The G20 may have declared a currency truce, but its ceasefire agreed in weekend talks appears to contain seeds of hostility that could germinate in future.
Analysts welcomed the pact by G20 finance ministers meeting in South Korea to “refrain from competitive devaluation of currencies” and to bring their current-account imbalances into line.
The IMF was empowered to police the agreement, which however lacks teeth in the absence of numerical targets for countries such as China to lower their swollen trade surpluses.
And at the same time, the G20 agreed a historic shift in power at the IMF to give China and other emerging powers a greater say, potentially creating new sources of friction within the world’s financial watchdog.
Domenico Lombardi, a former executive board member of the IMF and World Bank, said US Treasury Secretary Timothy Geithner had scored a victory for his argument that huge imbalances in trade are a new menace to the world economy.
“The G20 consensus is gradually shifting towards the US position, but without numerical targets it is unlikely that this broad commitment will bite,” said Lombardi, a senior fellow at the Brookings Institution in Washington.
He said that China had bought itself some breathing space after months of tension over its policy of deliberately cheapening the yuan, which critics argue gives Chinese exporters an unfair edge in global markets.
“The Chinese pledged greater flexibility in their currency ahead of the Toronto summit, but they did little afterwards,” Lombardi said, referring to a G20 leaders’ meeting in June.
By targeting China’s hefty current account surplus, Washington is groping for a new way to cajole Beijing into relaxing its tight shackles on the yuan.
However, many emerging markets including China suspect that the US is deliberately allowing the dollar to flounder on currency markets so that it can export its way back to prosperity.
Caught between the US and Chinese pincers are major economies such as Japan and emerging markets in Asia and Latin America, which are seeing their own currencies rise to alarming levels to the detriment of their exporting firms.
The G20’s credibility in resolving the tension was not helped by the decision of Brazilian Finance Minister Guido Mantega — who gave voice to fears of an “international currency war” last month — to stay away from South Korea.
Other G20 finance ministers admitted that the unwieldy grouping of advanced and developing economies had faced valid criticisms this weekend in the run-up to a Nov. 11 to Nov. 12 summit in Seoul.
“We arrived in Gyeongju full of apprehension and we leave full of expectation,” France’s Christine Lagarde said.
British Chancellor of the -Exchequer George Osborne said “no one really anticipated on arrival” the breakthroughs on tackling the currency question and IMF reform.
South Korean President Lee Myung-bak had jokingly threatened on Friday to shut down all transport from the meeting venue, a 90-minute drive from the nearest big airport at Busan, until a deal was struck.
Ahn Soon-kwon, a research fellow at the Korea Economic Research Institute, said the G20 had made a “good start” toward defusing any currency war and labeled the agreement “quite an achievement for the US.”
“But if you look into it, China will gain more, because striking a deal like this will hardly stop US consumers from buying cheap made-in-China goods,” he said. “This deal will actually help China earn some respite from Washington’s criticism on currency issues.”
Marco Annunziata, chief economist with Unicredit Group in London, brought attention to the inherent tension in tasking the IMF with a beefed-up surveillance role just as China is set to wield more votes on its board.
“The IMF will need to be extremely candid and outspoken, and the experience so far does not bode well: The IMF was already charged with monitoring global imbalances, but its surveillance has no teeth,” he said.
Geithner himself launched a thinly veiled attack on China’s past reluctance to allow the public release of IMF criticism of its currency policy.
Overall, Annunziata said, the G20 agreement would go “some way towards calming market fears of currency wars.”
“Whether the positive impact is durable, however, will depend on whether national policies are in fact changed to be in line with the agreement,” he said. “Otherwise this will be seen as an empty statement of principle.”
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