US Federal Reserve chairman Ben Bernanke has criticised countries like China that run large trade surpluses.
"Currency undervaluation by surplus countries is inhibiting needed international adjustment," he said in a speech to the European Central Bank
He said that by buying dollars, these countries were hurting the US recovery and the global economy with it.
He also defended the Fed's policy of "quantitative easing", which has been criticised by China and Germany.
Defending QE
China, Germany and others have attacked the Federal Reserve in recent weeks for its decision to purchase another $600bn of US government debt in a bid to stimulate the US economy.
They say that the policy will unfairly devalue the dollar in currency markets, and that this could lead to inflation and asset bubbles elsewhere in the world.
The Chinese also argued the Fed had failed to take account of its responsibility for protecting the value of the dollar as a global reserve currency.
In his speech, Mr Bernanke defended the policy as the right response to falling inflation and high unemployment in the US.
He also said it was a natural extension of monetary policy, given that interest rates were near zero and could not be cut further.
On the attack
But Mr Bernanke went further than this, hitting back against his critics.
He said that their policy of accumulating dollar reserves in order to weaken their currencies and help maintain a trade surplus would hurt the recovery in industrial economies, and this in turn could harm the entire global economy.
"For large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account," he said.
He spoke of a two-speed recovery, in which developing economies like China and India had rapidly bounced back, while industrialised countries like the US, Europe and Japan were growing much more slowly and suffered from high unemployment.
"Because a strong expansion in the emerging market economies will ultimately depend on a recovery in the more advanced economies, this pattern of two-speed growth might very well be resolved in favour of slow growth," he said.
Collateral damage
He also said the currency interventions by countries like China had other iniquitous effects.
He said it was unfair on other countries that allowed their currencies to appreciate, as they would be forced to bear the brunt of the economic adjustment.
Countries such as Brazil and South Africa have already complained that they have been put in exactly this position by the "currency war" between the US and China.
Mr Bernanke also warned that by refusing to let their currencies appreciate, countries like China would be forced to take other measures to stop risky inflows of speculative money, and to cool rising inflation.
On the same day of his speech, China announced a half-point rise in the percentage of cash its banks must hold in reserve - a measure designed to slow down a recent jump in inflation to 4.4%.
China has also taken measures in recent months to tighten up capital controls - designed to stop people speculating on the value of the Chinese currency.
Source: BBC
www.bbc.co.uk
Friday, November 19, 2010
Thursday, November 18, 2010
Greece unveils austerity budget
The Greek government has unveiled an austerity budget that aims to cut its 2011 public deficit to 7.4% of the nation's annual economic output or GDP.
If achieved, this would mean a 5bn-euro ($6.8bn; £4.3bn) reduction on Greece's projected 9.4% deficit for 2010.
Under the budget plans, the government will cut health and defence spending, and increase the sales tax on most retail items from 11% to 14%.
Greece had to accept a 110bn-euro ($150bn; £93bn) rescue deal in May.
This sum - which is being given to the country in three stages - has come from the European Union and International Monetary Fund.
To get the money, Greece had to agree to enforce substantial spending cuts to reduce both its public deficit and overall government debt, which are among the largest in Europe.
The country's finance department also said that the Greek economy would contract by 4.2% this year and by a further 3% in 2011, higher than its previous estimate of a 2.6% slowdown next year.
The budget also reveals that the Greek government is to sell stakes in state-owned companies, and even four Airbus A340 planes that it owns.
The sale of organisations to be partly or fully privatised included rail operator Trainose, mining firm Larko, gas operator DEPA, and defence group Hellenic.
Cource: BBC
www.bbc.co.uk
If achieved, this would mean a 5bn-euro ($6.8bn; £4.3bn) reduction on Greece's projected 9.4% deficit for 2010.
Under the budget plans, the government will cut health and defence spending, and increase the sales tax on most retail items from 11% to 14%.
Greece had to accept a 110bn-euro ($150bn; £93bn) rescue deal in May.
This sum - which is being given to the country in three stages - has come from the European Union and International Monetary Fund.
To get the money, Greece had to agree to enforce substantial spending cuts to reduce both its public deficit and overall government debt, which are among the largest in Europe.
The country's finance department also said that the Greek economy would contract by 4.2% this year and by a further 3% in 2011, higher than its previous estimate of a 2.6% slowdown next year.
The budget also reveals that the Greek government is to sell stakes in state-owned companies, and even four Airbus A340 planes that it owns.
The sale of organisations to be partly or fully privatised included rail operator Trainose, mining firm Larko, gas operator DEPA, and defence group Hellenic.
Cource: BBC
www.bbc.co.uk
Sunday, November 14, 2010
Difference of opinion at G-20 summit over what ails the global economy
Seoul: As a further indication of the fact that the pre-Summit negotiations of the G-20 are not going very smoothly, India has said that “there are no universally agreed upon diagnoses of what ails the global economy.”
Prime Minister Manmohan Singh conveyed this to British Prime Minister David Cameron, and President Philip Calderon of Mexico on Thursday during his bilateral meetings with them. This indicates that it disagrees with the United States' perception that only China's current account and capital account surpluses are to blame for the global economic predicament.
Dr. Singh also met the Prime Minister of Ethiopia in a bilateral meeting.
According to informed sources, the final G-20 communiqué could run to about 70 pages, reflecting the divergent views.
It has been evident that far too many differences of opinion on key issues of who has to do what have emerged and delegates have even been heard to “raise their voices,” according to an informed source.
The main issue is an old one, namely, that the U.S. and its allies do whatever they want to and then expect others to adjust their policies accordingly. The American decision to pump in $600 billion over the next few months has left everyone jumpy as to the consequences for their economies.
