–Not Expecting Near-Term Solution to Global Currency Debate

By Brai Odion-Esene

WASHINGTON (MNI) – U.S. Treasury Secretary Timothy Geithner
Wednesday spoke out against the foreign exchange policies of major
emerging market economies, which he said places increasing pressure on
other countries to prevent market forces from pushing up the value of
their currencies.

Geithner said there is greater chance of success on global currency
reform is countries take joint action. He was taking questions from the
audience after a speech at the Brookings Institution outlining U.S.
objectives for this week’s annual meetings of the International Monetary
Fund and World Bank as well as the upcoming meeting of G-20 finance
ministers in Korea.

At a time of rising concern that a currency war might break out
among the world’s major emerging economies, with Japan thrown into the
mix as well, Geithner was asked if there is an increased need for
coordinated action on currencies by the G20.

“This is inherently a multilateral issue,” Geithner responded.
“It’s much easier to solve if countries come together and do things to
complement each other.”

But the focus should not solely be on pushing for changes in
exchange rate regimes, but also must be accompanied by other policies
that help strengthen domestic demand and growth.

It is important the G20 becomes a more effective force, and that
the IMF plays an even more active role, in convincing countries of the
merit in making those policy changes, he said.

In his prepared remarks, Geithner warned against what he called
“competitive non appreciation,” which is when large economies with
undervalued exchange rates act to keep the currency from appreciating,
in turn encouraging other countries to do the same.

“The collective impact of this behavior risks either causing
inflation and asset bubbles in emerging economies, or else depressing
consumption growth and intensifying short-term distortions in favor of
exports,” the Treasury Secretary said.

Asked if recent currency intervention by Japanese authorities to
keep the yen low falls can be considered competitive non-appreciation,
Geithner said, “I don’t, no.”

He noted that over time major economies as a whole have moved
towards more flexible exchange rate policies. Today, however, the main
problem is that there is a set of emerging economies whose currencies
remain undervalued and are leaning heavily against the pressure for
appreciation.

“And that’s not a viable, sustainable strategy for them,” Geithner
said, nor for their trading partners, and makes a very compelling case
for coordinated action. The goal is now to find ways to encourage those
countries to allow more of the market pressure to flow through to the
exchange rate.

The Obama administration is not alone in pushing for more
market-oriented exchange rates, Geithner argued, saying the U.S. is not
without allies.

The key is to act in concert, he said. “China will be less likely
to move … if it’s not confident that other countries will move with
it.”

The Treasury Secretary, however, said this issue is unlikely to be
resolved anytime soon, and he told the audience not to expect any
near-term quick fixes. Instead, “it’s going to take a sustained set of
changes over time.”

Also in his prepared remarks, Geithner noted the need to bolster
the fragile economic recovery, warning the greatest risk to the world
economy today “is that the largest economies underachieve on growth.”

“We need to continue providing well-targeted support for the
recovery in the near term even as we put in place plans to help ensure
fiscal sustainability over the longer term,” he said in his speech.

“The U.S. economy is absolutely healing,” Geithner later told the
audience. “It’s healing in some ways more quickly than many of us
thought.”

He went to highlight areas of the economy that are looking very
strong, such as the high tech industry. The process of adjustment in the
economy “is very well advanced.”

The housing market, on the other hard, “remains very weak and very
hard,” he said. And while the Obama administration, along with the
Federal Reserve, have been successful in bring a measure of stability to
house prices, the government’s housing initiatives will continue trying
to aid as many at-risk homeowners as possible.

Asked to also comment on U.S. public debt outlook, Geithner said
there are “very substantial” but manageable fiscal challenges in the
long-term.

Dealing with the federal deficit “is a political test,” Geithner
said, and policymakers must work hard to build confidence in the
political will of Congress to take the actions needed to reduce the
public debt.

That is important, not just for growth in the long-run, but to give
U.S. authorities a little bit more flexibility in the short-term to take
those actions that are necessary to sustain the recovery, Geithner said.

Also, despite the fact that concerns over the debt situations of
the EU’s peripheral countries continue to linger, Geithner said “there
is still a quite high degree of confidence in the capacity of those
countries to restore balance in their fiscal conditions over time.”

He noted that while European authorities initially took “far too
long” in deciding to put in place a substantial financial backstop
program for struggling nations like Greece, “They’ve done that now.”

“And I’m completely confident that they’ll meet that commitment and
do what’s necessary to stand behind that committment,” Geithner added.

Geithner sought to distinguish between the challenges faced by
nations such as Greece — which have no choice but to act aggressively
to trim the deficits — from those faced by major economies.

“We are all trying to find a balance between ways to make sure
growth becomes self-sustaining and a framework for returning to fiscal
sustainability,” he said.

Geithner stressed that it is not in the world’s best interest for
the burden of solving all that ails the global economy to rest on the
shoulders of the United States.

“It is better for it to come in a multilateral context,” he said.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MN$FX$,MI$$$$,MGU$$$,MFU$$$,MT$$$$]