Wednesday 13 December 2017

Are currency wars the new hot, sexy thing for global finance chiefs?

Thomas Molloy

Thomas Molloy

SOMETIMES it is a form of light relief to revel in somebody else's problems for a change.

The International Financial Services Summit in Dublin's Four Season Hotel offered a rare opportunity for a little schadenfreude as a well picked group of experts discussed the problems that face leaders attending the Group of 20 summit, which kicks off in Seoul today.

CMC Markets strategist Ashraf Laidi may have been overstating it when he said the prospect of a currency war was a "hot, sexy thing" but it certainly caught the flavour of the meeting -- where all eyes were on what will happen in Korea today and tomorrow.

"Currency wars are clearly a bad idea," Oxford university's Linda Yueh told the conference. "But solutions are not obvious."

The China expert said the ill feeling between Asia and the West over the value of the Chinese currency was a sign that "the rise of China is coming to a head" and leaders must now develop a system where "you do not have hot money chasing yields around the world".

It was a neat summary of one of the key issues that will confront world leaders as they sit down to safeguard the global economic recovery and defuse trade and currency tensions.

But it is not the only one. Among other urgent tasks will be ironing out rifts between export-rich countries and debt-laden consumer nations.

World leaders have already agreed on a "framework" for balanced growth, and have submitted medium-term economic plans for International Monetary Fund review to ensure they do not clash but imbalances between the US and China continue to grow.

Foreign exchange rates, which are central to the imbalances debate, are another thorny problem. The United States and others have cajoled China to allow its yuan currency to rise faster and accuse Beijing of keeping it undervalued to gain a trade advantage. But Washington will have a tougher time making that case when many of its allies, including Germany and Japan, view the Fed's easy money as a means to weaken the dollar.

At previous G20 summits, leaders have haggled over whether to include a line in the closing statement singling out China for keeping its currency undervalued, yet so far that has not happened. G20 finance ministers agreed last month to avoid competitive currency devaluations, and leaders may endorse that commitment this week.

World leaders will also sign off on a 'Basel III' agreement to raise the quality and quantity of bank capital, the centrepiece of their reforms following the financial crisis. There will also be endorsements of the Financial Stability Board's proposals on tightening supervision of the over-the-counter derivatives market and reducing reliance on credit rating agencies.

However, significant progress on the rest of their regulation agenda is unlikely. While the G20 will endorse a series of broad recommendations by the Financial Stability Board to regulate banks judged "too big to fail", disagreement over whether such institutions should be subject to capital surcharges mean the agreement is likely to be light on specific measures.

Another issue will be trade; slow-growing advanced economies all want to export their way to economic health, which is the root of the tensions over currencies and imbalances.

Leaders will probably agree to broad pledges to avoid protectionism and work toward concluding the long-stalled Doha round of trade talks. (Additional reporting Reuters)

Irish Independent

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