October 5, 2010
By SEWELL CHAN
WASHINGTON — The United States is increasingly looking to the International Monetary Fund to hold countries like China accountable for “rebalancing” the global economy, a Treasury Department official said Tuesday.
Exchange rates are expected to be a major topic when finance ministers gather here this weekend for the annual meetings of the I.M.F. and the World Bank.
In a briefing Tuesday, a senior Treasury official said the United States was looking to the I.M.F. to ensure that countries contribute to “strong, sustainable and balanced growth” — the mantra adopted when leaders of the Group of 20 economic powers, including President Obama, gathered in Pittsburgh in September 2009 to coordinate the world’s emergence from the financial crisis.
In practical terms, the slogan means that export-oriented economies like China, Japan and Germany should stimulate domestic demand while heavily indebted countries, like the United States, should reduce their trade and budget deficits, by saving and investing more and borrowing and spending less. But while the world’s biggest economies have adopted those goals in principle, achieving them in practice has proved difficult.
The unity of the G-20 countries has been repeatedly tested this year, by the European debt crisis, China’s reluctance to allow its currency to appreciate in value, steep budget cuts in Britain, and Japan’s recent move to devalue the yen, among other developments.
The official, who spoke on the condition of anonymity under ground rules set by the Treasury, did not single out China by name but made it clear that the Obama administration was impatient over Beijing’s halting progress in permitting greater exchange-rate flexibility for its currency, the renminbi, as Chinese officials promised to do in June.
“The United States has been very consistent in its position that the leading economies should be supporting exchange rates based on market fundamentals,” the official said, adding: “We expect that countries will continue to move toward honoring the full set of their G-20 commitments.”
The I.M.F. managing director, Dominique Strauss-Kahn, said last week that he did not see a great risk of a “currency war” — with countries devaluing their currencies to make their exports cheaper — as some countries, like Brazil, fear. Nonetheless, he is expected to make currency a priority this weekend.
In its semiannual report on global financial stability, the fund also warned Tuesday that the world financial system “is still in a period of significant uncertainty and remains the Achilles’ heel of the economic recovery.”
José Viñals, director of the monetary and capital markets department at the I.M.F., called for countries to tackle the high public debts through fiscal consolidation over the medium term, address lingering vulnerabilities in their banking systems and make more progress on overhauling financial regulations.
Mr. Viñals also said that countries in Latin America and Asia were experiencing “very large amounts” of capital inflows, a result of the attractive investment returns, growth prospects and solid balance sheets. Large influxes of capital could cause macroeconomic instability if they were not carefully monitored, he said.
Progress toward stability “experienced a setback” since the last such report was released in April, the new report found, a result of anxieties over heavily indebted countries like Greece and Spain.
Both countries have taken drastic measures to pare government spending. They have been joined by Britain, whose budget cuts have been so severe that Americans have expressed anxiety about the potential impact on the world economy if too many governments cut their budgets at once as they exit from stimulus programs adopted in response to the crisis.
“We have to be careful to avoid a premature, synchronized exit that could threaten the global economic recovery,” said the Treasury official who briefed reporters on Tuesday.
The I.M.F. report also addressed other risks to global financial stability.
It drew attention to “liquidity disruption” — “the simultaneous and protracted inability of financial institutions to roll over or obtain new short-term funding across both markets and borders” — as a defining characteristic of the financial crisis. And it argued that the reliance on credit rating agencies to assess the risks facing sovereign countries had contributed to the instability that surrounded Europe’s debt crisis this year.
But the Treasury official underscored the reality that the fund’s main power is to produce research and monitor its members’ practices; it does not have the tools to enforce global agreements or compliance.
“It’s ultimately the responsibility of countries to act, but the fund must speak out effectively about the need for those actions,” the Treasury official said, adding that the I.M.F. needed to be “very clear in its communications on the extent to which countries are living up to their obligations.”
American officials also plan to use the meetings to continue a push for Europe to give up some of its seats on the I.M.F. board to allow greater representation of big emerging economies. Despite European resistance, the United States will push ahead “because of the critical importance of strengthening the I.M.F.’s legitimacy and credibility,” the officials said.
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