Brazil has already spoken out sharply against this. A Chinese official said on television that if America catches a cold it can't look for Chinese medicines.
China has already taken pre-emptive action against capital surges by asking Chinese banks to deposit more money with the Central bank. Many G-20 members have already put sand in the machine so that destabilising dollar inflows do not cause problems for them.
As a result of the U.S. decision, there are not many takers for the latest American proposal which seeks, as it were, to walk on four legs. In a letter to the G-20, U.S. Treasury Secretary Timothy Geithner, along with Tharman Shanmugaratnam, Singapore Finance Ministerand Wayne Swan, Finance Minister of Australia, have spelt out the four things that the world needs to do.
First, they say, global economic growth must be strengthened; second, in a manner of reminiscent of national policies, they say, global growth must also be balanced across countries so that some countries do not grow at a breakneck speed, while others languish; third, the first two objectives require the world to create “a new framework for cooperation to allow exchange rates to reflect economic fundamentals and support needed structural reforms;” and fourth, no protectionism, please.
The first and the last items are the only ones on which there is no disagreement. But the second and third suggestions are causing problems.
Informed sources told Business Line that India is sitting pretty during all these negotiations as it does what economic theory prescribes, namely, run a deficit on the current account which is financed by a surplus on the capital account. This is in contrast to “some countries” which run a surplus on both accounts.
India is, therefore, focusing on development by asking the developed world to invest in infrastructure in the developing countries. This is a relatively non-controversial issue.
However, India is being asked to endorse the currency adjustment suggestions and is looking for alternative and more ambiguous wording.
Source: www.indiaeveryday.com
Prime Minister Manmohan Singh conveyed this to British Prime Minister David Cameron, and President Philip Calderon of Mexico on Thursday during his bilateral meetings with them. This indicates that it disagrees with the United States' perception that only China's current account and capital account surpluses are to blame for the global economic predicament.
Dr. Singh also met the Prime Minister of Ethiopia in a bilateral meeting.
According to informed sources, the final G-20 communiqué could run to about 70 pages, reflecting the divergent views.
It has been evident that far too many differences of opinion on key issues of who has to do what have emerged and delegates have even been heard to “raise their voices,” according to an informed source.
The main issue is an old one, namely, that the U.S. and its allies do whatever they want to and then expect others to adjust their policies accordingly. The American decision to pump in $600 billion over the next few months has left everyone jumpy as to the consequences for their economies.
Brazil has already spoken out sharply against this. A Chinese official said on television that if America catches a cold it can't look for Chinese medicines.
China has already taken pre-emptive action against capital surges by asking Chinese banks to deposit more money with the Central bank. Many G-20 members have already put sand in the machine so that destabilising dollar inflows do not cause problems for them.
As a result of the U.S. decision, there are not many takers for the latest American proposal which seeks, as it were, to walk on four legs. In a letter to the G-20, U.S. Treasury Secretary Timothy Geithner, along with Tharman Shanmugaratnam, Singapore Finance Ministerand Wayne Swan, Finance Minister of Australia, have spelt out the four things that the world needs to do.
First, they say, global economic growth must be strengthened; second, in a manner of reminiscent of national policies, they say, global growth must also be balanced across countries so that some countries do not grow at a breakneck speed, while others languish; third, the first two objectives require the world to create “a new framework for cooperation to allow exchange rates to reflect economic fundamentals and support needed structural reforms;” and fourth, no protectionism, please.
The first and the last items are the only ones on which there is no disagreement. But the second and third suggestions are causing problems.
Informed sources told Business Line that India is sitting pretty during all these negotiations as it does what economic theory prescribes, namely, run a deficit on the current account which is financed by a surplus on the capital account. This is in contrast to “some countries” which run a surplus on both accounts.
India is, therefore, focusing on development by asking the developed world to invest in infrastructure in the developing countries. This is a relatively non-controversial issue.
However, India is being asked to endorse the currency adjustment suggestions and is looking for alternative and more ambiguous wording.
Source: www.indiaeveryday.com
Saturday, November 13, 2010
Why dollars must not sink and tempers must not rise at the G20
The global economic crisis demands that all nations consider the wider international picture rather than narrow national self-interest
Brazilian President Luiz Inacio Lula da Silva may be leaving the world stage, but he still knows how to make an impact. His blunt prediction on the first day of the G20 summit in Seoul – that the world economy was headed for "bankruptcy" unless rich nations raise consumer demand rather than relying on exports to drive recovery – was a warning shot fired at Washington.
The US, which has been accused by key developing nations of attempting to deflate the dollar with a $600bn quantative easing programme, also came under fire from China. "Don't make other people take the medicine for your disease," Yu Jianhua, a director general at China's ministry of commerce, told reporters in South Korea.
At the heart of this is the nature of global imbalances. For America, growth should return by exporting more and getting people to spend at home. For many developing nations who rely on selling goods and services into richer markets, this means sacrificing themselves on the altar of US interests. It's not just big, poorer nations, that are concerned: Germany, the world's third-largest exporter, is singing the same tune as South Korea, China and Brazil.
These countries see the dollar's fall as part of a feared circle of competitive devaluations across the major economies. Yet the US can simply shrug these attacks off – as its central bank can keep printing dollars.
The result is lots of money flowing into emerging economies, which are left to face a series of difficult decisions over the influx of dollars. Deflating a series of asset bubbles is the last thing developing nations need to tackle – especially given the bigger challenges of social inclusion, food security and infrastructure spending.
