Currency-war threat looms over G20 meeting

G20 finance ministers will meet in South Korea this week to try to chart a new direction for the world’s economy after a devastating downturn, but fears of a “currency war” could blow them off course.

The host nation dislikes the phrase—Finance Minister Yoon Jeung-Hyun has said the exchange-rate issue is not “like a duel in a Western film”.

But South Korea admits the disputes will loom large over the October 22 to 23 meeting of ministers and central bank chiefs in the south-eastern city of Gyeongju.

Ministers will set the agenda for the November 11 to 12 Group of 20 summit in Seoul, South Korea’s biggest international event for two decades.

Seoul wants to leave its mark on history with a “Korea Initiative” to set up a global financial safety net aimed at protecting emerging markets from disruptions caused by sudden changes in capital flows.

The nation, which built its economic “Miracle on the Han River” on the ashes of the Korean War, also intends to put development prominently on the G20 summit agenda for the first time.

And it wants to push ahead with reforms to the International Monetary Fund (IMF) to give emerging countries greater voting power, while encouraging the adoption of post-crisis rules to bolster the world’s banks.

“South Korea ... will stress that a currency war is tantamount to mutual economic destruction and push for a compromise,” an organiser told Yonhap news agency on condition of anonymity.

The United States and European Union, trying to export their way to economic health amid lacklustre domestic demand, accuse China of significantly undervaluing the yuan to boost its own exports.

Scapegoat
China says it is being made a scapegoat for US domestic problems.

And it points out that expectations of US “quantitative easing”, a move to pump more dollars into the market, are swamping emerging markets with destabilising capital inflows as investors chase higher yields.

The US last Friday signalled a temporary truce, delaying publication until after the Seoul summit of a report that could have labelled China a currency “manipulator”.

There is a chance that “some sort of understanding” may be reached in Gyeongju, the Seoul official said, after weekend talks overseen by the United Nations raised the need for deeper global governance to tackle common problems.

Yoon Deok-Ryong, of the Korea Institute for International Economic Policy, said it would be hard to reach a firm agreement on forex issues at the South Korea meetings.

“However, an understanding may be reached by countries to abstain from measures that can worsen the situation until the next G20 summit planned for 2011 in France,” Yoon said.

The stakes are high, according to IMF chief Dominique Strauss-Kahn.

“The spirit of cooperation must be maintained. Without that, the recovery is in peril,” he told a meeting in Shanghai Monday.

Fears
South Korea says the G20 pulled the world back from a 1930s-style Great Depression but must now show it can cooperate in a post-crisis era.

Indian Prime Minister Manmohan Singh, in comments to Wednesday’s Financial Times, expressed fears about the group’s fraying cohesion—a concern echoed by Bank of England governor Mervyn King.

King called on Tuesday for a “grand bargain” among the world’s major economies, saying forex tensions could spark trade protectionism.

“That could, as it did in the 1930s, lead to a disastrous collapse in activity around the world,” he said in a speech.

Ministers will discuss the state of the world economy, IMF reform and establishment of a financial safety net, the G20 framework for “strong, sustainable and balanced growth”, and regulatory reform among other issues.

The Basel Committee on Banking Supervision met on Tuesday in Seoul to finalise reforms requiring global banks to bolster their reserves.

“The capital requirement, combined with a global liquidity framework, will substantially reduce the possibility of a banking crisis in the future,” said its chairperson, Nout Willink.—AFP

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