The Financial Times reports that the G-7 meetings this weekend did not even address one of the two main issues on the agenda, the dollar, and along with the concurrent IMF meetings, featured a good deal of acrimony and disarray. Exactly what you don’t need with a crisis looming.
From the Financial Times:
After Friday’s meeting of the Group of Seven rich countries, finance ministers agreed a tougher statement on currencies, stressing the need for China to allow an accelerated appreciation of its effective exchange rate. They also continued the now ritual statements on their own currencies, with the US repeating its mantra of a strong dollar policy; the continental Europeans (except the Germans) suggesting markets took note of these words; and the US pouring cold water on the significance of its words by later insisting markets should determine currency levels.
One G7 insider said that, for all the noise afterwards, currencies had not actually been discussed at all.
At Saturday’s IMF meeting, the communiqué made it clear that despite the turmoil in markets, the participants could agree only to repeat previous statements that the risks to the world outlook were a shared responsibility requiring increased saving in the US, reform in Europe and Japan, boosts to domestic demand in Asia, and more currency flexibility.
Many of the fund’s most powerful members were angry that the IMF was so feeble just at the time it should be centre stage. The global credit squeeze was, after all, truly transnational, having its roots in the US subprime mortgage sector, but its consequences spreading worldwide.
The fear, privately expressed by central bankers, is that the credit squeeze is the first of many disorderly episodes that will result from the huge global trade imbalances that have emerged over the past decade. These have kept interest rates artificially low worldwide and encouraged reckless lending.
Many international officials believe that the IMF remains in serious trouble.
It is in the middle of a dispute with China over its new policies on scrutinising member countries’ economies and exchange rates. And after the Europeans stitched up the new managing director’s job and the chair of its most powerful committee, its reform efforts have stalled.
This leaves its legitimacy in emerging markets at a new low, without the ability to devise co-ordinated solutions and hold member countries to their commitments.
“We’re disappointed that we haven’t moved forward more quickly,” Robert McCormick, US undersecretary to the Treasury, said. The US, however, strongly supports the IMF’s new surveillance policy brought in by Mr Rato.
David Dodge, the outgoing Canadian central bank governor, was able to say publicly what others said behind the scenes. “This is precisely the time we need the fund’s ability and skills to deal with global imbalances.”
He added that the breakdown in reform efforts had decreased the “chance of coming to a common view across the fund’s membership” on currency policy.
“The longer the imbalances go on, the greater risk that we will end with a rather messy denouement.”
Instead of dealing with the big issue for the global economy – how to deal with frictions and trade imbalances that arise from many big countries operating market-based exchange rates while others have pegged rates – sideshows were the order of the weekend.
The G7 and IMF agreed to study best practice for sovereign wealth funds in terms of transparency and accountability but, as Ted Truman of the Peterson Institute of International Economics said, it was “stupid” for anyone to believe the IMF or any rich country finance minister could tell countries with huge surplus reserves and a sovereign wealth fund how it should operate.