But if they sit on their hands and do nothing, poorer nations face damaging their export competitiveness by letting their currencies rise. If they intervene to keep their currencies low, the risk is that they end up holding lots of worthless greenbacks. The least palatable option is the tricky policy decision to use capital controls to keep the cash out.
What this boils down to is the inability of developing nations to translate their growing economic heft into meaningful pressure on the US. It is a dramatic illustration of where real power lies in the global system. The world's "emerging" powers are still that – and will be so for many years to come. They may represent the future, but developing nations lack the diplomatic firepower to sway the world's great powers.
What the world is dealing with is a legacy of history. The rules governing global monetary reform evolved in a uni-polar world where the dollar was dominant. Today we face a multi-polar system of currencies. The features of the past created today's problems. To insulate against volatile currency flows and speculative attacks, developing nations accumulated dollars. The dollar's role as the global reserve currency encouraged unsustainable lending in the US.
But what are the rules appropriate for both the richer nations and for large emerging markets such as China, South Africa, Brazil and India? It's hard to see how a public punch-up at Seoul is going to answer that question. The G20 aspires to be a global club, steering the world economy out of a slump – and that does mean countries must consider the international picture, rather than simply their own, narrow national interest. It means not just letting the dollar sink and tempers rise in South Korea.
Perhaps the rest of the world should recognise how important the US is to the global economy – and accepting that the world's richest nation might need a helping hand. At the same time, the G20 could also think about the poorest too – by throwing open their doors to goods and services from the least developed countries. The world's biggest economies need to prove that the G20 is more than just a place to talk to each other.
Source: Guardian
www.guardian.co.uk
Brazilian President Luiz Inacio Lula da Silva may be leaving the world stage, but he still knows how to make an impact. His blunt prediction on the first day of the G20 summit in Seoul – that the world economy was headed for "bankruptcy" unless rich nations raise consumer demand rather than relying on exports to drive recovery – was a warning shot fired at Washington.
The US, which has been accused by key developing nations of attempting to deflate the dollar with a $600bn quantative easing programme, also came under fire from China. "Don't make other people take the medicine for your disease," Yu Jianhua, a director general at China's ministry of commerce, told reporters in South Korea.
At the heart of this is the nature of global imbalances. For America, growth should return by exporting more and getting people to spend at home. For many developing nations who rely on selling goods and services into richer markets, this means sacrificing themselves on the altar of US interests. It's not just big, poorer nations, that are concerned: Germany, the world's third-largest exporter, is singing the same tune as South Korea, China and Brazil.
These countries see the dollar's fall as part of a feared circle of competitive devaluations across the major economies. Yet the US can simply shrug these attacks off – as its central bank can keep printing dollars.
The result is lots of money flowing into emerging economies, which are left to face a series of difficult decisions over the influx of dollars. Deflating a series of asset bubbles is the last thing developing nations need to tackle – especially given the bigger challenges of social inclusion, food security and infrastructure spending.
But if they sit on their hands and do nothing, poorer nations face damaging their export competitiveness by letting their currencies rise. If they intervene to keep their currencies low, the risk is that they end up holding lots of worthless greenbacks. The least palatable option is the tricky policy decision to use capital controls to keep the cash out.
What this boils down to is the inability of developing nations to translate their growing economic heft into meaningful pressure on the US. It is a dramatic illustration of where real power lies in the global system. The world's "emerging" powers are still that – and will be so for many years to come. They may represent the future, but developing nations lack the diplomatic firepower to sway the world's great powers.
What the world is dealing with is a legacy of history. The rules governing global monetary reform evolved in a uni-polar world where the dollar was dominant. Today we face a multi-polar system of currencies. The features of the past created today's problems. To insulate against volatile currency flows and speculative attacks, developing nations accumulated dollars. The dollar's role as the global reserve currency encouraged unsustainable lending in the US.
But what are the rules appropriate for both the richer nations and for large emerging markets such as China, South Africa, Brazil and India? It's hard to see how a public punch-up at Seoul is going to answer that question. The G20 aspires to be a global club, steering the world economy out of a slump – and that does mean countries must consider the international picture, rather than simply their own, narrow national interest. It means not just letting the dollar sink and tempers rise in South Korea.
Perhaps the rest of the world should recognise how important the US is to the global economy – and accepting that the world's richest nation might need a helping hand. At the same time, the G20 could also think about the poorest too – by throwing open their doors to goods and services from the least developed countries. The world's biggest economies need to prove that the G20 is more than just a place to talk to each other.
Source: Guardian
www.guardian.co.uk
Friday, November 12, 2010
Concerning Capital Inflows
By Manoj Pradhan
China's hike in banks' reserve requirements today served notice to the G20 leaders' meeting later this week that capital inflows remain a major problem for EM policymakers. Brazil Finance Minister Mantega's ‘currency war' tag has continued to stay prominent in the lead-up to the G20 summit and certainly in discussions in the media. If currency tensions are indeed frustrating EM policymakers, then perhaps the blunt tools of interest rate cuts could be called upon in the future. This would represent an important turning point in EM dynamics for growth, inflation and currency movements. However, if a currency ‘war' is not a huge concern for EM policymakers, then the use of only FX interventions and possibly mild capital controls could be enough to alleviate EM concerns. And this is indeed the story that seems to coalesce from the views of our EM economics teams. Rather than aggressively fighting a currency war with every tool available, EM central banks seem to be keeping the blunt tool of policy rate cuts away from the skirmish so far. Rather, they seem to prefer the well-directed tool of FX intervention to soak up capital inflows and consequently increase FX reserves.
