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Geithner Proposes Targets for Current Accounts at G-20
Written by article default Friday, 22 October 2010 03:05
The G-20 meeting of finance ministers got underway today in South Korea. US Treasury Secretary Tim Geithner proposed a framework for going forward in regards to dealing with what Brazilian Finance Minister has called a “currency war.” The G-20 won’t get much agreement if the focus is strictly on currencies and foreign exchange so the tack used by Geithner is to focus on the underlying factors which is the imbalance in current accounts between the major economies.He is calling for G-20 nations to set targets for their current account surpluses as a way of defusing the tensions currently build up around recent currency movements. The aim would be for current account deficits and surpluses to be capped at no more than 4%.
Geithner Push for Trade Targets Splits G-20 Nations (via Bloomberg):
“He urged countries with persistent current account surpluses to “undertake structural, fiscal, and exchange rate policies to boost” domestic demand and those with “significantly undervalued currencies” to allow them to “adjust fully over time.” In return, advanced economies will pare their budget shortfalls, he said.”
The reaction from the other finance ministers was mixed as the title of the Bloomberg article suggests:
“Setting numerical targets would be unrealistic,” said Japanese Finance Minister Yoshihiko Noda, while German Economy Minister Rainer Bruederle rejected a “command economy” approach and Indian Finance Minister Pranab Mukherjee said caps would be hard to quantify. In interviews with Bloomberg Television, Canadian Finance Minister Jim Flaherty said the idea was a “step in the right direction” and Australian Treasurer Wayne Swan called it “constructive.”
Geithner also told his colleagues not to seek “competitive advantage by either weakening their currency or preventing appreciation of an undervalued currency.”
With the mix of opinion on the proposal, its unlikely we get a big agreement, but its interesting as this is also a microcosm of what we saw in the Euro-zone. Imbalances between a country like Germany with its huge account surplus, and countries running current account deficits like Greece, Spain and Portugal, created a situation that was unsustainable. Here the biggest imbalance is between China and the US.
The need for global “rebalancing” is strong, but its a lengthy process, esepcially as Chinese authorities are unwilling to do a large re-valuation of their currency. Since June, when China loosened up their currency it has gained 2%. Therefore the changes will be gradual as China embarks on a slow pace of letting the Yuan appreciate.
In terms of the short term impact, look out for any surprise agreements over the weekend, that could jolt the current dynamic, but likely we may see a flurry of action in the open in Asia on Monday, followed by our usual themes of Fed QE and the strength of the global recovery.