Monday, July 22, 2013

G-20 Debates Stimulus ExitMonday

Top Group of 20 finance officials meeting in Moscow on Saturday pressed for careful and clearly communicated unwinding of monetary stimulus by the world's major central banks, but indicated that the onus will be on individual developing countries to limit the impact on their markets and economies.
The final communique from finance ministers and central bankers of the world's largest industrial and developing nations highlighted the potential negative side effects of prolonged monetary easing, and underscored the harm that volatile currency movements and capital flows could cause.
"At the times of economic stagnation the quantitative easing is justified, the issue is what to do next without risks and negative implications for economies," said Russia Finance Minister Anton Siluanov after the meeting, adding "there are no clear recipes for that, it depends on a conditions."
While central bankers acknowledged the need to explain their measures to other G-20 members and to take the negative side effects of their policies into account, there is a limit to what practically can be done at the international level, officials say.
"Sound macroeconomic policies and strong prudential frameworks will help address potential volatility," the G-20 communique said, shifting the burden of action to the emerging markets affected by volatility resulting from unwinding of stimulus in the major economies.
"We will continue to monitor financial market conditions carefully," it added.
Federal Reserve Vice Chairwoman Janet Yellen told G-20 delegates that the speed and timing of the withdrawal of stimulus would be in line with the pace of the U.S. recovery, while Treasury Secretary Jacob Lew said the world's largest economy was picking up, South Korea's finance minister Hyun Oh-seok told reporters.
"I believe the implication is that the unwinding of QE in the U.S. will take place in an orderly manner, and that the emerging economies will have to come up with their own policy response," Mr. Hyun said after a working dinner of G-20 finance officials late Friday.
Indications the Federal Reserve may soon start reducing the amount of assets it buys to stimulate the U.S. economy--a policy known as quantitative easing--have triggered declines in emerging-market currencies, bonds and equities.
The Brazilian real collapsed 4.2% against the dollar in a day after Fed Chairman Ben Bernanke last month indicated the central bank would scale back its bond purchases, while the Indian rupee dropped 4.1%, although its decline was exacerbated by domestic factors. Other Asian currencies were also hit, with the South Korean won falling 2.8%, the Thai baht 2.6% and the Malaysian ringgit 2.2%.
China's Finance Minister Lou Jiwei said Saturday that the Fed must take a stable approach to exiting quantitative easing as it could cause turbulence in global financial markets. Once the U.S. exits quantitative easing the contribution of consumption to economic growth will disappear and the U.S. economy will likely fall again, he warned in comments reported by the official Xinhua News Agency.
On the issue of medium-term deficit reduction, G-20 officials continued to face difficulties in reconciling their views on the appropriate balance between growth and fiscal tightening.
While the communique said that progress was being made in developing "credible, ambitious and country-specific" medium-term fiscal strategies, the G-20 didn't have any concrete achievements to show from that process.
German officials have argued forcefully that governments need to reduce their debt loads to allow sustainable growth and said they want to define midterm targets for the period after 2016, when a deadline set at a meeting in Toronto in 2010 to stabilize or reduce government debt expires. But people present at the Moscow meetings said the issue gained little traction, with other countries--such as the U.S.--more concerned with fostering growth in the near term.
In contrast to recent G-20 meetings, officials said that Japan's economic circumstances took a back seat ahead of the country's Upper House elections Sunday. Ministers had cautiously welcomed the monetary and fiscal stimulus portions of Prime Minister Shinzo Abe's "Abenomics" strategy, but some analysts have complained that the third arrow of structural reform doesn't go far enough.
Additionally, the G-20 said it fully endorsed an Organization for Economic Coordination and Development action plan to tackle tax avoidance and base erosion--a major overhaul of international taxation, which Russia Finance Minister Siluanov described as the "most important tax move in a century."
Source: Dow Jones

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