But which exchange rate to consider? With QE2 emanating from the US, EM and DM currencies have appreciated vis-à-vis the US dollar. However, the effective appreciation of EM currencies against a broader basket of currencies has been much smaller (see EM Macro Strategy Update: Considerations on Currencies, October 15, 2010).
With AXJ economies tied closely to China through their trade links, and the Chinese currency virtually pegged to the dollar (modest appreciation aside), AXJ economies are effectively tied to the USD/CNY peg. Latin America also has close trade links with the US and growing ties to China. However, the situation is different for some countries in the CEEMEA region. For the CEE economies, the US dollar is secondary in importance to the euro. In fact, since the dollar affects imports (specifically commodity imports) more than exports, some appreciation against the dollar is not unwelcome.
QE blocs: Enhanced capital flows to emerging markets courtesy of QE2 have produced varying degrees of discomfort in the EM world. In a past note, we suggested that QE2 would create two ‘blocs' among EM economies (see "QE20", The Global Monetary Analyst, October 13, 2010). The first bloc, with economies at risk of overheating, would allow currencies to appreciate and dampen domestic growth and inflation. The other, with fewer concerns of overheating, would find currency appreciation unwelcome. This second bloc would likely act to stem the appreciation, and end up stimulating domestic growth. Getting a hands-on perspective from our EM economics teams, we find that this split is indeed borne out. The collective wisdom of our teams suggests that the economies that find currency appreciation unwelcome are also economies where overheating risks are small. On the other hand, economies at risk of overheating do not find the currency appreciation as offensive (with the notable exception of China, as discussed below), as policymakers there welcome the dampening effect that the appreciation has on domestic growth and inflation.
In economies at risk of overheating where domestic demand is strong and the central bank allows currency appreciation, US imports will likely become cheaper. In economies where currency appreciation is resisted, domestic demand is likely to get a boost, and this should increase the demand for all imports, including imports from the US. This is what we called a win-win situation for the US in our QE20 piece.
As always, China is different: China finds the enhanced pressure on its currency highly unwelcome and it will likely allow only a slow and steady appreciation. However, China's highly effective capital and credit controls imply two things: i) there really has been no impact of QE2 on the currency, but FX reserves have probably soaked up a large quantity of capital inflows; and ii) the domestic economy has not received an additional stimulus from QE2. With Chinese growth at 10% for 2010 and 9.5% in 2011, one can hardly say that China should grow faster to generate import demand. In short, China does not fit our dichotomy as it resists currency appreciation on the one hand but maintains firm control over domestic financial conditions and the economy on the other.
The policy response: The policy response from EM economies to the signals about QE2 in the US sent since August is quite varied, but a majority of central banks in the EM world have kept policy unchanged since then. A handful have responded by postponing hikes (the central banks of Peru and Poland have pushed rate hikes further out to keep the currency from strengthening further), while the SARB has actually eased policy outright (and further easing appears to be on the cards - our economists are forecasting a 50bp cut, see South Africa: Rate Call Change - We Expect a 50bp Cut, November 1, 2010). Some central banks that face strong domestic growth have even tightened policy despite the risk that such measures will invite even more capital inflows and put additional pressure on currency values.
Digging deeper: Overheating economies: A large majority of EM economies have shown strong growth. Unsurprisingly, AXJ economies feature prominently here along with Brazil, Chile and Peru from Latin America and Turkey, Israel and Poland from the CEEMEA regions. A smaller number of these strongly growing countries, however, have inflation concerns. This latter group includes India, Indonesia, China, Korea, Brazil, Peru and Poland. Clearly, this bloc would prefer some help in dampening domestic growth, and some currency appreciation might not be unwelcome. We illustrate that these overheating economies are also where central banks are not extremely concerned about currency appreciation (with the important exceptions of China discussed earlier and Brazil discussed below). However, as the cases of Poland and Peru show, even inflation concerns have sometimes been subordinated to keep in check excessive appreciation of the currency. In the case of Poland, inflation concerns are likely to win out fairly shortly, according to our Poland economist, Pasquale Diana.
Brazil clearly dislikes its stronger currency, has been intervening aggressively in FX markets and has quickly raised taxes on foreign investments in local fixed income products. The postponement of rate hikes in Brazil, however, can be traced back to its own slowdown earlier in the year rather than to a growing probability of QE2.
Digging deeper: No overheating: In economies where growth has either not led to inflation and even where growth has been weak with inflationary concerns, the EM emphasis on growth clearly shows because of the desire of these economies to keep their currency from appreciating. Most economies in this category have either intervened in FX markets or have stayed put on monetary policy. Thus, either through accumulating FX reserves leaking into the economy or through the postponement of monetary tightening, economic growth is likely to benefit from a tailwind.
The economies where growth is weak and inflation risks are present (Romania and Hungary) are worth noting. As noted before, these economies are more closely tied to the euro and might actually welcome an appreciation against the dollar, given the asymmetric effects on imports and exports. They do not therefore face the same dilemma as most other EM economies.
FX intervention: Central banks appear to be less reluctant to get involved in FX intervention. The bulk of EM central banks are involved in at least some FX intervention. Further, half of that pack have been intervening quite aggressively in currency markets, but even then with limited results. The difference in the way policymakers seem to have used broad monetary policy and FX intervention to deal with QE-related inflows could be explained in three ways: i) monetary policy is seen as a blunt instrument with broad effects, while FX intervention is seen as a targeted tool best equipped to deal with an FX problem; ii) FX interventions are a less public way of dealing with capital inflows, compared with the public attention that usually accompanies monetary policy changes and capital controls; and iii) EM central banks view FX policy and reserves policy as being distinct, and are accumulating reserves in excess of levels that could ostensibly be used for the defence of the currency.
