Global Trends by Martin Khor
Monday 15 November 2010
Inconclusive G20 summit,
The world economy remains in a web of serious problems with the potential to break out in new crises. The G20 Summit last week discussed them but could not agree on the causes or how to resolve them.
Even as the G20 leaders were
Ireland faced a big jump in
the interest cost of its debt, arising from (and giving rise to) fears
that it would have to be bailed out, like Greece some months ago, or
even face a debt default. It seemed like the investors' loss of confidence
crisis could also spread to
It took a hurried joint statement
by five European finance ministers, issued in
But it remains to be seen
if there will be new turmoil in
In the 1990s it was Asia that
faced a debt crisis, and in the decades before that Africa and
But until just months ago
it was inconceivable that a sovereign debt crisis would ever hit
Last month, a EU summit agreed that to set up a new system by 2013 in which private investors in government bonds would also have to bear part of the cost of bail outs.
There are no details yet of this system, though it is known the Germans are contemplating a European debt workout system, in which the creditors or bond holders would take a “haircut” (or partial loss), if a country is unable to repay its debt in full.
The fear of this system triggered the sharp rise in the yield of Irish bonds, to 9% at one stage, before the finance ministers' statement (clarifying that the new system would not affect holders of existing bonds) calmed the markets somewhat.
This latest market turmoil showed the vulnerable situation of the three or four European countries, and moreover how fragile too is the future of the euro single-currency itself.
The European crisis reminds one of the Asian crisis more than a decade ago, when one country after another was affected by the contagion effect until it became region-wide.
This crisis overshadowed the
G20 Summit, which has disappointed most analysts for not having any
concrete results. The considerable differences that major countries
had before the
Most of the key issues are in the paragraph on Monetary and Exchange Rate Policies. It says, “We will move toward more market-determined exchange rate systems and enhance exchange rate flexibility to reflect underlying economic fundamentals and refrain from competitive devaluation of currencies.”
This reflects the major
The statement also says that “Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates. Together these actions will help mitigate the risk of excessive volatility in capital flows facing some emerging market economies.”
This reflects the strong concerns that developing countries like China, Brazil and South Africa as well as Germany have voiced about the “quantitative easing” (printing of money) policy of the US.
The G20 Communique adds: “Nonetheless, in circumstances where countries are facing undue burden of adjustment, policy responses in emerging market economies with adequate reserves and increasingly overvalued flexible exchange rates may also include carefully designed macro-prudential measures.”
This reflects the view of
the developing countries like
To avoid the destabilising effects, the developing countries are already using or are planning measures such as placing a tax on various types of foreign short-term capital.
In the past, such measures were frowned upon by the IMF and the developed countries. Now even the IMF and World Bank have recognised that they are legitimate and useful.
In another paragraph, the leaders pledge to pursue policies to reduce excessive imbalances and to maintain current account imbalances at sustainable levels. They agreed to have “indicative guidelines” and “a range of indicators” to identify large imbalances that require actions to be taken. These guidelines will be prepared by next year.
This reflects a much diluted version of the
However, many countries including
The G20 Communique thus contains the different concerns of the countries while giving them sufficient space to continue with their policies. This has opened the G20 to the criticism that they merely papered over their differences without being able to agree on the problems and the solutions.
At least the leaders met and opened channels of dialogue. That's not good enough, but better than not talking at all.