G-20 co­or­di­na­tion calls con­front a more com­plex global land­scape

The Pak Banker - - BUSINESS -

With global cur­rency volatil­ity spik­ing and eq­ui­ties tip­ping into bear-mar­ket ter­ri­tory, calls have grown for the big­gest economies to co­or­di­nate a re­sponse.

While the Group of Seven, and broader Group of 20, have on oc­ca­sion is­sued joint com­mit­ments that helped sup­port in­vestor con­fi­dence, this time round the com­plex­ity of the chal­lenges may make it tougher to agree on an ap­proach that in­cludes pol­icy ac­tion.

In the 1980s, the ad­vanced economies agreed on ad­dress­ing ex­cess dol­lar strength, and later ex­ces­sive dol­lar de­clines. In the 1990s Asian cri­sis, de­vel­oped na­tions helped or­ga­nize res­cue pack­ages for emerg­ing mar­kets. When a global credit squeeze be­gan in 2007, the U.S. be­gan a years-long pro­vi­sion of dol­lar liq­uid­ity through swaps agree­ments.

Now, while some emerg­ing mar­kets are fac­ing sell-offs in their cur­ren­cies, oth­ers have seen rel­a­tive sta­bil­ity. China may pre­fer a cheaper cur­rency, though has proven un­will­ing to al­low rapid de­clines. In the rich world, diver­gent moves among the ma­jor cur­ren­cies have seen the Ja­panese and some Euro­peans sig­nal their ex­change rates are ap­pre­ci­at­ing too much.

A move to­ward even eas­ier mon­e­tary poli­cies or the pro­vi­sion of dol­lars by the Fed­eral Re­serve could po­ten­tially help some emerg­ing-mar­ket cur­ren­cies stop fall­ing, though any as­so­ci­ated dol­lar de­pre­ci­a­tion wouldn't be wel­come in Ja­pan or Europe, where cen­tral banks have al­ready cut in­ter­est rates below zero. Pol­i­tics could also be a con­straint and make any co­or­di­nated fis­cal re­sponse dif­fi­cult to en­vi­sion.

"Th­ese calls al­ways come out when there's in­creas­ing des­per­a­tion in mar­kets - - they want some sort of clear res­o­lu­tion to sta­bi­lize the global out­look," said Paul Mackel, head of emerg­ing mar­ket cur­rency re­search at HSBC Hold­ings Plc in Hong Kong. "The big­gest prob­lem com­pared with the past is that you could have co­or­di­na­tion to help at least one coun­try or set of coun­tries, but this time many are fac­ing the same chal­lenges."

In the run-up to the Group of 20 gath­er­ing of fi­nance min­is­ters and cen­tral bank gov­er­nors in Shang­hai Feb. 26-27, some an­a­lysts at in­vest­ment banks have called for an agree­ment such as the 1985 Plaza Ac­cord to ad­dress cur­rency volatil­ity. China's state news agency Xin­hua said this week in a com­men­tary that the poli­cies of ad­vanced economies like the U.S. have cre­ated spillover ef­fects to oth­ers, which then re­ver­ber­ate across the world, and urged co­or­di­na­tion and re­forms of global eco­nomic gov­er­nance.

For now, it's uni­lat­eral ac­tion that has dom­i­nated the head­lines, with Swe­den's cen­tral bank Thurs­day cut­ting its bench­mark rate fur­ther below zero to help keep the krona from ap­pre­ci­at­ing. In Ja­pan, the yen is poised for its big­gest two-week ad­vance ver­sus the dol­lar since the Asian Fi­nan­cial Cri­sis in 1998, fu­el­ing spec­u­la­tion the Bank of Ja­pan may make its first in­ter­ven­tion to sell the yen since 2011.

A "smooth­ing" op­er­a­tion that had the ac­qui­es­cence of other ma­jor coun­tries, par­tic­u­larly the U.S., could still be some­thing that could help break the cur­rent mar­ket psy­chol­ogy, ac­cord­ing to Masaaki Kanno, chief Ja­pan econ­o­mist at JPMor­gan Chase & Co. in Tokyo, who pre­vi­ously had jobs at the Bank of Ja­pan in­clud­ing as a for­eign-ex­change man­ager.

"Many in­vestors be­lieve that BOJ in­ter­ven­tion is im­pos­si­ble, be­cause it could trig­ger a cur­rency war or com­pet­i­tive de­val­u­a­tion," Kanno said. "So then one way to sur­prise the mar­ket is to say con­cern is shared" be­tween Ja­pan and oth­ers about the need to re­store the ap­petite for risk, he said. "Nat­u­rally, this is to buy time, and can't be a fi­nal so­lu­tion," Kanno said. Each coun­try would need to fol­low up with de­ter­mi­na­tion to ad­dress their own is­sues. Some oil-pro­duc­ing-na­tion deal to cut back sup­ply could be help­ful as a fol­low-up, he said.

Fur­ther volatil­ity may be


store when China's mar­kets re­open Mon­day af­ter be­ing shut this week for the lu­nar new year hol­i­day. China's host­ing of the G-20 gath­er­ing puts an even brighter spot­light on the na­tion's pol­icy mak­ers, who have faced calls from the In­ter­na­tional Mon­e­tary Fund and oth­ers to be clearer in com­mu­ni­cat­ing pol­icy in­ten­tions.

A political deal be­tween China and the U.S. to sup­port the yuan would risk the back­lash of U.S. politi­cians who have blamed China for Amer­i­can man­u­fac­tur­ing job losses. And an IMF move to set up swap lines for its Spe­cial Draw­ing Rights unit large enough to af­fect mar­ket con­fi­dence could sim­i­larly face crit­i­cism in Congress. With those and other pol­icy op­tions fac­ing bar­ri­ers, any co­or­di­nated global re­sponse may be con­fined to ver­biage.

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