FOCUS: IMF Members Let Nature - And Forex - Run Its Course

   By Christopher Emsden 
   Of DOW JONES NEWSWIRES 
 

ISTANBUL -(Dow Jones)- Big ideas failed to gain traction at the International Monetary Fund's annual meeting, but that was because natural processes have already paved ahead.

IMF Managing-Director Dominique Strauss-Kahn's proposal of making the IMF a global lender of last resort was politely downsized to a research project.

And the unchanged language on currency used in the Group of Seven communique issued here over the weekend masked the fact that markets are now being left to bid the U.S. dollar down and, eventually, push up the Chinese yuan.

Finance officials from almost 200 nations gathered in Istanbul to discuss how to refashion the global financial and monetary system in the wake of a credit meltdown that triggered fears of a replay of the 1930s. But they turned out largely to be actors in a play whose script is reaching its denouement with the unsurprising revelation that Asia will be the next global locomotive.

World Bank President Robert Zoellick, who asked for more money but had to agree to raise loan prices for developing nations, summed it up: "Bretton Woods is being overhauled before our eyes," he said in a concluding speech to the IMF's governing board, a reference to the conference that led to the IMF's creation.

China was the soft-spoken star.

In a closed-door presentation, one of its top central bankers convinced worried European G7 officials that China was doing its part to shift from export-led to domestic growth and accepted that this was likely to lead to an appreciation of its currency.

On Tuesday, as dozens of officials gave speeches pledging to keep fiscal and monetary stimulus measures in place for longer, Yi Gang, deputy governor of the Peoples Bank of China, was the sole hawk as he expressed his concern about inflation.

Asian currencies have been steadily rising against the U.S. dollar. Pressure is now on the yuan to follow suit.

On Tuesday, the Reserve Bank of Australia - a country with close commodity-trading ties with China - raised interest rates, essentially embarking on an exit strategy more than a year before the IMF suggests.

"The Aussie dollar is a kind of proxy for the Chinese yuan," said Stuart Gulliver, HSBC's chief executive for global banking and markets.

Sea Change

He and many officials here noted that what were once called emerging economies are now leading the global upturn even as western economies stumble along, and see it as a definitive sea change.

"It is possible the world could turn inside out from what we have known since 1945," Gulliver said.

V. Shankar, head of capital markets for Standard Chartered, called it the "K-factor," a letter he reckoned would describe coming economic and currency trends, with emerging economies occupying the shape's upper arm.

The shift may be one reason why the IMF's idea of having countries with excess international reserves pool them with the Fund hasn't taken off.

This time, many developing countries have access to private capital, while banking systems in the wealthier countries are suckling on government coffers.

According to Strauss-Kahn, the plan - which he noted would require fresh capital of at least $1 trillion and perhaps a lot more to be credible - is an extension of the IMF's mandate as decided in Bretton Woods 65 years ago.

In his view, one cause of the economic crisis is that emerging economies, notably in Asia, amassed extra reserves as a form of insurance against a run on their currencies and banking systems. As a global central bank, the IMF would help countries wean themselves off their inefficient habit.

But it isn't so simple. Central bankers from Brazil to Malaysia were circumspect. And none were more so than Axel Weber, the disciplinarian head of Germany's Bundesbank.

The IMF's mandate is to help countries with balance-of-payments and related currency problems - think Iceland - while stretching that to include budget-support measures would be a walk on thin ice, Weber said.

Germany, which last year ran the largest current-account surplus in the world after China, isn't convinced the IMF "should be a general insurance function for public-sector liabilities," he said.

The upshot of the Istanbul summit is that, instead of designing a new Bretton Woods, countries will simmer in their own macroeconomic stew as they rebalance their economies. And as they normalize, so will capital flows normalize, heading again to faster-growing economies.

Still, the mood was collaborative. Indeed, Strauss-Kahn reckoned that one-third of the economic uptick seen in the past quarter reflects global policy cooperation rather than the magnitude of individual nations' fiscal efforts.

So the change will be slow. The dollar won't crash, and the yuan won't be unpegged to the U.S. currency overnight.

After all, as China's Yi noted, even the allocation of voting rights at the IMF to give emerging economies a louder voice - the main ordinary institutional business at this year's meeting - seems to be taking its time.

-By Christopher Emsden, Dow Jones Newswires; +39-02-58-21-99-05; chris.emsden@dowjones.com

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(END) Dow Jones Newswires

October 06, 2009 13:19 ET (17:19 GMT)


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