Different strokes: Different emphases on each of these explanations apply to EM economies. For example, the objectives of FX intervention in Turkey appear to be oriented towards increasing the size of the reserves. Brazilian FX interventions, in line with its aggressive rhetoric and milder capital controls, have probably been aimed at keeping the currency from appreciating. And finally, in Israel, FX interventions have been used to stifle the impact of policy rate hikes on the currency. In all three cases, however, FX interventions have not been entirely successful in keeping the currency from appreciating.
Summary: The extent to which the ‘currency war' debate has been ramped up in the media does not gel with the feedback from our EM economics teams. In general, EM central banks appear to be unwilling to take strong, aggressive action in the form of postponing policy tightening or cutting rates outright (with the notable exceptions of the central banks of Peru and Poland for postponed rate hikes, and the SARB for outright easing). Rather than fighting any such ‘currency war', EM central banks appear to be dealing with the very familiar three-way trade off between capital inflows, exchange rate concerns and monetary policy independence - the trilemma (see "No ‘Currency War'...Yet", The Global Monetary Analyst, October 6, 2010). Central banks seem far less reluctant to use FX intervention. In fact, FX intervention is likely being used as a better directed tool to temper FX appreciation and build up FX reserves (in some cases) at the same time.
The feedback from our EM teams suggests that QE is indeed splitting the EM world into two broad blocs. Economies with strong growth and overheating concerns appear to be more willing to accept currency appreciation in order to dampen domestic growth and inflation. Countries where growth is weak, however, seem to be less tolerant of currency appreciation. The desire there to keep the currency from appreciating is likely to lead to higher domestic growth either through newly accumulated FX reserves leaking into the economy or via inaction (or less tightening, or even easing) on the policy front.
Source: MorganStanley
www.morganstanley.com
China's hike in banks' reserve requirements today served notice to the G20 leaders' meeting later this week that capital inflows remain a major problem for EM policymakers. Brazil Finance Minister Mantega's ‘currency war' tag has continued to stay prominent in the lead-up to the G20 summit and certainly in discussions in the media. If currency tensions are indeed frustrating EM policymakers, then perhaps the blunt tools of interest rate cuts could be called upon in the future. This would represent an important turning point in EM dynamics for growth, inflation and currency movements. However, if a currency ‘war' is not a huge concern for EM policymakers, then the use of only FX interventions and possibly mild capital controls could be enough to alleviate EM concerns. And this is indeed the story that seems to coalesce from the views of our EM economics teams. Rather than aggressively fighting a currency war with every tool available, EM central banks seem to be keeping the blunt tool of policy rate cuts away from the skirmish so far. Rather, they seem to prefer the well-directed tool of FX intervention to soak up capital inflows and consequently increase FX reserves.
But which exchange rate to consider? With QE2 emanating from the US, EM and DM currencies have appreciated vis-à-vis the US dollar. However, the effective appreciation of EM currencies against a broader basket of currencies has been much smaller (see EM Macro Strategy Update: Considerations on Currencies, October 15, 2010).
With AXJ economies tied closely to China through their trade links, and the Chinese currency virtually pegged to the dollar (modest appreciation aside), AXJ economies are effectively tied to the USD/CNY peg. Latin America also has close trade links with the US and growing ties to China. However, the situation is different for some countries in the CEEMEA region. For the CEE economies, the US dollar is secondary in importance to the euro. In fact, since the dollar affects imports (specifically commodity imports) more than exports, some appreciation against the dollar is not unwelcome.
QE blocs: Enhanced capital flows to emerging markets courtesy of QE2 have produced varying degrees of discomfort in the EM world. In a past note, we suggested that QE2 would create two ‘blocs' among EM economies (see "QE20", The Global Monetary Analyst, October 13, 2010). The first bloc, with economies at risk of overheating, would allow currencies to appreciate and dampen domestic growth and inflation. The other, with fewer concerns of overheating, would find currency appreciation unwelcome. This second bloc would likely act to stem the appreciation, and end up stimulating domestic growth. Getting a hands-on perspective from our EM economics teams, we find that this split is indeed borne out. The collective wisdom of our teams suggests that the economies that find currency appreciation unwelcome are also economies where overheating risks are small. On the other hand, economies at risk of overheating do not find the currency appreciation as offensive (with the notable exception of China, as discussed below), as policymakers there welcome the dampening effect that the appreciation has on domestic growth and inflation.
In economies at risk of overheating where domestic demand is strong and the central bank allows currency appreciation, US imports will likely become cheaper. In economies where currency appreciation is resisted, domestic demand is likely to get a boost, and this should increase the demand for all imports, including imports from the US. This is what we called a win-win situation for the US in our QE20 piece.
As always, China is different: China finds the enhanced pressure on its currency highly unwelcome and it will likely allow only a slow and steady appreciation. However, China's highly effective capital and credit controls imply two things: i) there really has been no impact of QE2 on the currency, but FX reserves have probably soaked up a large quantity of capital inflows; and ii) the domestic economy has not received an additional stimulus from QE2. With Chinese growth at 10% for 2010 and 9.5% in 2011, one can hardly say that China should grow faster to generate import demand. In short, China does not fit our dichotomy as it resists currency appreciation on the one hand but maintains firm control over domestic financial conditions and the economy on the other.
