next week.
But as sage Washington observers note, that becomes a harder sell if a prominent G20 member – indeed, a G7 member – is intervening as well. Of course, Washington could argue that Japan was forced into extraordinary action because of China’s persistent intervention. But at the very least it complicates the choreography.
G20 nations must implement policies agreed at the latest summit, otherwise “large imbalances may re-emerge, with the attendant risk of disorderly adjustment.”
This from the Bank of Canada’s latest Monetary Policy Report, which finds Canadian growth “proceeding largely as anticipated” and risks to Canada’s economy roughly balanced. Read more
What do you do if you are part of the Group of 20 and cannot agree on a coordinated global economic strategy? Agree to differ and set your best communique drafters to work.
The first thing to do is to find areas on which everyone can agree. Growth is the answer. When have you heard a leader or a finance minister openly advocating policies for stagnation? But alongside justice and education, growth is one of those words everyone advocates, but is meaningless. Growth is not a policy, but an aspiration. Read more
Having strengthened yesterday, the renminbi has opened sharply down against the dollar – indeed by the largest weakening since December 2008.
Market talk suggests Chinese state-owned banks bought dollars to save the central bank from having to intervene. If the currency is seen as a one-way bet, ‘hot money’ will likely flow into China – potentially interrupting monetary policy transmission and causing inflation. Read more
Forward prices for the renminbi are surging even though there is no exchange rate shift yet from the People’s Bank of China, which announced on Saturday it would “enhance flexibility” of the exchange rate. In a defensive statement lacking detail, the Bank said it would:
“further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.”
But two things suggest this change will not prove as significant as it could be. First, the language. The statement talks of ‘furthering’ and ‘enhancing’ the current policy, rather than changing it. The only change word, ‘reform’, is used to refer to a continuing process.
Second, the defensive tone and text. “The basis for Read more
Global banking levy – RIP. I have consistently argued that no one should get too excited about the idea because it will not happen. And now it has been consigned to the dustbin of history.
The G20 communique is pretty vague about the execution: Read more
Policy makers perform U-turns only at times of no alternative. Though there was a lot of talk about growth here in Busan, South Korea, the big news was that the global community now thinks fiscal stimulus is yesterday’s idea.
All in all, it is pretty sobering stuff. Fiscal stimulus has been ditched, not because the G20 thinks the private sector is surging ahead in Europe, but because there is no other option.
As recently as April, the G20 communique concluded:
“In economies where growth is still highly dependent on policy support and consistent with sustainable public finances, it should be maintained until the recovery is firmly driven by the private sector and becomes more entrenched.”
But today, all talk of continued policy support until recovery is entrenched has disappeared and the tone is very different:
“The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation. We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.
Although Britain, in particular, claimed credit for the change of tone and some deficit hawks such as Jean Claude Trichet, president of the European Central Bank, seemed genuinely pleased, many other ministers and officials worried that Read more
There is no doubt that the international wrangle over new banking regulations is hotting up. Standards for capital, liquidity and leverage are due to be settled by November and this is the big bone of contention here in Busan where G20 finance ministers are meeting. There does not seem to be a resolution in sight yet.
Everyone agrees that banking regulations need to be beefed up, but that is where consensus ends and the dissent starts. That this is difficult and threatens to blow up is clear from the delay to the higher capital requirements for banks’ trading books, which was due to be introduced in January and has now been postponed. There are disagreements over: Read more
By James Lamont in New Delhi
A possible emergency interest rate hike in India is back on the cards.
Data showing India had recorded 8.6 per cent economic growth in the quarter to the end of March has reignited expectations that the Reserve Bank of India might not wait for the July quarterly policy review to tighten monetary policy.
Comments by Pranab Mukherjee, the finance minister, on his arrival in South Korea for G20 talks will have only emboldened the hawks. India, after only Australia, has tightened monetary policy most aggressively in the G20. More is to come soon.
Mr Mukherjee said India would continue to raise interest rates in spite of uncertainty surrounding the wider effects of the eurozone’s debt woes to the global economy. In his view, India’s largely domestically-driven economy has very little exposure to Greece.
What Mr Mukherjee says about monetary policy counts. Read more
By James Lamont
India has kept its hand well hidden at the table of the G20’s deliberations over how to prevent another global financial crisis. So the acknowledgement by Pranab Mukherjee, the country’s finance minister, that a bank tax is no alternative to better regulation is illuminating.
Senior Indian policymakers have been non-committal about International Monetary Fund-backed proposals for a global banking tax. They were similarly muted when Gordon Brown, the former UK prime minister, claimed to have gained wide support among the G20 countries for a global banking tax to fund future bail outs. The UK Treasury was seeking out India as a key ally.
Part of the reason for India’s reticence is that it experienced the financial crisis very differently from the west, and even some of its Asian peers. India’s banks suffered no threat of collapse, nor earned a reputation for excessive risk or returns. Policymakers are confident of India’s own prudent regulation. They are less sure of regulation elsewhere. Read more
Here in Busan, South Korea, a port city which seems to double as the Blackpool of Korea, it is already clear that finance ministers and central bank governors will agree that growth is good for the world economy. Yes, really.
