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U.S. pushes FX and trade target plan at reluctant G20

U.S. Treasury Secretary Tim Geithner speaks during the first meeting of the financial stability oversight council to vote on a number of resolutions at the Treasury Department in Washington, October 1, 2010. REUTERS/Jason Reed
U.S. Treasury Secretary Tim Geithner speaks during the first meeting of the financial stability oversight council to vote on a number of resolutions at the Treasury Department in Washington, October 1, 2010. REUTERS/Jason Reed

By Gernot Heller and Tetsushi Kajimoto

GYEONGJU, South Korea (Reuters) - The United States sought to corral reluctant finance leaders into a deal that would commit emerging markets to cut their current account surpluses and allow their currencies to rise at a meeting on Friday.

G20 finance officials started their formal meetings on Friday with nations from the developing world and Japan dismissing the U.S. proposals which it says are aimed at defusing tensions that economists fear could trigger trade wars.

U.S. Treasury Secretary Timothy Geithner, in a letter to finance leaders that was seen by Reuters, said "countries with persistent surpluses should undertake structural, fiscal and exchange rate policies to boost domestic sources of growth."

In return, countries such as the United States that are running big budget and trade deficits would adopt "sustainable medium-term fiscal targets."

Geithner's overtures have already been rejected by countries as diverse as India and Japan and markets are skeptical of a universal deal that would address global economic imbalances and tackle attempts by many emerging economies and others to weaken their currencies.

While the G20 won praise for coordination of stimulus packages during the global financial crisis, its sense of unity has gradually evaporated in the face of strains resulting from unprecedented efforts to revive global growth.

"There is an action plan, but there is an awful lot of complaints, proposals," Russian finance official Andrey Bokarev said ahead of the meetings.

A financial source who met with Geithner in South Korea said that the U.S. official had asked countries to limit their current account surpluses or deficits to 4 percent of gross domestic product, something that few G20 members felt able to accept.

China, India, Saudi Arabia and Russia are all running substantial surpluses while the U.S. is in deficit.

"We need to talk about it first, but numerical targets are unrealistic," Japanese Finance Minister Yoshihiko Noda said.

The issue of addressing "undervalued" currencies will also tax leaders, although Canadian policymakers said that China had agreed in principle to move toward more foreign exchange flexibility.

The U.S. dollar was down 0.27 percent against a basket of six major currencies, near a low for the year struck last Friday and currency strategists said there would be further weakness if the G20 disappointed.


Geithner's letter made no reference to the anticipated language of the final communiqué on foreign exchange arrangements.

He did state that G20 countries "should commit to refrain from exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing the appreciation of an undervalued currency."

The best the meeting could hope for, other officials said, was a statement on avoiding competitive currency undervaluation and some indicated there would not be any significant hardening of rhetoric.

"The reference to avoiding 'competitive currency undervaluation' as a goal between big economies is not new but appeared in a previous G20 meeting in the UK. It will likely appear again in the communiqué this time," a senior G20 negotiator who spoke on condition of anonymity told Reuters.

Many emerging market policymakers are loath to allow their currencies to rise substantially and blame the United States for financial mismanagement that led to the global financial crisis and accuse it of engaging in its own devaluation by flooding markets with liquidity from its quantitative easing policies.

That has had the effect of pushing a wall of money into emerging markets like Brazil, spurring them into action to stem capital flows which have boosted their currencies and asset prices and complicated fiscal and monetary policy.

The language of the last G20 summit stressed the need to "refrain from competitive devaluations" and anything stronger would mark a significant move from countries like China and host South Korea, said Credit Suisse currency strategist Olivier Desbarres.

"You would have to commit to allowing your currency to appreciate," he said.

(Additional reporting by Abhijit Neogy, Yoo Choonsik and Kevin Plumberg in Hong Kong; Writing by David Chance; Editing by Tomasz Janowski)