MNeagle
10th November 2010, 07:46 AM
By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — Expectations are low for this week’s summit of leaders from the Group of 20 major economies, as concern over the Federal Reserve’s decision to launch a second round of bond purchases seems to have “hijacked” the meeting, analysts said Tuesday.
“The meeting is not expected to be very productive,” said Steve Dunaway, adjunct senior fellow in international economics at the Council on Foreign Relations in Washington.
C. Fred Bergsten, director of the Washington-based Peterson Institute for International Economics, said he expected the G-20 to declare victory on new bank capital standards, known as Basel III, and reform of the International Monetary Fund, but leave the thorny issues of global imbalances and dueling currency policies unresolved.
A U.S. proposal to address the currency woes by having G-20 countries commit to keeping their current-account imbalances below 4% of gross domestic product over the next few years appears unlikely to be endorsed by the leaders, analysts said.
Instead, the G-20 will likely “creep off” with a statement papering over the differences that all countries need to follow appropriate policies to tackle imbalances, Dunaway said.
The Fed’s decision to purchase $600 billion in bonds over the next eight months has been a lightening-rod in recent days, with strong criticism from officials of Germany, Brazil and China. Read more about Fed’s controversial move.
The Fed’s move has driven down interest rates on Treasurys and caused money to flood into emerging markets seeking higher yields.
In essence, the Fed’s policy is “more a matter of ‘forcibly enrich thy neighbor’ rather than a ‘beggar thy neighbor’ competitive devaluation,” Neal Soss, head of U.S. economist at Credit Suisse, said in a recent report.
The problem is that emerging economies don’t want to hike interest rates or allow their currencies to strengthen because of the inflows.
They fear that doing so would make their products less competitive against Chinese goods, Dunaway said.
At bottom, it is still China’s exchange-rate policy that is leading to difficulties and should be in the spotlight at the G-20 summit, he said.
Ted Truman, a former top Fed staff member and now a fellow at the Peterson Institute, said Fed chief Ben Bernanke could have done a better job of addressing foreign concerns with the bond-buying plan.
Bernanke failed to mention the issue in any speech leading up to the Fed’s decision to purchase bonds or in his commentary in the Washington Post defending the plan.
James Glassman, economist at J.P. Morgan Chase, said the decline in the dollar in foreign-exchange markets is a typical, short-sighted reaction by currency traders. The possibility that the U.S. economy might emerge stronger than that of the European Union or Japan because of the Fed’s bond purchases does not seem to factor into their thinking, he said.
Colin Bradford, a non-resident senior fellow at the Brookings Institution and the Center for International Governance Innovation in Canada, was one analyst who was not gloomy about the G-20 prospects.
Analysts were still not used to the noisy G-20 process after two decades of experience with the G-7 richest countries, who kept most disputes hidden, Bradford said.
The controversy over the Fed’s monetary policy won’t “throw the wagon off the track” at the Seoul summit, he said.
As long as the G-20 countries commit to a new process to have their domestic policies assessed by the IMF for the likely international impact, the meeting will be a success, Bradford said.
http://www.marketwatch.com/story/low-expectations-for-g-20-summit-2010-11-09?siteid=rss&rss=1
WASHINGTON (MarketWatch) — Expectations are low for this week’s summit of leaders from the Group of 20 major economies, as concern over the Federal Reserve’s decision to launch a second round of bond purchases seems to have “hijacked” the meeting, analysts said Tuesday.
“The meeting is not expected to be very productive,” said Steve Dunaway, adjunct senior fellow in international economics at the Council on Foreign Relations in Washington.
C. Fred Bergsten, director of the Washington-based Peterson Institute for International Economics, said he expected the G-20 to declare victory on new bank capital standards, known as Basel III, and reform of the International Monetary Fund, but leave the thorny issues of global imbalances and dueling currency policies unresolved.
A U.S. proposal to address the currency woes by having G-20 countries commit to keeping their current-account imbalances below 4% of gross domestic product over the next few years appears unlikely to be endorsed by the leaders, analysts said.
Instead, the G-20 will likely “creep off” with a statement papering over the differences that all countries need to follow appropriate policies to tackle imbalances, Dunaway said.
The Fed’s decision to purchase $600 billion in bonds over the next eight months has been a lightening-rod in recent days, with strong criticism from officials of Germany, Brazil and China. Read more about Fed’s controversial move.
The Fed’s move has driven down interest rates on Treasurys and caused money to flood into emerging markets seeking higher yields.
In essence, the Fed’s policy is “more a matter of ‘forcibly enrich thy neighbor’ rather than a ‘beggar thy neighbor’ competitive devaluation,” Neal Soss, head of U.S. economist at Credit Suisse, said in a recent report.
The problem is that emerging economies don’t want to hike interest rates or allow their currencies to strengthen because of the inflows.
They fear that doing so would make their products less competitive against Chinese goods, Dunaway said.
At bottom, it is still China’s exchange-rate policy that is leading to difficulties and should be in the spotlight at the G-20 summit, he said.
Ted Truman, a former top Fed staff member and now a fellow at the Peterson Institute, said Fed chief Ben Bernanke could have done a better job of addressing foreign concerns with the bond-buying plan.
Bernanke failed to mention the issue in any speech leading up to the Fed’s decision to purchase bonds or in his commentary in the Washington Post defending the plan.
James Glassman, economist at J.P. Morgan Chase, said the decline in the dollar in foreign-exchange markets is a typical, short-sighted reaction by currency traders. The possibility that the U.S. economy might emerge stronger than that of the European Union or Japan because of the Fed’s bond purchases does not seem to factor into their thinking, he said.
Colin Bradford, a non-resident senior fellow at the Brookings Institution and the Center for International Governance Innovation in Canada, was one analyst who was not gloomy about the G-20 prospects.
Analysts were still not used to the noisy G-20 process after two decades of experience with the G-7 richest countries, who kept most disputes hidden, Bradford said.
The controversy over the Fed’s monetary policy won’t “throw the wagon off the track” at the Seoul summit, he said.
As long as the G-20 countries commit to a new process to have their domestic policies assessed by the IMF for the likely international impact, the meeting will be a success, Bradford said.
http://www.marketwatch.com/story/low-expectations-for-g-20-summit-2010-11-09?siteid=rss&rss=1