Is this surprising? No. Growth, like education and justice is generally a good thing. Everyone wants it. But no one is sure how best to achieve it when it comes to fiscal policy.
They are still unsure whether the global economy is best served by fiscal stimulus or prudence.
Everyone also agrees that the world economy is fragile and fiscal consolidation should be growth enhancing rather than detracting. But, in briefings before tomorrow’s Group of 20 meeting, few were willing to define exactly what they meant. Read more
By Alan Beattie and Tom Braithwaite in Washington
The proposal for a levy on banks’ balance sheets and profits was high on the agenda of the G20 grouping of nations after recommendations in a feasibility report by the International Monetary Fund, released earlier this week. Read more
Here in DC waiting for the G20 central bank governors and finance ministers meeting to end. There have been no actual cries of pain and bodies thrown out of the room as yet, but I think it’s safe to say that agreement over the vexed issue of taxes on banks’ balance sheets and/or profits is not going to be resolved this weekend. The Canadians at least have some moral authority on their side when they point out that their banks didn’t fail during the crisis, so why should they adopt the preferred solution of those whose banks did?
One thing strikes me, though. As we all know, the baton of global governance has passed from the G7 to the G20, sign of the rising power of Asia and Latin America, etc, etc. But this subject – the one that is most vexing and dividing them at the moment, except perhaps exchange rates – is a pure G7 issue. Few other countries’ banking sectors are big and developed enough to try to steal business from London or New York or Frankfurt or Paris or Tokyo as a result of new bank taxes, and those that might conceivably be – Singapore, Switzerland – aren’t in the G20 either. The G20: not a governance panacea. Who’d a thought it?
Should we feel sorry for the International Monetary Fund? Quite often the answer is yes. The Fund gets passed an international hot potato to write a report about because countries cannot agree; it then writes an equivocal report; and then gets it in the neck when – surprise, surprise – countries do not like the findings.
On the international tax on banks two of these three features apply. The Fund was asked by the Group of 20 to investigate how to make banks contribute to the taxpayer support they enjoyed when there was no consensus at all last September; and countries such as Canada and Japan hate the Fund’s report. But in this instance, the Fund did not write an equivocal report. The leadership of the IMF are fully signed up to the principle of an international tax on banks and have been staunch advocates of taxing banks for some time.
As the report says:
“Expecting taxpayers to support the sector during bad times while allowing owners, managers, and/or creditors of financial institutions to enjoy the full gains of good times misallocates resources and undermines long-term growth. The unfairness is not only objectionable, but may also jeopardize the political ability to provide needed government support to the financial sector in the future.”
The big question is whether a new tax on banks (or two new taxes as the IMF is proposing) will ever happen. Read more
So now it looks like the April 15 deadline for the US Treasury’s currency report is conveniently going to slip, largely because it would look a bit churlish to welcome Hu Jintao to Washington for the April 12-13 nuclear talks and then hang a big scarlet sign saying “MANIPULATOR” round his neck as soon as he steps off the plane. Most likely it will also slip beyond the “strategic and economic dialogue” meeting that the US is having with China in May. And then maybe beyond the G20 at the end of June? Or perhaps, if the US has piped down about the currency for a couple of months, China might announce a float, or a crawling revaluation, some time in June.
But one question is whether Congress is prepared to wait that long. Charles Schumer (Dem, NY, not a fan of China) wants to introduce his bill allowing a limited form of currency retaliation against China by the end of May. The key question for the coming weeks is how much patience Capitol Hill has with waiting both for the currency report and for Beijing to move. Congress might secretly be paragons of patience. But they sure don’t look like it.
This letter the other day from Barack Obama, Gordon Brown, Nicolas Sarkozy, Lee Myung-Bak and Stephen Harper looks at first sight like the usual bland exhortations for everyone to do better. (Why didn’t Angela Merkel sign, btw? Too busy with Greece?) But the semiotics are a bit more complex. The bit about “We all understand that ongoing trade, fiscal and structural imbalances cannot lead to strong and sustainable growth” looks pretty much like a pointed jab at China.
So does this mean the currency wars are going to break out in the G20? Since the grouping is supposed to work on consensus, it has generally shied away from arguments about exchange rates, which have the potential to blow up any meeting or institution in which they take place. Throwing them into the mix will make G20 meetings a lot livelier, at least. I’m not convinced it’s wise, though, for a joint letter apparently aimed at China to be signed exclusively by a gang of rich countries. If the US wants to use the G20 to put pressure on the Chinese, it will have to get on board emerging market countries also suffering from renminbi undervaluation, Brazil being the obvious example. The last thing the US wants is to replicate the unhelpfully rigid rich-country-vs.-poor-country divisions that have blocked progress in the WTO.