G20 stalemate points up disruptive power shift

By Alan Wheatley, Global Economics Correspondent

BEIJING, Nov 14 (Reuters)

Economic power is leeching from the old world to emerging markets. The politics of globalisation are not keeping pace with this shift. And that makes it hard to agree joint action to tackle urgent issues such as how to reduce China's external surplus.

The Group of 20 summit in Seoul amply corroborated each of these truisms. The risk now is that, in the absence of policy coordination, a purely market-driven adjustment of global economic imbalances will be messier than it need be.

And where market forces are not allowed to prevail, as is the case with China's exchange rate, the temptation for politicians in the United States and Europe to try to force the adjustment through tariffs and import barriers can only grow.

"There is a pervasive sense that the G20 has reached the limit of cooperative efforts towards rebalancing of the world economy," said Eswar Prasad, a Cornell University professor and a senior fellow at the Washington-based Brookings Institution.

With advanced economies barely plodding along while emerging markets are enjoying red-hot growth, reconciling the different types of policies required has become difficult, Prasad said. "In an increasingly integrated world economy with emerging markets playing a prominent role, cross-border spillovers of domestic policies then set up a situation ripe for conflict," he added.

These conflicts were on show in Seoul. Emerging economy members of the G20 flailed the easy-money policies of the Federal Reserve, the U.S. central bank; President Barack Obama, beset at home by high unemployment and low growth, urged Chinese President Hu Jintao to ease the pressure on American manufacturers by letting the yuan rise faster.

But the writ of the United States in the global economic system no longer runs unchallenged.
Gone are the days when a U.S. Treasury secretary could gather four counterparts around a table and set in motion sweeping changes to exchange rates and trade positions.

In the eyes of policymakers in many developing countries, U.S. primacy and credibility have been eroded by the global financial crisis, which had its origins in the U.S. subprime mortgage meltdown.

The ultra-loose monetary and fiscal policies that the United States has adopted in response is testing faith in the dollar to destruction -- and not just among the likes of China and Russia. No less a figure than World Bank President Robert Zoellick, himself a former U.S. Treasury official, said last week it was time to start thinking about building a new monetary system.

So it is little wonder that Washington has repeatedly failed to get Beijing to do its bidding on the yuan. In Seoul, a different tactic fizzled: the G20 refused to back a U.S. plan for numerical targets for current account surpluses and deficits -- a roundabout way of applying peer pressure on China.

Instead, Hu stuck to Beijing's well-rehearsed stance that the yuan's rate of climb would remain gradual and calibrated to China's national interest. In case someone had not heard the first time, Hu repeated his position at an Asia-Pacific leaders' meeting on Sunday in the Japanese port city of Yokohama.

Stewart Patrick with the Council on Foreign Relations in New York said the Fed's recent decision to embark on a $600 billion bond-buying programme had undercut Obama at the summit. Moreover, his party's trouncing in mid-term Congressional elections had made his G20 counterparts sceptical of the president's ability to deliver on global commitments "Confidence in U.S. global economic leadership continues to wane," Patrick said.

"VICTORY FOR EMERGING MARKETS"
Illustrating how the sands are shifting, the G20 gave its blessing to developing countries such as Brazil that opt for capital controls to prevent incoming walls of cash from pushing up already overvalued exchange rates.

Not long ago, such curbs were anathema to the United States and the IMF. In another nod to the growing clout of developing countries, the Seoul summit formally endorsed a deal that gives them more power in the running of the IMF, largely at Europe's expense. "On balance, this G20 meeting was a victory for emerging markets," commented Lena Komileva, head of G7 market economics at Tullett Prebon.

The G20 is not doomed to deadlock as emerging giants try to wrestle power from advanced economies. As well as settling on a redistribution of chairs and shares at the IMF, the group agreed new rules designed to avert future bank collapses.

But the Seoul stalemate over imbalances points up the group's limitations when it is not confronted by an immediate crisis, as it was at the first G20 summit two years ago. Then, the freezing up of global credit markets and the onset of recession concentrated minds and generated a coordinated stimulus in response.