The policy response: The policy response from EM economies to the signals about QE2 in the US sent since August is quite varied, but a majority of central banks in the EM world have kept policy unchanged since then. A handful have responded by postponing hikes (the central banks of Peru and Poland have pushed rate hikes further out to keep the currency from strengthening further), while the SARB has actually eased policy outright (and further easing appears to be on the cards - our economists are forecasting a 50bp cut, see South Africa: Rate Call Change - We Expect a 50bp Cut, November 1, 2010). Some central banks that face strong domestic growth have even tightened policy despite the risk that such measures will invite even more capital inflows and put additional pressure on currency values.
Digging deeper: Overheating economies: A large majority of EM economies have shown strong growth. Unsurprisingly, AXJ economies feature prominently here along with Brazil, Chile and Peru from Latin America and Turkey, Israel and Poland from the CEEMEA regions. A smaller number of these strongly growing countries, however, have inflation concerns. This latter group includes India, Indonesia, China, Korea, Brazil, Peru and Poland. Clearly, this bloc would prefer some help in dampening domestic growth, and some currency appreciation might not be unwelcome. We illustrate that these overheating economies are also where central banks are not extremely concerned about currency appreciation (with the important exceptions of China discussed earlier and Brazil discussed below). However, as the cases of Poland and Peru show, even inflation concerns have sometimes been subordinated to keep in check excessive appreciation of the currency. In the case of Poland, inflation concerns are likely to win out fairly shortly, according to our Poland economist, Pasquale Diana.
Brazil clearly dislikes its stronger currency, has been intervening aggressively in FX markets and has quickly raised taxes on foreign investments in local fixed income products. The postponement of rate hikes in Brazil, however, can be traced back to its own slowdown earlier in the year rather than to a growing probability of QE2.
Digging deeper: No overheating: In economies where growth has either not led to inflation and even where growth has been weak with inflationary concerns, the EM emphasis on growth clearly shows because of the desire of these economies to keep their currency from appreciating. Most economies in this category have either intervened in FX markets or have stayed put on monetary policy. Thus, either through accumulating FX reserves leaking into the economy or through the postponement of monetary tightening, economic growth is likely to benefit from a tailwind.
The economies where growth is weak and inflation risks are present (Romania and Hungary) are worth noting. As noted before, these economies are more closely tied to the euro and might actually welcome an appreciation against the dollar, given the asymmetric effects on imports and exports. They do not therefore face the same dilemma as most other EM economies.
FX intervention: Central banks appear to be less reluctant to get involved in FX intervention. The bulk of EM central banks are involved in at least some FX intervention. Further, half of that pack have been intervening quite aggressively in currency markets, but even then with limited results. The difference in the way policymakers seem to have used broad monetary policy and FX intervention to deal with QE-related inflows could be explained in three ways: i) monetary policy is seen as a blunt instrument with broad effects, while FX intervention is seen as a targeted tool best equipped to deal with an FX problem; ii) FX interventions are a less public way of dealing with capital inflows, compared with the public attention that usually accompanies monetary policy changes and capital controls; and iii) EM central banks view FX policy and reserves policy as being distinct, and are accumulating reserves in excess of levels that could ostensibly be used for the defence of the currency.
Different strokes: Different emphases on each of these explanations apply to EM economies. For example, the objectives of FX intervention in Turkey appear to be oriented towards increasing the size of the reserves. Brazilian FX interventions, in line with its aggressive rhetoric and milder capital controls, have probably been aimed at keeping the currency from appreciating. And finally, in Israel, FX interventions have been used to stifle the impact of policy rate hikes on the currency. In all three cases, however, FX interventions have not been entirely successful in keeping the currency from appreciating.
Summary: The extent to which the ‘currency war' debate has been ramped up in the media does not gel with the feedback from our EM economics teams. In general, EM central banks appear to be unwilling to take strong, aggressive action in the form of postponing policy tightening or cutting rates outright (with the notable exceptions of the central banks of Peru and Poland for postponed rate hikes, and the SARB for outright easing). Rather than fighting any such ‘currency war', EM central banks appear to be dealing with the very familiar three-way trade off between capital inflows, exchange rate concerns and monetary policy independence - the trilemma (see "No ‘Currency War'...Yet", The Global Monetary Analyst, October 6, 2010). Central banks seem far less reluctant to use FX intervention. In fact, FX intervention is likely being used as a better directed tool to temper FX appreciation and build up FX reserves (in some cases) at the same time.
The feedback from our EM teams suggests that QE is indeed splitting the EM world into two broad blocs. Economies with strong growth and overheating concerns appear to be more willing to accept currency appreciation in order to dampen domestic growth and inflation. Countries where growth is weak, however, seem to be less tolerant of currency appreciation. The desire there to keep the currency from appreciating is likely to lead to higher domestic growth either through newly accumulated FX reserves leaking into the economy or via inaction (or less tightening, or even easing) on the policy front.
Source: MorganStanley
www.morganstanley.com
Tuesday, November 09, 2010
Finally, a talking-shop worth having
The G20 has been a mild success. If it sticks to boring, pragmatic incrementalism, it might just remain one
ONE of the few winners from the global financial crisis was the G20, a group of the world’s biggest economies. These countries’ leaders have met four times in the past two years to chart a common response to the global recession and find ways to prevent a repeat. With big players from the emerging and rich worlds around the table, the G20 has a legitimacy that is lacking in other economic clubs, such as the rich-country-only G7. In the darkest moments of the crisis the G20 yielded impressive results, from a common commitment to fiscal stimulus to more resources for the IMF. Optimists hoped it could become something all too rare in international economic diplomacy: a talking-shop worth having.
