G20 working on international financial architecture, while the IMF “to bury its head in the sand”?

8 April 2013

The G20’s agenda on the international financial architecture looks to tackle sovereign defaults, but not ‘currency wars’.

Expectations have been raised amongst civil society groups that work on sovereign debt, as the Russian presidency of the G20 has prioritised debt as one of the key themes of 2013. The G20’s working group on international financial architecture reform will be working on “government borrowing and public debt sustainability” along with IMF governance (see Update 85). A February civil society paper for the G20 argued that it “needs to acknowledge the need for sovereign debt work out” and “establish milestones for a global dialogue and a common debt work out framework.”

However, so far the group seems to be focusing on a review of the World Bank/IMF Debt Sustainability Framework. The presence of the IMF in the discussions may prevent more radical thinking (see Update 82). Ugo Panizza of Switzerland-based The Graduate Institute and formerly of the UN Conference on Trade and Development, argued in an early February paper that the IMF’s incentives as the main international lender of last resort actually make it difficult to prevent delayed, costly and messy sovereign defaults because it “cannot credibly commit to stop providing financing if the crisis country does not fulfil the programme’s conditions”. Panizza proposed automatic triggers on sovereign default, arbitration and haircuts on IMF loans, but admitted that his proposals were “currently not politically feasible”.

the IMF will prefer to bury its head in the sand

Currency wars?

In the lead-up to the February meeting of G20 finance ministers in Moscow, Japan’s efforts to reduce the value of the yen sparked much talk of currency wars, the intentional devaluation of currencies by states to gain trade competitiveness. The IMF sought to dispel fears of such wars, with IMF managing director Christine Lagarde saying “we have not seen any such thing as a currency war. … We’ve heard currency worries, not currency wars.” Over the last few years countries such as Brazil and Switzerland have intervened in markets to counter the appreciation of their currencies (see Update 80, 77). The media storm over the issue died down when the G20 refused to censure Japan over its devaluations.

Despite the Fund’s public statements, concerns over currency wars resurfaced. Speaking to the Financial Times in March, Kathleen Brooks of financial firm said: “Even if the G20 failed to mention the term currency war, it doesn’t mean that it isn’t going ahead,” adding “In the current environment having a weak currency is economically advantageous, as strong currencies can shave percentage points off growth; hence we could see currency wars by stealth, rather than public battles.”

Given claims that the IMF has not been even-handed in its policy advice (see Update 85, 84), the Fund faces a dilemma. Aldo Caliari of US NGO Center of Concern said: “Currency wars can only be stopped with multilateral cooperative action. But any real route out of the problem means ousting the currency of the US as the main one for international invoicing and store of value. It is not surprising that the IMF, where the US holds veto power, will prefer to bury its head in the sand.”