Today, divergent trade and inflation trends are leading to tension rather than policy coordination, according to economists at J.P. Morgan. "Ironically, this tension is likely to produce a desired aggregate outcome -- an easier global monetary policy setting that increases the likelihood of a strong global growth outcome next year.

"However, widening imbalances alongside inappropriately synchronised policy stances raise concern that the eventual global policy normalisation will prove far more disruptive than necessary," they wrote in the bank's weekly Global Data Watch.

In my view, this all points to a continual decline in the USD. Whatever trade you have on, do not have any part that is long USD's - KT

Ireland sneezes but little sign of globalised cold

10 Nov 2010 Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - About six months ago, the euro zone debt crisis was hot enough to trigger headlines like "Wall Street falls on worries about Greece". It was all about contagion, fears that default in economic minnow Greece could spread not just to Portugal and Spain but beyond, crushing the euro zone in its wake. Tensions are increasing again about debt in the euro zone periphery - particularly Ireland - with some yield spreads and debt-insurance costs at record levels.

But to date there has been little sign of global contagion, primarily because investors have been looking elsewhere - mainly the Federal Reserve - and because of crisis management programmes that can now be employed by policymakers. The spread between Irish 10-year bonds and German Bunds hit a record 571 basis points on Tuesday, up from around 300 at the height of the crisis and a good 200 above where it was in mid-October.

Greece, too, is back up to uncomfortable levels, if not as wide as at the height of the crisis, and Portugal's spread has widened to a record as well. The impact further afield, however, has only been felt mildly so far, mainly on the euro, and even then only in the past day or so at a time when the dollar has been rising broadly anyway. "Markets fear of contagion has fallen," said Klaus Wiener, head of research at Generali Investments in Cologne. "In May, the escalation of the debt crisis in Greece threatened to end in a systemic crisis. This fear is not as pronounced any longer." The 30-day correlation between the movement in peripheral bond spreads and the euro was around -0.6 in May, meaning that widening in spreads was usually matched by euro weakness.

That correlation is now close to zero for Ireland and only slightly negative for Greece, suggesting that at least over the past month the debt problems have been isolated, having little if any impact on the currency. It is more or less the same story with stocks. In the past three weeks as the Irish spread has widened 200 basis points, the pan-European FTSEurofirst 300 stock index has gained more than three percent. It was up three-quarters of a percent on Tuesday as the spreads widened to another record.

Globally, stocks have paid even less attention, with MSCI's all-country world index rising around 4 percent over the period. Data from iTraxx, meanwhile, shows that investors are pricing in the chances of default in European companies as less than that for Western European sovereigns -- not good news for sovereigns but hardly a thumbs down for corporates, which suggests fear does not stretch to a systemic crisis which would surely engulf companies as well.

DIFFERENT CONDITIONS
There are two main reasons why the market impact from the renewed debt worries has been muted so far. One is simply that investors have had their minds on other things, notably the $600 billion quantitative easing programme launched by the Fed last week to stimulate the U.S. economy. The global economic picture has also improved, with even lagging U.S. jobs creation ticking up. "The big theme was quantitative easing, the economic cycle. It is undeniable that the data has been positive, almost globally," said Joost Van Leenders, investment specialist at BNP Paribas Investment Partners in Amsterdam.

The second big reason is that investors believe lessons were learnt in the earlier Greek crisis and policymakers stand ready to stop disorderly default contagion. Since June, a European stabilisation mechanism has been in place, funded by the European Union and International Monetary Fund, to provide as much as 750 billion euros at relatively low interest rates to euro zone countries needing them. No money has been taken, but it is seen by many as a safety net. There are also plans afoot to create a permanent mechanism. Although political differences will make agreement hard, the mere fact that it is under discussion underlines the willingness of authorities to act. None of this is to say that the current stresses in Ireland and elsewhere are negligible. It is inconceivable, for example, that a default or restructuring in Greece or Ireland would not have wider impact.

But the lack of sharp reaction outside the countries concerned so far does suggest investors are not expecting a blow up across markets similar to the one earlier this year.