UPDATE 1-IMF says major currencies may need to weaken

* FX adjustment needed between advanced/emerging nations

* China would benefit from stronger currency

(Adds details, quotes)

By Leika Kihara

WASHINGTON, April 21 (BestGrowthStock) – Heavily indebted rich
countries may need to weaken their currencies to promote
exports because reducing government debt will probably slow
domestic growth, an IMF official said on Wednesday.

The comments from Olivier Blanchard, the International
Monetary Fund’s chief economist, reflected a subtle twist on a
well-worn theme of rebalancing global growth.

The IMF has warned for years that huge reserves in surplus
countries such as China and massive debt piles in the United
States and elsewhere posed a threat to economic stability.

Most of the attention has focused on the need for China to
allow its yuan currency to appreciate to help drive domestic
demand. But Blanchard stressed that rich countries also have a
big incentive to allow their own currencies to depreciate as
they wrestle with huge sovereign debt burdens.

“In advanced economies, fiscal consolidation is needed but
is likely to have an adverse effect on demand and growth. To
offset these adverse effects and maintain growth, advanced
economies as a whole may need to depreciate their currencies so
as to increase their net exports,” Blanchard said.

His recommendations came amid escalating calls in the
global community, notably from the United States, for China to
let its currency appreciate to resolve global imbalances.

“In China, the shift away from exports toward domestic
consumption, the shift that requires both structural measures
to decrease savings and the appreciation of the currency,
appears highly desirable on its own,” Blanchard said at a news
conference on the Fund’s World Economic Outlook.

Many U.S. economists estimate China’s currency is
undervalued by as much as 40 percent. They say that gives China
an unfair price advantage in international trade, takes jobs
away from other countries and adds to global financial
distortions.

In its updated outlook, the IMF said that the global
economy has recovered from recession more quickly than expected
with emerging economies leading the upturn.

But as advanced economies prioritise fiscal consolidation
and begin unwinding stimulus measures put in place during the
global financial crisis, fast-growing developing nations will
also need to play a role in easing the pain.

“This in turn implies that emerging and developing
countries, again as a whole, do the reverse, namely let their
currencies appreciate and reduce their net exports,” Blanchard
said.

The IMF argues that currency appreciation would also help
emerging economies curb excessive capital inflows and tame
inflation pressures, which led countries like India recently to
hike interest rates.
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(Additional reporting by Lesley Wroughton and Emily Kaiser;
writing by Patrick Graham)

UPDATE 1-IMF says major currencies may need to weaken