UPDATE 1-Geithner: inflexible currencies are biggest monetary problem

* Geithner says solutions lie at national, not global, level

* Calls for stronger IMF to highlight monetary risks

* Says U.S. is working to stabilise its debt level

(Adds details, background)

NANJING, China, March 31 (Reuters) – Tightly controlled
exchange rate regimes are the main flaw in the international
monetary system and the solution is simple, U.S. Treasury
Secretary Timothy Geithner told a G20 meeting on Thursday.

In a thinly veiled swipe at the Chinese hosts of the seminar
of the Group of 20 wealthy and developing economies, Geithner
said that countries should have flexible exchange rates and
permit free flows of capital to be major players in the global
currency order.

He also used his speech to call for a stronger International
Monetary Fund and to defend U.S. policies, acknowledging that
past failures had caused much damage but saying the government
was aiming to stabilise debt levels to avoid future problems.

The G20 seminar was spear-headed by France, which is pushing
a bold reform agenda in its year-long presidency of the group,
and was meant to be focused on ills in the monetary system.

Geithner offered a straightforward diagnosis. While major
currencies moved freely and most emerging economies were well
along that path, there were still some with little exchange rate
flexibility and extensive capital controls, he said.

This asymmetry fuelled inflation risks in the economies
whose exchange rates are undervalued, magnified currency
appreciation in others and also generated protectionist
pressures, he added.

“This is the most important problem to solve in the
international monetary system today. But it is not a
complicated problem to solve,” he said, according to the
prepared text of his remarks.

“It does not require a new treaty, or a new institution. It
can be achieved by national actions,” he added.

Although Geithner did not mention China by name, the United
States has long called on Beijing to let its currency rise more
quickly, accusing it of keeping its exchange rate artificially
cheap to give its exporters an unfair advantage.

In recent months, Geithner has taken to casting the Chinese
currency as a broader global problem, saying that it is making
life difficult for other developing economies. India and Brazil,
among others, have agreed, saying that a cheap yuan has
undermined their competitiveness.

The Chinese government told countries attending the G20
seminar in the eastern city of Nanjing not to mention specific
currencies in their speeches and to keep their focus on broader
questions in the global monetary system, according to a source
attending the meeting.

PLAN FOR CHANGE

While saying that national governments held the key to
reform in their own hands, Geithner called for a stronger
International Monetary Fund to shine a spotlight on risks.

“We would also support giving the IMF a greater capacity to
help influence the policy choices made by the major economies,
including greater independence to publish its analysis,” he
said.

The IMF should be able to make recommendations for how to
preempt the emergence of large imbalances in the global economy,
he said.

On the Special Drawing Right (SDR), the IMF’s unit account
that France and China believe should take on a bigger role in
the international monetary system, Geithner was clear.

Both French President Nicolas Sarkozy and Chinese officials
have said it is time to consider bringing the yuan into the
basket of currencies that constitutes the SDR, which is
currently restricted to the dollar, euro, yen and pound.
Geithner suggested that certain conditions should be met first.

“We believe that currencies of large economies heavily used
in international trade and financial transactions should become
part of the SDR basket, and that to achieve this objective, the
concerned countries should have flexible exchange rate systems,
independent central banks, and permit the free movement of
capital flows,” he said.

Emphasising that solutions to the global monetary system’s
problems rest at the national level, Geithner said the United
States had made progress in fixing the policy mistakes that
caused damage in the global financial crisis but still had work
to do.

“We are committed to … fiscal reforms that will reduce
deficits as a share of the economy to three percent over the
next several years so that we stabilize the ratio of debt to GDP
at a level that will not threaten future economic growth,” he
said.

(Reporting by Simon Rabinovitch; Editing by Ken Wills)

UPDATE 1-Geithner: inflexible currencies are biggest monetary problem