Those hopes can be realised even though there are signs that the G20’s utility has faded as the world economy has recovered. The leaders’ last meeting, in Toronto in June, was a washout. It did nothing to reconcile widening divisions, particularly between Europeans and Americans, over the merits of short-term budget austerity. That feebleness has raised the stakes for the next gathering, in Seoul on November 11th-12th.
Global currency tensions are rising as America’s Federal Reserve embarks on a second round of “quantitative easing” (printing money to buy bonds, see article), as China resists allowing the yuan to strengthen much and as other emerging economies face a surge of capital inflows. If the G20’s leaders manage no more than another mealy-mouthed communiqué, many people will begin to suspect that it—like so many other of the Gs—is a waste of time.
That would be a pity. For behind the scenes, under the energetic chairmanship of South Korea, the G20 has notched up a few notable accomplishments in recent weeks. There has at last been some progress in overhauling the IMF. A reform of the “quotas” that determine countries’ heft will increase the clout of emerging economies. Over-represented European countries have been cajoled into giving up two seats on the board. The IMF has also revamped its lending schemes so that well-run countries have access to large amounts of cash if a crisis hits. South Korea argued, rightly, that such a safety net is essential if emerging economies are able to withstand financial crises without piling up ever-larger foreign-exchange reserves. These are small but important improvements. And, thanks to the G20, they were done quite quickly (at least by the glacial standards of international institutions).
If the Seoul summit is to be a success, the G20’s leaders must apply the same approach—call it urgent incrementalism—to today’s main challenge: rebalancing global demand so that it relies less on overindebted America and more on domestic spending in vibrant emerging economies, particularly China. The process will take several years, and is complicated by domestic politics. In America the Republican victory in the mid-term elections reduces the already slim chances of progress either on short-term fiscal stimulus or medium-term deficit reduction. Fiscal gridlock means extra reliance on quantitative easing to boost the economy. That, in turn, will provoke extra capital flows to emerging economies. And since the main emerging economy, China, keeps its capital account closed and its currency pegged, the pressure on others is all the greater.
A Korean lesson for France
The G20 meeting will not magically resolve these tensions. But it can help manage them. It can provide a common analysis of how far countries’ currencies are over- or undervalued and where current-account balances ought to head. America has proposed limiting these imbalances to 4% of GDP. That is too rigid, but there is plenty of scope for the G20 to agree on the ranges countries’ current-account balances should reach.
Incrementalism, however, even of the urgent sort, may not be grand enough for France, which takes over the leadership of the G20 on November 12th. Nicolas Sarkozy, France’s president, has made clear that he wants a debate “without taboos” on the future of the international monetary system. He wants to tackle big subjects, such as the dollar’s role as a reserve asset (see article). Unfortunately, history suggests that big-picture debates on the future of the international monetary system rarely yield results, while diverting attention from smaller, practical goals. France should take note. The G20 will remain worth having only if it sticks to the art of the possible.
Source: The Ecoomist
www.economist.com
ONE of the few winners from the global financial crisis was the G20, a group of the world’s biggest economies. These countries’ leaders have met four times in the past two years to chart a common response to the global recession and find ways to prevent a repeat. With big players from the emerging and rich worlds around the table, the G20 has a legitimacy that is lacking in other economic clubs, such as the rich-country-only G7. In the darkest moments of the crisis the G20 yielded impressive results, from a common commitment to fiscal stimulus to more resources for the IMF. Optimists hoped it could become something all too rare in international economic diplomacy: a talking-shop worth having.
Those hopes can be realised even though there are signs that the G20’s utility has faded as the world economy has recovered. The leaders’ last meeting, in Toronto in June, was a washout. It did nothing to reconcile widening divisions, particularly between Europeans and Americans, over the merits of short-term budget austerity. That feebleness has raised the stakes for the next gathering, in Seoul on November 11th-12th.
Global currency tensions are rising as America’s Federal Reserve embarks on a second round of “quantitative easing” (printing money to buy bonds, see article), as China resists allowing the yuan to strengthen much and as other emerging economies face a surge of capital inflows. If the G20’s leaders manage no more than another mealy-mouthed communiqué, many people will begin to suspect that it—like so many other of the Gs—is a waste of time.
That would be a pity. For behind the scenes, under the energetic chairmanship of South Korea, the G20 has notched up a few notable accomplishments in recent weeks. There has at last been some progress in overhauling the IMF. A reform of the “quotas” that determine countries’ heft will increase the clout of emerging economies. Over-represented European countries have been cajoled into giving up two seats on the board. The IMF has also revamped its lending schemes so that well-run countries have access to large amounts of cash if a crisis hits. South Korea argued, rightly, that such a safety net is essential if emerging economies are able to withstand financial crises without piling up ever-larger foreign-exchange reserves. These are small but important improvements. And, thanks to the G20, they were done quite quickly (at least by the glacial standards of international institutions).
If the Seoul summit is to be a success, the G20’s leaders must apply the same approach—call it urgent incrementalism—to today’s main challenge: rebalancing global demand so that it relies less on overindebted America and more on domestic spending in vibrant emerging economies, particularly China. The process will take several years, and is complicated by domestic politics. In America the Republican victory in the mid-term elections reduces the already slim chances of progress either on short-term fiscal stimulus or medium-term deficit reduction. Fiscal gridlock means extra reliance on quantitative easing to boost the economy. That, in turn, will provoke extra capital flows to emerging economies. And since the main emerging economy, China, keeps its capital account closed and its currency pegged, the pressure on others is all the greater.
A Korean lesson for France
The G20 meeting will not magically resolve these tensions. But it can help manage them. It can provide a common analysis of how far countries’ currencies are over- or undervalued and where current-account balances ought to head. America has proposed limiting these imbalances to 4% of GDP. That is too rigid, but there is plenty of scope for the G20 to agree on the ranges countries’ current-account balances should reach.
