RPT-SCENARIOS-How the world can tackle skewed growth, FX

(Repeats without changes)

SEOUL, Oct 21 (BestGrowthStock) – Finance leaders are trying to
reconcile their differences over deep imbalances in the global
economy and reduce the risk of a currency war.

Talks at the meeting of Group of 20 finance ministers and
central bankers this week in South Korea and of their leaders in
November should reveal the struggle among these diverse economies
to find common ground on policies and currencies.

Below are possible ways forward for addressing uneven global
growth and currency tensions, evident in China’s export might and
its yuan currency, and the declining dollar in face of slow
growth and high debts of many rich economies.

GIVE IMF AN ENHANCED ROLE AND REFORM IT

PROBABILITY: High.

This is the route that countries agreed to try at their
meetings in Washington earlier in October. A lot of work remains
on details and to make any agreement work.

The International Monetary Fund’s 187-member countries have
agreed that urgent action is needed to give the IMF a more
assertive role in highlighting the economic policies of countries
that could cause currency problems, and that toughened scrutiny
of rich countries is a priority.

Dominique Strauss-Kahn, the IMF’s managing director, has
proposed drawing up “spill-over reports” on how the economic
policies of the world’s five largest economies — the United
States, China, the euro zone, Japan and the United Kingdom —
affect each other.

The reports would build on existing IMF powers, known as
Article IV annual reviews, where the IMF examines the economic
policies of all its 187 members and makes recommendations. But
the IMF has struggled to get governments to heed its calls for
tough reforms.

If toughened review powers can be twinned with a giving a
bigger voice to developing countries at the IMF, which
traditionally is dominated by the West, the proposal may gain
momentum. With debate over currencies and current account
balances heating up, it is likely any say on IMF reform will be
left to the G20 leaders at next month’s summit in South Korea.
For details, please see [ID:nN04141757]

Similar approaches to build on the Article IV reviews have
failed twice in the past. China balks at calls for reform of its
currency system. In the past it has even blocked publication of
its IMF review. European countries have also ignored Fund
suggestions that they undertake politically sensitive reforms,
such as to their labor markets.

Hence there is some skepticism why this time should be
different.

USE THE G20 TO THRASH OUT CURRENCY DIFFERENCES

PROBABILITY: France will try it next year, big challenge.

The Group of 20, representing the leading developed and
emerging economies, last year became the main forum for
discussing the global economy, overtaking the G7.

G20 finance ministers and central bank governors meet in
South Korea on Oct. 22-23 before a leaders summit in Seoul on
Nov. 11-12. The G20 traditionally issues a communique which could
lay out a common stance on how to redress global imbalances and
relieve pressure on currencies.

Countries have indicated that currencies will be a major
theme at the meetings. One proposal is a limit on current account
balances, although it also seems certain officials will baulk at
any one-size-fits-all norm.

Privately, officials from some rich countries grumble that
the G20 is too unwieldy for detailed debate of complex issues and
informal discussions with some of the G20’s biggest members are
more fruitful.

But France, which assumes the G20 presidency in 2011, has
said there is no obvious alternative to the G20 for discussing
currencies. French President Nicolas Sarkozy wants to make review
of the international monetary regime a centerpiece of his G20
presidency next year.

Brazil has suggested the G20 should work on a “new Plaza
Accord” — the landmark 1985 pact under which five countries
(United States, Japan, Britain, West Germany and France)
engineered a dollar depreciation via currency market
interventions and economic reforms. U.S, officials too seem to
favour some norms on FX policy. But few expect such explicit
prescriptions in a more complex world.

G7 PLUS CHINA THRASH OUT THEIR DIFFERENCES

PROBABILITY: Unlikely

The economic powers of the 20th Century that make up the Group
of Seven — the United States, Japan, Germany, Britain, France,
Italy and Canada — could invite China to join them to work out
their differences.

The currencies of the G7 — U.S. dollar, yen, euro and
Canadian dollar — account for the bulk of the $3 trillion in
daily trading volumes in global foreign exchange market (Read more about international currency trading. )s.

Including China in talks with the G7 financial leaders on
currencies would be essential because it is the world’s biggest
exporter and has amassed $2.45 trillion in foreign exchange
reserves while keep the value of the yuan down.

The head of the euro zone finance ministers, Jean-Claude
Juncker, told Reuters on Friday that the G7 plus China would be
the “ideal forum” for discussing currencies. [ID:nWAL8LE6NK]

But the G7 is a waning forum and no longer issues formal
communiques and China would probably refuse to join a group whose
other members are all likely to put it under pressure to revalue
the yuan.

A G7-plus-China format would also probably be resented by
other emerging economic heavyweights such as Brazil, Russia and
India. An alternative would be G7 plus the BRICs but there has
been little serious discussion of such a grouping recently.

DO NOTHING

PROBABILITY: Likely

One possibility is that countries cannot agree on how to
coordinate and instead pursue national policies, reversing the
remarkable unity seen after the credit crisis exploded.

The backlash over the budget deficits is leading to fiscal
retrenchment and retreat to national solutions, particularly in
Europe. The risk is that taking fiscal policy off the table when
monetary policy is near exhaustion and growth still fragile will
feed uneven growth, heightening currency misalignments and spill
over into currency and trade wars.

China’s central bank governor Zhou Xiaochuan said on Friday
that currency problems might fade away when the rich economies
finally recover. A hands-off approach would suit China which does
not want to change its yuan policy.

Developing economies in Latin America and Southeast Asia
would either have to cope with further strengthening of their
currencies, as investors pour money into their high-yielding
bonds, or attempt costly interventions and controls, risking an
outbreak of trade protectionism and policy discord.

USE A NEW RESERVE CURRENCY

PROBABILITY: Highly unlikely in the short term.

China and Russia favor moving the global economy away from
reliance on the U.S. dollar as the world’s primary reserve
currency. They have floated the idea of using Special Drawing
Rights, a synthetic IMF unit made up of a basket of currencies.
This would make countries less reliant on the value of the
dollar, now used as the primary medium for world trade. In the
meantime, China is striking more bilateral agreements to trade in
the yuan and bypassing the U.S. dollar.

Shifts in world currencies take years if not decades, as seen
with the decline of sterling before World War II and then the
abandonment of the dollar peg from 1968 to 1972.

French President Sarkozy wants to examine international
monetary arrangements as part of his G20 presidency next year.

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For a PDF report “Currencies: Race to the bottom”
http://r.reuters.com/gez77p

Reshaping financial regulation: http://r.reuters.com/zys68p

Package of graphics on currencies, trade and monetary policy:
http://r.reuters.com/deh58p

G20 graphic: http://link.reuters.com/men39p

Related stories: [ID:TOE69K01G]

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RPT-SCENARIOS-How the world can tackle skewed growth, FX