Wednesday, 13 April 2011 IMF's Lipsky Sees Agreement On Measuring Distortions
World financial leaders are expected to agree this weekend on how to measure dangerous distortions to the economic system, and there is broad consensus on the need and the policies to rebalance the global economy, a top International Monetary Fund official said Wednesday.
"It is reasonably clear on what are the primary needs of each of the deficit advanced countries and the surplus emerging countries, and there is no disagreement in those broad terms of what needs to be done," John Lipsky, the IMF's No. 2 official, said in an interview.
"The issue is one of speed, effectiveness of measures and appropriate coordination so that the process is mutually beneficial," he said.
The idea is to fully identify problems in the global economy and then push for ways to ward off future crises and strengthen global growth. The Group of 20 financial leaders will meet as the IMF and World Bank hold spring meetings in Washington from Thursday through Saturday.
Agreement on the economic indicators will effectively create a short list of countries whose policies are adversely affecting their major trading partners and the global economy as a whole. The short list would then trigger a deeper assessment of the policies that are causing the distortions and what should be the fixes. "It's not hard to come up with a group of key economies that you would imagine, of necessity, would be part of that process," Lipsky said.
The U.S., with its major deficit and debt problems, and China, with its massive foreign-exchange reserves and pegged exchange rate that benefits its exporters, are expected to be at the top of the short list. The process, managed by the IMF, will be closely aligned with the IMF's new "spillover reports," that analyze the international economic implications of several major economies, including China, Japan, the U.K., the U.S., and the euro-zone area.
The IMF set the tone for the Washington G-20 meetings in an outlook paper earlier this week, warning of the building need for the G-20 to take action to trim some member's bloated economic balance sheets. Rich countries, particularly the U.S., need to slash their ballooning and unsustainable budgets, reduce their mountains of overhanging debt and cultivate stronger growth, the IMF said. Emerging nations, most importantly China, need to let their currencies appreciate and bolster domestic demand.
*On a separate G-20 agenda item, Lipsky said that, although there will likely discussion about inclusion of the Chinese yuan in the currency basket that is the basis for IMF's lending unit, the Special Drawing Right, no decision is expected from the group.
The IMF has proposed that one option to encourage Beijing to liberalize its currency policy could be a road map for early inclusion of the yuan based on a progression of criteria being met by China. The concept is being championed by France, which is currently chairing the G-20, but it has encountered some resistance from the U.S. Although Washington supports including the yuan in the SDR basket in principle, its stance is firm on China first meeting all the eligibility requirements.
Regarding Europe's sovereign debt, budget and growth woes, the IMF's No. 2 official said the E.U. had effectively curtailed contagion to the three countries that have already sought a bailout: Greece, Ireland and Portugal.
"So far, this process has been successful in decoupling the obvious problem countries from others that may have challenges," he said. "Previously, where there was concern about contagion, the evidence suggests clearly that there's been a change of views on the part of market participants."
In particular, he said the perception is that Spain has successfully been "decoupled from the near-term fate of the other peripheral economies." _"Six months ago I think it would have been considered a virtual certainty that, if Portugal had to move, then Spain would move, too. And yet, we've seen, through the actions of the Spanish authorities, that the markets have changed their views about the linkages," Lipsky said.
In a side note to the Global Financial Stability Report the fund published Wednesday, the IMF said Europe urgently needs to strengthen and refine its new euro-area crisis-management package. The IMF criticized the euro zone for taking so long, a problem complicated by the political divisions among member states. "Adopting a proactive approach rather than a reactive approach is long overdue, and ensuring consistency of policies has become paramount," it said.
The fund also encouraged the EU to move ahead with planned financial system stress tests, but warned that they would be effective only if accompanied by clear plans to force banks to build larger capital buffers equal to the size of the uncertainty about the value of their assets and shut down "unviable business models and banks." "We have a clear message that the problems of the European banks are manageable, but they need to be managed. They don't cure themselves," Lipsky warned.
The IMF, other economists and markets have criticized previous stress tests for not exposing the true nature of the financial system's problems.
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