IMF managing director Dominique Strauss-Kahn yesterday appealed to politicians to take action to rebalance their economies in order to avert a currency and trade war.
He warned that language alone was “ineffective” and publicly criticised the Brazilian finance minister Guido Mantega for “triggering a declaration of currency war” just days before the IMF meetings opened.
In a final press conference at the end of the IMF meetings, Strauss-Kahn appeared to acknowledge that the wording of the communique of the Fund’s International Monetary and Financial Committee, made up of finance ministers and central bankers, was too weak.
The communique referred to exchange rate movements as a cause of “tensions and vulnerabilities” and tasked the IMF with producing “further analysis and proposals” over the coming year.
But Strauss-Kahn said: “The language is ineffective. The language is not going to change things. Policy will have to be adapted so the question is not to change the language but the question is more coordinated policy to make the reality change.”
He said that revaluing currencies was essential to rebalancing the world economy, which he described as a long-term structural question. “There is no way to believe that global growth could be rebalanced without changing some currency value,” he said.
The meetings have been dominated by fears of an outbreak of a what Mantega called an “international currency war”, Japan intervened to lower the yen’s exchange rate and China made it clear it would not bow to American demands to revalue the renminbi.
Youssef Boutros-Ghali, the Egyptian finance minister who chairs the IMFC, described the exchange rate issue as a “friction” and said it was being addressed in a “systematic fashion”.
Currencies face the risk of fresh volatility when markets open again on Monday. “Market reaction was muddled, but that is almost to be expected given the steady stream of commentary” from officials in Washington for the meetings,” David Watt, senior currency strategist at RBC Capital Markets, said.
He said that net short positions on the dollar had risen strongly over the last week while net long positions on the yen had doubled, as traders “test the Bank of Japan’s resolve”.
Boutros-Ghali struck a downbeat note, saying the global recovery was “fragile” and “uneven”.
“It is still threatened by a number of elements that could push on the downside. Some elements related to sovereign risk, others related to the financial sector, which is still not yet fully recovered.”
Mantega defended his decision to speak out over currency tensions. “I was the first to mention the currency war; it shocked some people at the time. But now everybody has acknowledged that what is happening is a kind of non declared war... which could lead to great confusion,” he said.
In his submission to the IMFC, Mantega launched a call for a resumption of fiscal stimulus policy in advanced economies, especially in the US to boost their domestic markets and avoid mass unemployment.
“The global crisis was not adequately resolved. We are having a weak recovery,” he said. “There is a need to rethink fiscal policy [...] instead of beggar-thy-neighbour type of policies,” he said, adding that a new round a quantitative easing could actually make things worse.
However French finance minister echoed Strauss-Kahn’s anger at the Brazilian, saying: “It is not necessary to use belligerent metaphors. In a war, there are always losers.
“We are not in a war situation. There may be issues about brutal capital flows to and from emerging markets [but] it is not by using such vocabulary that we will be able to solve this kind of problem.”