Failure by global institutions to make a coordinated push to persuade countries such as China to let their currencies' value rise would endanger the global economy, U.S. Treasury Secretary Timothy Geithner said Wednesday.
Geithner, laying out the U.S. position ahead of this weekend's semi-annual meetings of the International Monetary Fund and World Bank, made clear he sees the risk of a round of destructive competitive currency devaluations.
"This is a problem because when large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same," he said at the Brookings Institution, a Washington think tank.
He told a questioner the Obama administration has ample backing for its efforts to get Beijing to move toward market-oriented exchange rates, which would make its exports more costly, but cautioned against expecting quick results.
"China will be less likely to move to allow its currency to rise more rapidly if it is not confident other countries will move with it," Geithner said, in a clear reference to risks that others are becoming more willing to keep their currencies' value down as a policy to boost exports.
Focus on Emerging Markets
Geithner's remarks were pointed, essentially saying that the United States was set to do its part to help rebalance global growth but that many others were not and that big emerging economies were especially reluctant.
"As America saves more, countries overly reliant on exports to us for their own growth will need to change their policies, or else global growth will slow and all of us will be worse off," he warned.
"Countries that chronically run large surpluses need to undertake policies that will boost their domestic demand," he added. China has run persistently big surpluses on its U.S. trade for years, prompting angry U.S. lawmakers to pass a legislative proposal threatening tariffs against its imports unless the yuan's value is allowed to rise.
Geithner sounded a note of frustration that so many countries were apparently willing to use currencies as a policy tool.
"The main problem today is you have a set of emerging economies that both remain undervalued and are leaning heavily against appreciation," he said. "That's not a viable strategy for them, it's not a sustainable strategy for their trading partners, for the countries they compete with, and it's not good for the system as a whole."
Currencies have become a point of contention in recent weeks as the U.S. dollar, to which China links the yuan's value, has steadily fallen in anticipation of a further easing in U.S. monetary policy. This has sent investors into emerging markets in search of higher yields, driving those countries' currencies higher.
Geithner said it will require coordinated action among trading partners to settle how to let markets determine currency values and warned the United States can't make the case alone.
"Don't look for a near-term quick fix on this," he said.
"This is the central existential challenge of cooperation internationally and it will take a long period of time."
Geithner refused to respond when asked directly whether some type of coordinated intervention was needed in currency markets, saying he would only answer the question if it was "useful" for him to do so.
He also said the United States is going to have to move cautiously in removing economic stimulus because growth is still relatively soft, signaling it will be reluctant to take major steps quickly to cut its debts or raise interest rates.
"We believe the United States in particular needs 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.
Geithner said that the problem of undervalued currencies was "inherently a multilateral problem" that would take a cooperative effort to solve in the form of an effective multilateral mechanism to push countries with big current account surpluses to abandon export-oriented policies.
He suggested the IMF needed to be more forceful in surveillance of global currency practices and to push for "a cooperative rebalancing of policy" that would help sustain growth.
"We'd like to see the IMF have more leverage, more capacity to make a difference in these things," Geithner said.
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