Incrementalism, however, even of the urgent sort, may not be grand enough for France, which takes over the leadership of the G20 on November 12th. Nicolas Sarkozy, France’s president, has made clear that he wants a debate “without taboos” on the future of the international monetary system. He wants to tackle big subjects, such as the dollar’s role as a reserve asset (see article). Unfortunately, history suggests that big-picture debates on the future of the international monetary system rarely yield results, while diverting attention from smaller, practical goals. France should take note. The G20 will remain worth having only if it sticks to the art of the possible.
Source: The Ecoomist
www.economist.com
Monday, November 08, 2010
Germany attacks US economic policy
By Ralph Atkins, FT.com
Germany has put itself on a collision course with the US over the global economy, after its finance minister launched an extraordinary attack on policies being pursued in Washington.
Wolfgang Schäuble accused the US of undermining its policymaking credibility, increasing global economic uncertainty and of hypocrisy over exchange rates. The US economic growth model was in a "deep crisis," he also warned over the weekend.
His comments set the stage for acrimonious talks at the G20 summit in Seoul starting on Thursday. Germany has been irritated at US proposals that it should make more effort to reduce its current account surplus. But Berlin policymakers were also alarmed by last week's US Federal Reserve decision to pump an extra $600bn into financial markets in an attempt to revive US economic prospects through "quantitative easing".
On Friday, Mr Schäuble described US policy as "clueless". In a Der Spiegel magazine interview, to be published on Monday, he expanded his criticism further, saying decisions taken by the Fed "increase the insecurity in the world economy".
" They make a reasonable balance between industrial and developing countries more difficult and they undermine the credibility of the US in finance policymaking."
Mr Schäuble added: "It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank's] printing press."
Germany's export success, he argued, was not based on "exchange rate tricks" but on increased competitiveness. "In contrast, the American growth model is in a deep crisis. The Americans have lived for too long on credit, overblown their financial sector and neglected their industrial base. There are lots of reasons for the US problems -- German export surpluses are not part of them."
There was also "considerable doubt" as to whether pumping endless money into markets made sense, Mr Schäuble argued. "The US economy is not lacking liquidity."
On the future of the eurozone, Mr Schäuble confirmed in the same interview that Berlin will push for a greater private investor involvement in future bail-outs. To ensure German taxpayers faced the smallest possible burden it was important to have the possibility of an orderly debt restructuring with the participation of private creditors, he said.
Germany's proposals for a planned new rescue mechanism have run into resistance from the European Central Bank, which fears they will add to investor uncertainty at a crucial time for Europe's 12-year old monetary union. Mr Schäuble said the new mechanism would apply only to new eurozone debt but argued the European Union "was not founded to enrich financial investors".
Mr Schäuble envisaged a two-stage process in a future crisis. The EU would put in place the same sort of saving and rescue programme as imposed this year on Greece. In a first stage, the term structure of government debt could be extended. If that did not work, then in a second stage, private creditors would have to take a discount on their holdings. In return, the value of the remainder would be guaranteed, Mr Schäuble said.
Source: CNN
www.cnn.com
Germany has put itself on a collision course with the US over the global economy, after its finance minister launched an extraordinary attack on policies being pursued in Washington.
Wolfgang Schäuble accused the US of undermining its policymaking credibility, increasing global economic uncertainty and of hypocrisy over exchange rates. The US economic growth model was in a "deep crisis," he also warned over the weekend.
His comments set the stage for acrimonious talks at the G20 summit in Seoul starting on Thursday. Germany has been irritated at US proposals that it should make more effort to reduce its current account surplus. But Berlin policymakers were also alarmed by last week's US Federal Reserve decision to pump an extra $600bn into financial markets in an attempt to revive US economic prospects through "quantitative easing".
On Friday, Mr Schäuble described US policy as "clueless". In a Der Spiegel magazine interview, to be published on Monday, he expanded his criticism further, saying decisions taken by the Fed "increase the insecurity in the world economy".
" They make a reasonable balance between industrial and developing countries more difficult and they undermine the credibility of the US in finance policymaking."
Mr Schäuble added: "It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank's] printing press."
Germany's export success, he argued, was not based on "exchange rate tricks" but on increased competitiveness. "In contrast, the American growth model is in a deep crisis. The Americans have lived for too long on credit, overblown their financial sector and neglected their industrial base. There are lots of reasons for the US problems -- German export surpluses are not part of them."
There was also "considerable doubt" as to whether pumping endless money into markets made sense, Mr Schäuble argued. "The US economy is not lacking liquidity."
On the future of the eurozone, Mr Schäuble confirmed in the same interview that Berlin will push for a greater private investor involvement in future bail-outs. To ensure German taxpayers faced the smallest possible burden it was important to have the possibility of an orderly debt restructuring with the participation of private creditors, he said.
Germany's proposals for a planned new rescue mechanism have run into resistance from the European Central Bank, which fears they will add to investor uncertainty at a crucial time for Europe's 12-year old monetary union. Mr Schäuble said the new mechanism would apply only to new eurozone debt but argued the European Union "was not founded to enrich financial investors".
Mr Schäuble envisaged a two-stage process in a future crisis. The EU would put in place the same sort of saving and rescue programme as imposed this year on Greece. In a first stage, the term structure of government debt could be extended. If that did not work, then in a second stage, private creditors would have to take a discount on their holdings. In return, the value of the remainder would be guaranteed, Mr Schäuble said.
Source: CNN
www.cnn.com
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