U.S. plan hits opposition at G20, FX accord remote

GYEONGJU, South Korea Thu Oct 21, 2010 1:45pm EDT

U.S. Treasury Secretary Tim Geithner speaks during the first meeting of the financial stability oversight council to vote on a number of resolutions at the Treasury Department in Washington, October 1, 2010. REUTERS/Jason Reed

U.S. Treasury Secretary Tim Geithner speaks during the first meeting of the financial stability oversight council to vote on a number of resolutions at the Treasury Department in Washington, October 1, 2010.

Credit: Reuters/Jason Reed

GYEONGJU, South Korea (Reuters) - G20 officials are unlikely to reach an accord rejecting currency devaluations and capping current account balances, an informed source said on Thursday, after U.S. proposals ran into stiff opposition.

The swift rebuff of a U.S. call for numerical targets for "sustainable" trade surpluses and deficits underscored difficulties facing Group of 20 finance ministers gathering in South Korea to try to defuse tensions over currencies and economic imbalances.

The G20 source, who has direct knowledge of deliberations at the meeting, said the proposals had not found favor with India, China and other emerging economies, or even the likes of Germany, which has a large current account surplus.

In an interview with the Wall Street Journal, U.S. Treasury Secretary Timothy Geithner called for an agreement on exchange rate policy "norms."

"Right now, there is no established sense of what's fair," he told the paper. "We would like countries to move toward a set of norms on exchange rate policy."

Washington is also floating the idea of specific targets for current account balances. This would build on a G20 pledge a year ago to tilt growth away from exports in fast-growing surplus countries, such as China, and to boost savings in rich deficit economies, including the United States.

"We are exploring whether we can agree to commit to keep the external imbalances to levels that are more sustainable," Geithner said.

The United States faces pressure from all sides on its trade policies. Some lawmakers in Congress are pushing legislation that would punish China for keeping its currency undervalued to gain a trade advantage. Big multinational U.S. companies want a hands-off approach.

Heavy equipment maker Caterpillar Inc warned Washington to "avoid policy decisions that may create trade tensions between the United States and other key trading partners and avoid tax policy that puts U.S. multinationals, like Caterpillar, at a competitive disadvantage.

The G20 source said the drafting of a communique would only begin late on Friday after a first round of meetings between finance ministers and central bank governors in Gyeongju.

"If the U.S. persists with that line, we will oppose it," he said, adding that the final communique would make a rather "subdued" reference to currencies and current account balances.

French Economy Minister Christine Lagarde said coordination on currency policy was lacking and that Asia had a vital role to play. "We can see there are imbalances, that coordination is at times lacking on policy," she said in Paris.

"LET'S ALL LIVE IN PEACE"

Diplomats said Washington was proposing that countries should aim to limit their surplus or deficit on the current account -- the broadest measure of trade in goods and services -- to 4 percent of gross domestic product.

But German Economy Minister Rainer Bruederle said he was opposed to numerical goals.

"Macroeconomic fine-tuning and quantitative targets are not the right approach in our view," Bruederle told Reuters in Berlin before leaving for the G20 talks.

Russian deputy finance minister Dimitry Pankin was also skeptical about the U.S. initiative.

"The United States will try to put the question of exchange rates and current account balances at the top of the agenda, to try to press China to make some commitments on this issue. In my view it is unlikely that they will succeed," Pankin said.

"Most likely, there will be some general words, along the lines of 'let's all live in peace'. I do not expect much success in this sphere," he told reporters.

An Indian finance ministry official gave equally short shrift to Geithner's idea of numerical goals.

"I do believe that this has to be looked at more fundamentally. By artificially linking current account deficit levels to the GDP you are merely skimming the surface. I am not sure that this will be supported by very many emerging economies," the official told Reuters.

BLAME GAME

Pankin criticized Washington for piling pressure on emerging markets to lead a rebalancing when it was loose U.S. policy settings that were sending capital pouring into developing economies, generating pressure for their exchange rates to rise.

"We think that such policies will not come to any good," he said. Things would not turn out well unless the United States cut its budget deficit and tightened monetary policy, he added.

His forthright remarks contrasted with the emollient note on exchange rates struck by Geithner, who hopes that, by preaching currency cooperation, he can coax China into allowing the value of the yuan to rise more quickly.

Major currencies were "roughly in alignment now," Geithner told the Wall Street Journal.

The Treasury chief repeated his view that the yuan, also known as the renminbi, was significantly undervalued. But he said that would be corrected over time if the brisker pace of appreciation witnessed since September were sustained.

"If China knew that if it moved more rapidly, other emerging markets would move with them, it would be easier for them to move," Geithner said.

Countries from Brazil to G20 host South Korea are loath to allow their exchange rates to rise for fear of losing competitiveness to China. For its part, Beijing is adamant that the yuan's rate of climb must be gradual.

"If the renminbi exchange rate is not stable, companies will not be stable, employment will not be stable and society will not be stable," the People's Daily, the mouthpiece of the ruling Communist Party, said in an editorial on Thursday.

The task for finance ministers and central bank governors, at a two-day meeting starting on Friday, is to paper over such tensions so they do not mar a G20 summit next month in Seoul.

(Additional reporting by David Lawder in Gyeongju, Gernot Heller in Berlin and Jean-Baptiste Vey in Paris; Writing by Alan Wheatley and Mike Peacock; Editing by Hugh Lawson and Andrew Hay)

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Comments (34)
LeeSiuHoi wrote:
You go into a casino, change dollar for chips. The casino put the money in a bank as reserve and leave some cash at the counter in case you want to change back some of the chips into dollar. In any case, these are the customer’s money, not the casino’s money.

This is what foreign currency reserve is all about. You go to China, change dollar for Yuen. The Chinese Government put away the money as foreign currency reserve. It is still your money. It is not the money of the Chinese Government.

Now instead of changing 1 piece of chip into 1 dollar, you want the casino to change 1 piece of chip to 1 dollar and 20 cents. The owner of the casino says ‘no’, I cannot give money back to you for your chips.

What are you trying to achieve here? No more gambling? No more investment in China? Invest all your money in US?

The politicans can play any games. At the end of the day, logic prevails.

Oct 21, 2010 5:11am EDT  --  Report as abuse
fallboy wrote:
Mr. Geithner lied when he said he was not deflating the dollar. He and his elite buddies are squeezing even more margins out of printing more money, and there is nothing the American people can do about it but pay more in inflation to make them richer. This guy, Geithner,was born into connections going back to his grandfather and has never done anything of merit except leach off the system:
http://en.wikipedia.org/wiki/Timothy_Geithner

Oct 21, 2010 6:42am EDT  --  Report as abuse
kaceltd wrote:
If the USA intends to re-balance and rejuvenate its domestic economy, bold new formulations will have to be undertaken. The USA needs to boost savings and interest returns by instituting new development bonds for the revival of its manufacturing sector, but ONLY with a reciprocal understanding on the part of labour and unions that part of a loaf if better than none. A brave new frontier where efficiency and ingenuity take centre place, while living within your means – a return to the American frontier days of survival and innovation. A dramatic and sensible revision of workplace laws without burdening industry with litigation, while ensuring ‘reasonable’ worker and end-user rights. By the way, fire all of your political representatives and start afresh. Otherwise, the USA is just a trading post on the globe and the day that the harbours silt up, ships will find new ports of call elsewhere…..

Oct 21, 2010 8:27am EDT  --  Report as abuse
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