Political Risk Latin America Blog @PolRiskLatam

Keep the faith: the G20 can stop the war

Posted in News and Articles, Political Risk by politicalrisklatam on November 9, 2010

by Kemal Dervis for Financial Times, November 8th, 2010.

Alarmist concerns about impending currency wars were temporarily moderated by the G20 finance ministers’ pre-summit meeting in Gyeongju, where they agreed to work towards limits on the current account deficits and surpluses of their balance of payments.

But they flared up again with the launch of a new round of quantitative easing – QE2 – by the US, triggering fears of dollar devaluation and floods of hot money into emerging markets. Is it peace or war now on the currency front? Is the Gyeongju “agreement” just another pious wish without practical implications? What does it mean for the G20 summit?

Sceptics will highlight that the agreement does not specify numerical ceilings. A symmetric upper bound of 4 or 5 per cent for deficits and surpluses was under consideration, but was dropped. The communiqué states that “national or regional circumstances” would be considered, highlighting the situation of commodity exporters, whose current accounts vary considerably with prices.

It was also agreed the International Monetary Fund would provide guidance on how to implement the agreement, but it is not clear how it will do this. It is unlikely anything more concrete can be agreed at this week’s summit, except perhaps more detail on indicators to determine current account limits, but no more. Some will therefore dismiss the agreement on targeting upper bounds for current accounts as inconsequential and argue the G20 is losing credibility as a “potential steering group” for the world economy. (continue  reading… )

 

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