IMF warns recovery ‘in peril’ if cooperation fails

The head of the International Monetary Fund (IMF) on Monday warned central bankers that the global recovery would be “in peril” if the world’s major economies do not keep working together, amid mounting fears of a currency war.

IMF managing director Dominique Strauss-Kahn made the comments at the end of a meeting in Shanghai that brought together high-level officials from Asia, Africa, Europe, and North and South America.

The Shanghai conference follows IMF and World Bank annual meetings earlier this month, where finance officials discussed how to strengthen the recovery from the worst recession since World War II and the global financial system.

It also comes ahead of this week’s key Group of 20 meeting in South Korea, where currency reform is expected to dominate talks, amid fears that nations could adopt trade barriers in the face of competition from Asian exports.

“The spirit of cooperation must be maintained. Without that, the recovery is in peril,” Strauss-Kahn said, according to a copy of his closing remarks released by the Washington-based IMF.

“Today, there is a risk that the single chorus that tamed the financial crisis will dissolve into a cacophony of discordant voices as countries increasingly go it alone. This will surely make everybody worse off.”

Strauss-Kahn and People’s Bank of China (PBOC) chief Zhou Xiaochuan co-chaired the closed-door meeting, according to the IMF.

The US Federal Reserve was represented by Kevin Warsh, a member of the central bank’s policy-setting Federal Open Market Committee.

The talks focused on macro-prudential policies — the big systemic picture of reducing the risk of too-big-to-fail institutions, Strauss-Kahn said.

“Supervision must be intensive and intrusive — not afraid of saying no to powerful interests,” he said.

He stressed the need for domestic and international mechanisms that “allow failing firms to be wound down with minimal cost to taxpayers and to end the scourge of too-big or too-important to fail”.

Trade protectionism
In the run-up to the G20 finance ministers’ meeting, which begins on Friday, South Korea has warned that frictions over the currency upheaval are growing and could lead to trade protectionism.

The United States, facing mid-term elections next month, has ratcheted up the pressure on China to allow the yuan to rise more rapidly, but Beijing insists its currency must not be used as a “scapegoat” for US economic woes.

People’s Bank of China vice-governor Yi Gang reiterated the central bank’s stance at a news conference, saying China would keep the yuan at “a reasonable and balanced level”.

“We will continue the reform of our exchange rate regime in a gradual manner and at the same time maintain the stability of the economy,” Yi said.

With Beijing keeping a tight grip on the yuan, many other Asian economies are suffering as their currencies soar against the dollar. Despite Europe’s debt woes, the euro has also surged.

Xia issued a thinly veiled warning to the US not to print more money to stimulate growth.

“The key is to restrict issuance of currencies of major powers, which is very difficult,” Xia said. “A nation that historically has had the dominant currency will not easily give up its interests.”

‘There is no currency war’
IMF first deputy managing director John Lipsky sought to dispel talk of a currency war, saying decisions by the US and other advanced economies should be seen in the context of low growth and very low inflation.

“There is no currency war,” Lipsky told reporters. “Clearly these policies are aimed at the domestic situation not aimed at their international implications.”

A year ago, the Group of 20 developed and developing nations tasked the IMF with stepping up its focus on global systemic stability.

Authorities agreed a broader approach was needed to spot weakness in the increasingly interconnected financial system, to complement the traditional regulations of bank-by-bank audit and supervision.

Asia-Pacific leaders will meet for a summit in Japan following a G20 gathering in Seoul next month. — AFP

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