Emerging Market Policymakers Slam Fed Move

Friday, 05 Nov 2010 08:20 AM

 

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Policymakers from the world's new economic powerhouses in Latin America and Asia on Thursday criticized the U.S. Federal Reserve's move to inject billions of dollars into the U.S. economy to boost growth.

Emerging market economies said the Fed's move made any substantive deal on cutting global economic imbalances less likely at next week's Group of 20 meeting in Seoul.

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massive inflation coming. Get details from the economists who predicted the
housing crisis and the last stock market crash. Click Here Now.


Developing countries also threatened fresh steps to curb capital inflows which are pushing up their currencies against the U.S. dollar.

"Everybody wants the U.S. economy to recover, but it does no good at all to just throw dollars from a helicopter," Brazilian Finance Minister Guido Mantega said.

Brazil said it would use the G20 meeting as a forum to complain about the Fed's decision to buy a further $600 bln in U.S. Treasury debt. Mantega said the move was unlikely to spur global economic growth and may aggravate imbalances in the world economy, a concern shared also by China.

"As long as the world exercises no restraint in issuing global currencies such as the dollar -- and this is not easy -- then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament," Xia Bin, an adviser to China's central bank, wrote in a newspaper managed by the bank.

Misgivings about U.S. policy were also expressed in the developed world. Germany's Economy Minister Rainer Bruederle said he was concerned the United States was trying to stimulate growth by injecting liquidity into its economy. His French counterpart, Christine Lagarde, said the reaction from emerging economies showed the need for reforms.

Still, European Central Bank President Jean-Claude Trichet said he was confident that the United States still supported a strong dollar, stressing that this remained in U.S. interests. The IMF also supported the Federal Reserve's policy.

BACKFIRE POSSIBLE

In South Korea, the Ministry of Finance and Strategy said it would "aggressively" consider controls on capital flows and Economy Minister Ali Babacan of Turkey, where the central bank has been buying increasing amounts of foreign exchange in an effort to curb appreciation of the lira against the dollar, said the Fed's policy might backfire.

Thailand raised the possibility of concerted action to combat the flood of investment dollars that are expected to wash into emerging markets.

A senior Indian finance official, who spoke on condition of anonymity, said that while the United States had a right to stimulate its own economy, other countries would also pursue their own interests and any deal on currencies in Seoul had to be a "win for both the blocs."

G20 finance ministers last month reached an agreement that papered over the radically different views on managing the world economy held by the two main belligerents -- the United States and China. In a statement that called for competitive currency devaluations to be avoided, the G20 urged governments to work toward policies to reduce current account imbalances.

U.S. central bankers say it is unfair to blame only the United States for global imbalances, pointing to countries that keep their exchange rates artificially low, as many believe China does.

NO TARGETS LIKELY

China's Xia bluntly warned in the Chinese-language Financial News on Thursday that Beijing would pursue its own interests, saying: "We must think 'what is good for us'."

"It doesn't seem to me that this is the kind of environment in which any country will commit to targets," said Credit Suisse currency strategist Olivier Desbarres.

In the wake of the Fed's decision, South Korea's central bank was seen selling its won currency on Thursday in an effort to cap gains after it hit six-month highs.

Other high-yielding currencies also rose with the Australian dollar breaking through $1 to its highest levels since 1982. Japan warned it was ready again to use intervention to halt a rising yen which could hit its exporters.

In public, South Korean officials remained optimistic of a meaningful deal from the G20 next week but in private, optimism for a pact backed by firm numbers has been tempered by opposition from Germany and China.

"It's very difficult to say that we will have numbers (out of next week's summit)," said a South Korean official who declined to be named but who had direct knowledge of the talks.

Seoul has held off announcing controls on capital flows for fear of embarrassment ahead of the G20, but others who will participate have been less shy.

Brazil has announced measures over the past few weeks to curb appreciation of the real currency by direct intervention in markets and by doubling a tax on portfolio inflows.

Mexico said it would closely watch for signs that excess liquidity was being funneled into the country. Chile, although not a G20 member, announced new limits to foreign investment in pension funds in a bid to curb appreciation of its peso.

Capital inflows into developing countries have been massive. Flows into emerging market funds reached $46.4 billion in the year to the fourth week of October compared with $9.4 billion for all of 2009, according to Global fund tracker

EPFR.

Countries are worried not only by the fact that fund inflows will boost their currencies, but that the inflows could be followed by the bursting of an investment bubble in emerging markets when currencies eventually change direction.

"When risk appetite goes south and dollar liquidity tightens, you find Korean banks and corporates cannot roll over their foreign exchange debt," said Credit Suisse's Desbarres.

Editor's Note: Dick Morris predicts coming Obama economic "Aftershock" —
massive inflation coming. Get details from the economists who predicted the
housing crisis and the last stock market crash. Click Here Now.


© 2014 Thomson/Reuters. All rights reserved.

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